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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20559
FORM 10-KSB
(Mark One)
(x) Annual Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
or
( ) Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 33-26531-LA
ZEROS & ONES, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0241079
(State of Incorporation) (I.R.S. Employer Identification No.)
39 East Walnut Street, Pasadena, California 91103
(Address of principal executive offices) (Zip Code)
(626) 584-4040
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
COMMON STOCK OTC
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (x) Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
The aggregate market value of voting stock held by non-affiliates of the
registrant was $104,481,579 as of March 31, 2000 (computed by reference to the
last sale price of a share of the registrant's Common Stock on that date as
reported by NASDAQ).
There were 23,574,089 shares outstanding of the registrant's Common Stock
as of March 31, 2000.
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TABLE OF CONTENTS
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10KSB
PART I.........................................................................3
ITEM 1.........................................................................3
ITEM 2........................................................................12
ITEM 3........................................................................12
ITEM 4........................................................................12
PART II.......................................................................13
ITEM 5........................................................................13
ITEM 6........................................................................13
Income Statement..............................................................
ITEM 7........................................................................18
Balance Sheet.................................................................19
Income Statement 2............................................................
Cash Flow Statement...........................................................21
Table9........................................................................
Table10.......................................................................
ITEM 8........................................................................36
PART III......................................................................36
ITEM 9........................................................................36
ITEM 10.......................................................................39
ITEM 11.......................................................................40
ITEM 12.......................................................................40
ITEM 13.......................................................................41
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PART I
ITEM 1. BUSINESS
GENERAL
Zeros & Ones, Inc. is a Nevada corporation (the "Company") organized on
October 18, 1988. It was initially incorporated under a different name with the
purpose of evaluating and acquiring businesses. Effective July 1, 1999, the
Company entered into and closed a Plan of Reorganization and Asset Purchase
Agreement (the "ZOI Plan") with Zeros & Ones, Inc., a Delaware corporation
("ZOI"). Pursuant to the Plan of Reorganization and Asset Purchase Agreement,
the Company acquired ZOI's assets in exchange for shares of the Company's common
stock, and changed its name to Zeros & Ones, Inc. The Company also closed Plans
of Reorganization and Exchange Agreements with five media technology companies:
Quantum Arts, Inc., EKO Corporation, KidVision, Inc., Wood Ranch Technology
Group, Inc., and Polygonal Research Corporation. Pursuant to those agreements,
the Company owns Quantum, EKO, KidVision, Wood Ranch, and Polygonal as 100%
owned subsidiaries. The Company also entered into exchange agreements with the
shareholders of Pillar West Entertainment, Inc. ("PWE"). The Company absorbed
PWE's assets and has dissolved it. By consolidating the technical experts of all
of these companies, the Company believes that it is in a unique position to
develop content and technology for new and emerging broadband platforms.
The Company creates proprietary technology and content-based intellectual
property to advance the convergence of television and the Internet. Convergence
is a result of the natural progression of digitization: the encoding, storage,
and retrieval of information in the binary code of ones and zeros.
The advent of the Internet has introduced new business models, knowledge
sharing and personalization methods, forms of transacting commerce, means of
remote collaboration, and efficiencies of scale. Television's assimilation into
the digital framework forces all economic players to rethink their businesses
and adapt to changing times. The resulting platform combines the energetic
media-rich style of television with the up-to-the-millisecond connectivity of
the Internet.
Regardless of how convergence may continue to evolve over time, Management
believes that the anatomy of any new digital application is comprised of three
key parts: content to attract and engage the audience participant, technology
that empowers the content to interact and perform transactions, and services
that extend the application. The Company refers to the model of these three
constants as the "convergence triad."
The Company is focused on a specific group of projects in each of the three
distinct parts of the convergence triad. More importantly, the existence of
these projects establishes the groundwork for the propagation of end-to-end
solutions, by the Company and by other developers, in which the Company strives
to have ownership or revenue-participation in at least one-third of the total
digital supply chain.
As technologies advance and media opportunities emerge, the Company plans
to continually leverage and fortify its library of triad building block assets.
This strategy is designed to provide a wide base for sustained growth and market
penetration that is far less susceptible to shifting market trends than
comparable single-sided technology companies. It empowers the Company to
participate in the revenue and equity streams of highly valued Internet
businesses without becoming distracted from its core focus. The Company also
plans a growth strategy through the acquisition of other companies and
businesses that provide strategic value.
The Company plans to relocate its offices and those of its subsidiaries to
an Advanced Media Production Center which is expected to be located near the
heart of the emerging new media district in Santa Monica, California, or in a
nearby city. The Advanced Media Production Center is anticipated to provide both
traditional and advanced digital post production services and to provide a
launch pad for the Company to demonstrate newly developed products. See
"BUSINESS - Advanced Media Production Center."
RECENT DEVELOPMENTS
The Company recently developed strategic relationships in the areas of
Internet telephony (with Apropos Technology), real-time 3D rendering (with
WildTangent Inc.) and
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digital television (with ICTV Corporation). The Company is currently developing
a new strategic relationship in the area of broadband streaming media (with
Akamai Technologies). The Company maintains existing strategic relations with
Microsoft Corporation, Sun Microsystems, and Cybercash Corporation. The Company
intends to enter into written agreements with these companies on a project by
project basis as necessary.
The Company recently entered into a Website development agreement with
National Legal Services, Inc. Pursuant to the terms of the agreement, the
Company is developing a unique, sophisticated Website which will enable National
Legal Services, Inc. to provide real-time online legal services to its clients.
The Company also recently entered into an agreement with Paul Frank
Industries, Inc. ("PFI"), a successful fashion design company with national
distribution through stores such as Nordstrom and Urban Outfitters, which
entitles the Company to utilize PFI-related images and branded-characters to
produce and syndicate original content. The agreement grants the Company
exclusive rights to develop media and merchandise utilizing all PFI characters.
The Company plans to use the characters initially to develop and produce media
content for online delivery. Eventually, the Company plans to use the characters
to develop and produce media content for television, films, theme parks, and
other entertainment or communication related ventures.
Through publisher and client-funded projects, the Company designs and
develops interactive properties, and collaborates with major corporations on
work-for-hire projects. The Company distributes its products through continuing
relationships with high-profile publishers and distributors. As bandwidth to the
consumer has continued to increase at a rapid rate, the Company has begun to
develop new products which may be distributed directly to the consumer via
online channels.
The Company continues to combine and integrate its acquired subsidiaries,
including key individuals, strategic relationships, software source code,
proprietary technology, intellectual property, fixed assets, intangible assets,
and other holdings into the unified brand name of Zeros & Ones, Inc. The
following sections describe the history and organization of the constituent
corporate entities, their distinct contributions to the ongoing objectives of
the Company, and other related details.
PLAN OF REORGANIZATION WITH ZOI
Effective July 1, 1999, the Company (formerly known as Commercial Labor
Management, Inc.) and its prior principal shareholders entered into and closed a
Plan of Reorganization and Asset Purchase Agreement (the "ZOI Plan") with Zeros
& Ones, Inc., a Delaware corporation ("ZOI"). ZOI was a private corporation and
Robert J. Holtz was the sole shareholder of ZOI. Pursuant to the ZOI Plan, which
was amended on March 30, 2000 to be effective as of July 1, 1999, the Company
acquired 100% of the assets of ZOI in exchange for 220,000 shares of the
Company's Common Stock, which were distributed by ZOI to Robert Holtz
immediately after the closing. ZOI tendered $120,000 in cash to the Company from
which the Company paid its accounts payable. The Company paid a final
installment of $87,500 plus simple interest at the rate of 10% per annum to the
prior shareholders of the Company in March 2000. On the closing, the prior
shareholders of the Company each tendered to the Company for redemption and
cancellation 1,850,000 shares of the Company's common stock which they owned. A
prior principal shareholder resigned as an officer and director of the Company.
Robert J. Holtz was appointed as the Chairman of the Board of Directors and
President of the Company, and Steve Schklair was appointed as a director, Chief
Executive Officer, Chief Financial Officer and Secretary of the Company. The
Company also appointed William Burnsed and Bernie Butler-Smith to its Board of
Directors.
QUANTUM ARTS
GENERAL. Quantum Arts, Inc., a California corporation ("Quantum"),
originated as an interactive development studio with a focus on the creation of
entertainment and educational software. Founded by Steve Schklair, Quantum has
delivered a HOT WHEELS CD-ROM title to Mattel, and delivered SECRET DIARY AND
MORE to Encore Software in April 1999. At the date of acquisition by the
Company, Quantum Arts had begun development of a large scale broadband and
CD-ROM computer based educational project for McGraw Hill. Quantum completed
Phase I of the project and has elected not to enter into a development agreement
with McGraw Hill for Phase II of the project.
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Currently, Quantum Arts, a wholly-owned subsidiary of the Company, has a
contract with Electronic Arts for the development of real-time gaming over the
Internet. Through the use of a new browser-based 3D technology obtained through
one of the Company's strategic relationships, Quantum Arts is delivering
innovative content to Electronic Arts.
Quantum delivers its products via both high and standard bandwidth online
channels and CD-ROMs which are sold through retail channels. Quantum receives
its development funding from software publishers and clients. Quantum expects to
recognize profits through two main sources: negotiated product royalties based
on unit sales, and margins included in its development and production budgets.
Quantum completed the development of SECRET DIARY AND MORE!, which is part
of the GIRLS ONLY! line from Encore Software. SECRET DIARY AND MORE! is a fun
productivity title which targets young girls between the ages of seven to 14.
The title allows users to keep a secret encoded journal, a calendar/datebook,
and an address book and to write letters on custom stationery. In addition to
these features, a special part of the program allows users to write and print
secret messages to their friends which can only be read through special decoding
viewers, a few of which are included with the initial software purchase.
Quantum holds a contractual right of first refusal with Mattel for future
HOT WHEEL'S COLLECTORS GUIDE's, as well as an ongoing royalty agreement for
sales of the product.
RESEARCH AND DEVELOPMENT. d3D, a project originated with Quantum, which has
been renamed "LiveCast 3D(TM)" and is now offered directly by the Company, is a
developing technology ideally suited to capitalize on the Federal Communications
Commission ("FCC") mandated digital broadcast standards. LiveCast 3D(TM)'s new
technology is being designed to enable broadcasters to transmit REAL TIME 3D and
2D broadcasts of the same event simultaneously. The source of these signals may
be either pre-recorded tape or live television broadcasts covering popular
events such as sports programming. Through the use of LiveCast 3D(TM)
technology, television viewers at home will be able to view program material in
true stereoscopic 3D. The Company plans to recognize revenue through the
licensing and direct sale of a myriad of key components in the LiveCast 3D(TM)
system. Additionally, it is anticipated that the Company will profit through
consulting services, the production of 3D high definition commercial video
content for distribution to the consumer markets, and through the sale of tools
into the growing 3D filmed entertainment market.
The FCC, which regulates the public airwaves, has advanced digital
television ("DTV") in the United States by assigning a new digital channel to
each broadcaster. In return, all television stations must convert their
operations to broadcast a digital signal. Twenty-six stations were supposed to
begin digital broadcasts by late 1998. This group expanded to 40 in mid-1999 and
will grow to 120 in 2000, blanketing the top 30 television markets (53% of U.S.
citizens) with DTV signals from all four major networks. By approximately 2007,
every station in the United States must broadcast DTV or lose its broadcasting
license. In order to comply, broadcasters must make substantial capital
expenditures for infrastructure upgrades. Nevertheless, there is no audience for
DTV broadcasts today and few supporting advertisers. With such significant
mandatory upgrade expenses, networks are highly motivated to find products and
services that will help develop the DTV market and make it more attractive to
advertisers in order to justify those expenses. The LiveCast 3D(TM) project was
formed to provide such a product.
Sports programming drives a significant amount of television viewing, and
sports advertising comprises one of the largest segment of television revenues.
The Company plans to benefit from the American consumers' interest in televised
sports by delivering an entirely new way to watch sporting events: LiveCast
3D(TM) technology and broadcast methodology delivering live sports television to
viewers in stereoscopic 3D with digital surround audio.
Quantum believes that LiveCast 3D(TM)'s primary competitive advantage is
the opportunity to establish the standard for 3D broadcast technology by being
the first to protect its designs through a combination of copyright, trademark,
trade secret and patent laws, and contractual provisions to protect intellectual
property rights in its products. In January 2000, the Company, as the parent
company of Quantum Arts, filed for patents with the United States Patent &
Trademark Office.
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PLAN OF REORGANIZATION AND EXCHANGE AGREEMENT. Effective July 1, 1999, the
Company entered into and closed a Plan of Reorganization and Exchange Agreement
(the "QA Agreement") with Quantum and Steve Schklair ("Schklair"), the sole
shareholder of Quantum. Pursuant to the terms of the QA Agreement, the Company
acquired 100% of the total issued and outstanding stock of Quantum in exchange
for the issuance of 850,000 shares of the Company's common stock to Schklair and
a cash payment totaling $300,000, payable in installments. The Company paid
$60,000 of its obligation to Schklair in 1999 and paid the remaining balance
plus simple interest at the rate of 4% per annum during the first quarter of
2000. Schklair is the Chief Executive Officer and Chairman of the Board of
Directors of Quantum.
EKO CORPORATION
GENERAL. EKO Corporation, a Delaware corporation ("EKO"), was established
in 1997 by Robert J. Holtz and ZOI. EKO is a development stage company which has
developed proprietary source code for an Internet-based commerce-oriented online
service and virtual community for entertainment professionals. The Company is
utilizing this source code to accelerate development of e-commerce and live
collaboration projects. Project EKO is also the source of several of the
Company's current technologies, including Websuites(TM) Technology.
PLAN OF REORGANIZATION AND EXCHANGE AGREEMENT Effective July 1, 1999, the
Company entered into and closed a Plan of Reorganization and Exchange Agreement
(the "EKO Agreement") with EKO and Robert Holtz ("Holtz"), the owner of 98.3% of
the total issued and outstanding stock of EKO. Pursuant to the terms of the EKO
Agreement, which was amended on March 30, 2000 to be effective as of July 1,
1999, the Company acquired the 98.3% of the total issued and outstanding stock
of EKO not already acquired by the Company from ZOI in exchange for the issuance
of 297,000 shares of the Company's common stock to Holtz. Holtz is the Chairman
of the Board of Directors and Chief Executive Officer of EKO.
KIDVISION, INC.
KidVision, Inc., a California corporation ("KidVision"), is a development
stage company formed in 1998 to be a distributor of educational products for
families. KidVision also marketed The Kids Educational Network, a portal Website
which was created by ZOI. KidVision may provide the Company with e-commerce
fulfillment methodologies and strategic direct marketing relationships.
PLAN OF REORGANIZATION AND EXCHANGE AGREEMENT. Effective July 1, 1999, the
Company entered into and closed a Plan of Reorganization and Exchange Agreement
(the "KidVision Agreement") with KidVision and Charles Overton ("Overton"), the
sole shareholder of KidVision. Pursuant to the terms of the KidVision Agreement,
the Company acquired 100% of the total issued and outstanding stock of KidVision
in exchange for the issuance of 16,000 shares of the Company's common stock to
Overton. Overton is the Chairman of the Board of Directors and the Chief
Executive Officer of KidVision.
WOOD RANCH TECHNOLOGY GROUP, INC.
GENERAL. Wood Ranch Technology Group, Inc., a Delaware corporation ("Wood
Ranch"), was co-founded in 1996 by William Burnsed and Robert Holtz to consult
in building next generation television facilities. Wood Ranch's consulting
division will be fused into the Company as the "Advanced Media Group."
The Company and Wood Ranch have conceived the Advanced Media Production
Center as a state of the art facility for the production and post production of
programming for a variety of media, including television, the Internet and
broadband networks. William Burnsed plans to procure and configure the advanced
equipment necessary to provide the most sophisticated post production services
in the industry. Advanced digital techniques will be applied by Burnsed to
attract the producers of all types of programming to utilize the Advanced Media
Production Center for post production, editing, special effects, multimedia
authoring, and related program production services. The Company believes that
the market for such services, although extremely competitive, is broad and
growing, with the demand for programming continuing to burgeon to satisfy an
increasing number of broadcast outlets. Management also believes that the timing
for the establishment of the Center is opportune because the rapid pace of
technological advances, especially in digital technology, is
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rendering many existing facilities relatively obsolete. Nevertheless, the
Company expects to encounter pricing pressure for its planned services.
The Company plans to eventually consolidate all of its and its
subsidiaries' offices in the Advanced Media Production Center as soon as it is
completed. In order to establish the Center, the Company must first locate at
least 22,000 square feet of office space, preferably in Santa Monica,
California, or another location in the Los Angeles metropolitan area. An
acceptable lease for such space or appropriate purchase financing must be
obtained, and the Company must be adequately capitalized to equip, configure and
market the Center. There can be no assurance that the Company will be able to
establish the Advanced Media Production Center, or that it will operate
successfully. The capitalization of the Advanced Media Production Center is also
dependent on securing a lease or leases for approximately $10,000,000 worth of
additional equipment.
PLAN OF REORGANIZATION AND EXCHANGE AGREEMENT. Effective July 1, 1999, the
Company entered into and closed a Plan of Reorganization and Exchange Agreement
(the "Wood Ranch Agreement") with Wood Ranch, Robert Holtz ("Holtz") and William
Burnsed ("Burnsed"), the shareholders of Wood Ranch. Pursuant to terms of the
Wood Ranch Agreement, the Company acquired 100% of the total issued and
outstanding stock of Wood Ranch in exchange for the issuance of 228,000 shares
of the Company's common stock to Holtz and 500,000 shares of the Company's
common stock to Burnsed. After the closing of the exchange, Burnsed became a
director of the Company on August 24, 1999. Mr. Burnsed is also the Vice
President of Advanced Media Group of the Company. Burnsed is a director and
President of Wood Ranch and Holtz is a director of Wood Ranch. Although Burnsed
has not yet commenced work for the Company, he plans to join the Company once
the Company has adequate capital to commence the construction of its planned
Advanced Media Production Center.
POLYGONAL RESEARCH CORPORATION
GENERAL. Polygonal Research Corporation, a Delaware corporation
("Polygonal"), is a development stage company established in 1998 by Bernie
Butler-Smith, an acclaimed imaging technologies engineer, and Robert J. Holtz,
the founder of Zeros & Ones, Inc. Mr. Butler-Smith and Mr. Holtz formed
Polygonal to address the limitations of existing image compression.
As digital television, electronic cinema, and new forms of high-quality
digital video applications continue to emerge, the weaknesses of existing image
compression algorithms will become obvious. The problem is fundamental and stems
from the fact that current compression engines are being stretched into
applications for which they were never intended. The goal of all image
compression methods is to store an image in such a manner that it will occupy as
small a space as possible. On the Internet, making images use fewer bits of data
also means they download faster. Compressed digital video runs more easily than
regular digitized video because the computer has less data to process in every
frame of a sequence. Image compression also allows a publisher of CD-ROMs and
DVDs to reduce production stages and material costs while making the users'
experience more seamless and continuous.
CinePEG(TM), and its internal algorithm, DPC (Dynamic Polygonal
Compression) are based on fundamental and advanced principles of Cartesian
geometry. CinePEG(TM) is not based on fractals, wavelets, or color
scale-suppression. The Company believes CinePEG(TM) is the first motion-centric
image compression technology. It was created specifically for digital video. The
CinePEG(TM) Compression Engine runs a sequence model representation through a 24
stage process to deliver the right balance of image quality and playback
performance. Using a comparable licensing model to that established by Dolby
Laboratories for the sublimation of distortion in sound recordings, the Company
plans to license CinePEG(TM) to hardware and software developers for services
and products that use, create, and manipulate digital video in both professional
and consumer venues. CinePEG(TM) algorithms will also be a key component in the
Company's LiveCast 3D(TM) system.
The Company also plans to create "Fluid Fusion," a product that the Company
believes will revolutionize the way people compress digital video. Using Fluid
Fusion, users are expected to be able to actually see the 3D polygon (3DL)
created by CinePEG(TM). Users will be able to adjust each nuance manually to
obtain the best possible result without the trial and error associated with most
current-day compression technologies. The Company anticipates that its Advanced
Media Production Center will feature a "Fluid Fusion" suite where clients can
have their uncompressed source video compressed using CinePEG(TM).
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Polygonal anticipates that consumer licensees of CinePEG(TM) will likely be
interested in licensing elements of "Fluid Fusion" for consumer-oriented desktop
video products and a myriad of other yet-to-emerge applications. Further
development of CinePEG(TM) and creation of "Fluid Fusion" are still in the
research and development phase, and there is no assurance that the Company will
successfully develop said products or earn any revenue or profit from them.
PLAN OF REORGANIZATION AND EXCHANGE AGREEMENT. Effective July 1, 1999, the
Company entered into and closed a Plan of Reorganization and Exchange Agreement
(the "Polygonal Agreement") with Polygonal and Robert Holtz ("Holtz") and Bernie
Butler-Smith ("Butler-Smith"), the shareholders of Polygonal. Pursuant to the
terms of the Polygonal Agreement, the Company acquired 100% of the total issued
and outstanding stock of Polygonal in exchange for the issuance of 155,000
shares of the Company's common stock to Holtz and 300,000 shares of the
Company's common stock to Butler-Smith. Butler-Smith is the President and Holtz
is the Chairman of the Board of Directors of Polygonal. Butler-Smith became a
director of the Company as soon as permitted under Section 14(f) of the
Securities Exchange Act of 1934, as amended, which was August 24, 1999. Mr.
Butler-Smith is also the Vice-President of Imaging Technology of the Company,
although he has not yet commenced working for the Company, he is in discussions
to terminate his employment with an unaffiliated company before commencing
full-time employment with the Company.
PILLAR WEST ENTERTAINMENT, INC.
GENERAL. Pillar West Entertainment, Inc., a California corporation ("PWE"),
has produced an online portal to a network of Websites on the Internet referred
to as The Kids Educational Network ("K.e.N."). Although the site is no longer
on-line, PWE has proposed that the Company expand K.e.N. ("K.e.N. Project").
Management is currently considering the proposal.
PLAN OF REORGANIZATION. The Company's Plan of Reorganization with PWE (the
"PWE Plan") was approved by PWE's shareholders. Pursuant to the PWE Plan, the
PWE shareholders were issued a total of approximately 2,380,000 shares of the
Company's common stock and approximately 370,000 warrants to purchase an
additional 370,000 shares of the Company's common stock in exchange for all of
the issued and outstanding Convertible Redeemable Preferred Stock and common
stock of PWE. PWE became a 100% owned subsidiary of the Company and was
subsequently dissolved in November 1999. The Company absorbed PWE's assets,
including the K.e.N. Project.
INTERNET AND THE "VENTURE CATALYST INITIATIVE"
GENERAL. Some have postulated that "e-commerce is the zenith of the
Internet." The Company believes the evolution spectrum of e-business is much
larger than the Internet. Convergence opens the doors of commerce to more areas
and aspects of our everyday environments - on the television, in our kitchens,
in cellular phones, inside handheld devices, and on automobile dashboards. The
Company believes that in the coming years there will be an astonishing number
of places to transact commerce with a retailer or service provider that will
dwarf today's Internet.
The activity in the e-commerce and e-business sectors is outpacing the
ability for venture capitalists to make thorough evaluations of management
teams, business models, and technology selections. This is due, in no small
part, to the scarcity of experts that can perform accurate assessments of the
potential success of next generation e-businesses. Venture capitalists and
institutional investors need candidates that are pre-qualified and ready to
deploy.
The Company developed the Venture Catalysm Initiative to address the
growing need for Internet start ups and new e-business ventures to accelerate
their time-to-market. The Company plans to take an equity and revenue position
in all candidates that undergo the six-stage process of venture catalysm. These
six stages include "Consideration and Exploration," "Strategic Planning,"
"Prototyping," "Development," "Growth," and "Transfer."
At the final phase, "Transfer," the entity is either spun off via an
initial public offering or solicited for acquisition by outside companies. This
model empowers the Company and its shareholders to participate in the revenue
opportunities of the dot-com world without defusing the Company's core focus.
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As a result of its acquisitions, the Company has three projects undergoing
this developmental process. The Company is actively seeking other opportunities
with outside parties which would meet the required standards of strategic
benefit and revenue potential to qualify for admission into the program.
MOVIESHOPPING.COM. The Company, through its acquisition of assets from ZOI,
is currently developing a Website for moviegoers called MovieShopping.com.
MovieShopping.com is planned to be the online shopping experience for movie
enthusiasts. With just a few clicks, a user will be able to select a movie and
have instant access to a world of cinematic merchandise, including videos, DVDs,
movie posters, apparel, toys, books, video games, and collectibles. The Company
plans to implement the capability for users to purchase advance movie tickets
online. Theatrical trailers are also planned to be available for review on the
MovieShopping.com Website. MovieShopping.com is currently in the midpoint
"Prototyping" stage. The Company currently owns 100% of MovieShopping.com.
NATIONAL LEGAL SERVICES. Following an initial investment of Company
resources into the business plan and prototype for National Legal Services,
Inc. ("NLS"), the Company recently entered into a Website development agreement
with NLS. Pursuant to the terms of the agreement, the Company is developing a
unique, sophisticated Website which will enable NLS to provide real-time online
legal services to its clients. The Company currently owns approximately 3% of
National Legal Services, Inc., and is also receiving payments from NLS for the
development work. The Company anticipates that it will realize a profit margin
from the payments received from NLS.
FINEITEMS.COM. FineItems.com is an online executive gifts store that offers
quality brand new merchandise for men, women, and children. Offerings include
jewelry, executive gifts, decorative products, collectibles, clocks, luggage,
and other high-quality items. The site was originally launched as a soft test
for ZOI's back-end e-commerce technology. The selection of products has become
more popular and the Company plans to maintain and expand the Website by the
third quarter of 2000. The Website was selected in 1999 by Amazon.com to be a
charter merchant and an invited participant in Amazon Auctions, where it earned
the highest rating from Amazon.com customers. The Website was also
platinum-certified by PublicEye, a third-party entity which is regarded by many
industry analysts as the "Good Housekeeping Seal of The Internet." FineItems.com
was issued the highest rating from the Better Internet Bureau. The Company
currently owns 100% of FINEITEMS.COM.
As the Company advanced the FineItems.com Website to "Development" phase,
several valuable relationships with leading players in the online shopping arena
were established, including: eToys.com, Beyond.com, CBS Sportsline, PC Flowers &
Gifts, ArtSelect Framed Prints, NextCard Visa, Candy Direct, Fragrance.Net,
Nature's Pharmacy, Learn2.com, Seattle's Finest Coffee, American Spice, Lobster
Net, Omaha Steaks, Decor Linens & Gifts, Bed and Bath, SmokeShop Cigars, Optical
Site, CarPrices.com, MagMall.com, FoundMoney.com and Cardservice International.
Fineitems.com is planned to enter the "Growth" stage shortly.
ADVANCED MEDIA PRODUCTION CENTER
The Company plans to build an Advanced Media Production Center ("AMPC")
which will house the Company and its subsidiaries. The Company anticipates that
the AMPC will be located near the heart of the emerging new media district in
Santa Monica, California or in a nearby city. The AMPC is planned to provide
both traditional and cutting edge post production services, including telecine,
film scanning and recording, random access non-linear online editing, computer
graphics and effects, vault storage, compression services, HD color correction,
and network delivery services. The Company anticipates that the AMPC will
centralize and expand its internal production capabilities. The AMPC is planned
to have a demonstration room to showcase the Company's new technologies such as
CinePEG(TM) and LiveCast 3D(TM). The Company believes that this demonstration
room will be of major benefit to the Company, as the AMPC will attract a daily
stream of new clientele which may be potential customers for the Company's new
technologies. The AMPC facility will begin construction when the Company has
raised enough additional capital to assure a timely completion of the project.
In the meantime, the Company will continue to operate from its Pasadena
executive offices or new executive offices, if obtained.
C0NSULTING AGREEMENT
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Effective November 1, 1999, Charles Overton resigned as an officer and
director of the Company and entered into a consulting agreement with the
Company. Pursuant to the consulting agreement, Mr. Overton agreed to assist the
Company with the implementation of its business plan, with raising capital, and
with the completion of the transaction contemplated in the ZOI Plan. Mr. Overton
agreed to provide consulting services to the Company on a nonexclusive basis
through June 30, 2000. He also agreed to remain as the Chairman and Chief
Executive Officer of KidVision, Inc. until final decisions are made regarding
the business and operating plans for KidVision, Inc. In consideration for Mr.
Overton's consulting services, the Company has agreed to pay a net referral fee
to Mr. Overton equal to one-half of one percent of capital that is raised for
the Company through Mr. Overton's efforts, up to a maximum fee of $100,000. Any
other consulting or referral fees payable by the Company to Mr. Overton (i.e. up
to a maximum fee of $400,000) will be applied to the payment of accounts
receivable owed to the Company by an affiliate of Mr. Overton.
COMPETITION - INTERNET
The market for selling products over the Internet is relatively new,
rapidly evolving and intensely competitive. The Company expects competition to
intensify further in the future. Barriers to entry are relatively low, and
current and new competitors can launch new sites at a relatively low cost using
available commercial software. The Company's FineItems.com and MovieShopping.com
Websites will compete with a number of other companies providing e-commerce to
consumers. The Company potentially faces competition from a number of large
online communities and services that have expertise in developing online
commerce. Certain of these potential competitors, including Amazon.com, AOL and
Microsoft, currently offer a variety of business-to-consumer traditional
services and classified advertising services. Competitive pressures created by
any one of these companies, or by the Company's competitors collectively, could
have a material adverse effect on the Company's business, results of operations
and financial condition.
COMPETITION - PROGRAMMING PRODUCTION SERVICES
The entertainment service and post production industry is intensely
competitive. The Company's planned Advanced Media Production Center ("AMPC")
will compete with a myriad of other post production facilities that have access
to much of the same advanced digital production technology and equipment as the
Company. The Company's competitors in this field presently have substantial
competitive advantages over the Company, including infrastructure already
installed, customers already being serviced, greater name recognition (AMPC has
not yet been built and has no name recognition), and greater financial resources
than the Company. There is no assurance the AMPC will be built or will
successfully compete for the business of program producers. The Company is
expected to encounter pressure to maintain modest prices for its services
because of the competition, which could adversely affect the financial condition
and results of operations of the Company.
The Company and its subsidiaries are also expected to encounter fierce
competition in the planned production and marketing of any projects. Due to the
rapid growth of technology, shifting consumer tastes, and the popularity and
availability of other forms of entertainment, it is impossible to predict the
overall effect these factors will have on the potential revenue from and
profitability of the Company's projects or programs.
GOVERNMENT REGULATION - INTERNET
The Company is not currently subject to direct federal, state or local
regulation, other than those laws or regulations applicable to access to or
commerce on the Internet. Due to the increasing popularity and use of the
Internet and other online services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online services
covering issues such as user privacy, freedom of expression, pricing, content
and quality of products and services, taxation, advertising, intellectual
property rights and information security. Although sections of the
Communications Decency Act of 1996 ("CDA") that, among other things, proposed to
impose criminal penalties on anyone distributing "indecent" material to minors
over the Internet, were held to be unconstitutional by the U.S. Supreme Court,
there can be no assurance that similar laws will not be proposed and adopted.
Certain members of Congress have proposed legislation
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that would regulate the distribution of "indecent" material over the Internet in
a manner that they believe would withstand challenge on constitutional grounds.
The nature of such similar legislation and the manner in which it may be
interpreted and enforced cannot be fully determined and, therefore, legislation
similar to the CDA could subject the Company and/or its customers to potential
liability, which in turn could have an adverse effect on the Company's business,
results of operations and financial condition. The adoption of any such laws or
regulations might also decrease the rate of growth of Internet use, which in
turn could decrease the demand for the Company's online services or increase the
cost of doing business, or in some other manner have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast majority
of such laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies.
GOVERNMENT REGULATION - ENTERTAINMENT PROGRAMMING
The Federal Communications Commission (the "FCC") regulates the television
industry and has established certain standards regarding the dedication of time
to programming for children. Domestic regulation by the FCC may impact the
content and frequency of exhibition of the Company's entertainment programming
in the United States, if it produces such programming for television on the
Internet.
In 1994, the United States was unable to reach agreement with its major
international trading partners to include audiovisual works, such as television
programs and motion pictures, under the terms of the General Agreement on Trade
and Tariffs Treaty ("GATT"). The failure to include audiovisual works under GATT
allows many countries (including members of the European Union, which consists
of Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg,
the Netherlands, Portugal and the United Kingdom) to continue enforcing quotas
that restrict the amount of American programming which may be aired on
television in such countries. The Council of Europe has adopted a directive
requiring all member states of the European Union to enact laws specifying that
broadcasters must reserve a majority of their transmission time (exclusive of
news, sports, game shows and advertising) for European works. The directive does
not itself constitute law, but must be implemented by appropriate legislation in
each member country. In addition, France requires that original French
programming constitute a required portion of all programming aired on French
television. These quotas generally apply only to television programming and not
to theatrical exhibition of motion pictures. There can be no assurance that
additional or more restrictive television quotas will not be enacted or that
countries with existing quotas will not more strictly enforce such quotas.
Additional or more restrictive quotas or more stringent enforcement of existing
quotas could materially and adversely affect the business of the Company by
limiting its ability to fully exploit the programs (if any) internationally and,
consequently, to further finance the programs, if necessary.
EMPLOYEES
The Company and its subsidiaries currently have approximately 18 full time
employees, and also retain a number of independent contractors. The employees
include four executive officers.
SEASONALITY
The Company's business is not expected to be substantially affected by
seasonality.
TRADEMARKS
The Company has not been issued any registered trademarks for its "Zeros &
Ones," "CinePEG," "LiveCast 3D," or "HuMotion" trade names, nor have its
prospective subsidiaries been issued registered trademarks or tradenames for
their respective businesses and products. The Company plans to file trademark
and tradename applications with the United States Office of Patents and
Trademarks for its proposed tradenames and trademarks. No
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assurance can be given that the Company will be successful in obtaining any
trademarks, or that the trademarks, if obtained, will afford the Company any
protection or competitive advantages.
ITEM 2. PROPERTIES
The Company does not own any real property and leases approximately 5,000
square feet of office space at 39 East Walnut Street and 45 East Walnut Street,
in Pasadena, California 91103. The Company leases the space pursuant to a
month-to-month lease at a base rental rate of approximately $5,000 per month,
with annual increases equal to the percentage annual change in the applicable
Consumer Price Index. Once a site has been secured and construction is
completed, the Company and its subsidiaries plan to consolidate and relocate to
the planned Advanced Media Production Center. There is no assurance that the
Company will be able to find suitable space on acceptable terms for its planned
new facilities.
ITEM 3. LEGAL PROCEEDINGS
On August 6, 1998, the Company entered into a Plan of Reorganization and
Stock Exchange Agreement with CNG Communications, Inc. ("CNG") and the sole
shareholder of CNG Communications, Inc. pursuant to which the Company was to
acquire 100% of the issued and outstanding stock of CNG in consideration for the
issuance of 4,200,000 shares of the Company's common stock (i.e., to result in
the CNG shareholder owning an agreed upon percentage of the Company's total
issued and outstanding stock on the closing of the transaction). The proposed
acquisition of CNG did not close. Management believes that CNG and its
shareholder breached the agreement. Accordingly, the Company and its two prior
principal shareholders filed a lawsuit in 1999 in United States District Court,
Central District of California, against CNG and the sole shareholder of CNG for
breach of contract, fraud and related claims. The Company has not yet specified
the amount of its damages.
There is no assurance that the Company will prevail in its lawsuit against
the defendants, or that it will recover any of its claimed damages. The two
prior principal shareholders of the Company have advanced the costs of the
lawsuit on behalf of the Company through March 31, 2000 and will each retain a
25% interest in any damages recovered from the lawsuit regardless of which
claims remain. The Company may assume the responsibility for the costs of the
lawsuit against CNG and its prior shareholder after March 31, 2000. The lawsuit
is presently being handled on a contingency fee basis by legal counsel for the
Company and it two prior principal shareholders. The Company and its
co-plaintiffs recently won their motions for California jurisdiction, and
defendants' motions to dismiss on various grounds were rejected by the court.
Discovery in the case is continuing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The written consent of a majority of shareholders of the Company was
obtained on June 18, 1999 to amend the Company's Articles of Incorporation to
change the name of the Company from Commercial Labor Management, Inc. to Zeros &
Ones, Inc. The change of the Company's name was made in preparation for the
closing of the Plan of Reorganization and Asset Purchase Agreement, effective
July 1, 1999, by and between the Company, the prior majority shareholders of the
Company, Zeros & Ones, Inc., a Delaware corporation ("ZOI"), and the
shareholders of ZOI. In the business combination, the Company also acquired 100%
of Quantum Arts, Inc., a California corporation, Wood Ranch Technology Group,
Inc., a Delaware corporation, KidVision, Inc., a California corporation,
Polygonal Research Corporation, a Delaware corporation, and EKO Corporation, a
Delaware corporation, by entering into plans of reorganization and exchange
agreements with those companies and the shareholders of those companies. The
Board of Directors of the Company concurred in the action by the unanimous
written consent of the Board members.
The written consent of a majority of the shareholders was obtained on
February 8, 2000 to approve an amendment to the Company's Articles of
Incorporation to provide for an increase in the number of authorized shares of
common stock to 100,000,000, and to effect a three-for-one forward stock split
of the outstanding shares of the Company's common stock. The Board of Directors
of the Company concurred in the shareholder action by the unanimous written
consent of the Board members.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the NASD OTC Bulletin Board Market
under the symbol "ZROS." The range of high and low bid quotations for each
fiscal quarter since the last report and previous two years, as reported by
Bloomberg, was as follows:
2000 HIGH LOW
- ---- ---- ---
First quarter(3) $22.00 $6.75
1999 HIGH LOW
- ---- ---- ---
First quarter(2) $9.75 $2.75
Second quarter(2) $11.75 $6.50
Third quarter(2) $10.14 $5.75
Fourth quarter(2) $9.13 $3.75
1998 HIGH LOW
- ---- ---- ---
First quarter(1) $.31 $.09
Second quarter(1) $.31 $.28
Third quarter(2) $.56 $.09
Fourth quarter(2) $18.50 $.50
(1) Reflects the one-for-100 reverse stock split effective in December 1997.
(2) Reflects the one-for-five reverse stock split effective in July 1998.
(3) Reflects the three-for-one forward stock split effective on February 25,
2000. The information is through March 31, 2000.
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
As of December 31, 1999, there were approximately 430 record holders of the
Company's common stock, not including shares held in "street name" in brokerage
accounts which is unknown. As of March 31, 2000, there were approximately 734
record holders of the Company's common stock, not including shares held in
"street name" in brokerage accounts, which is unknown. As of March 31, 2000,
taking into account the three-for-one forward stock split effective on February
25, 2000 and the completion of the private placement of common stock and
warrants on March 13, 2000 that raised approximately $8,100,000 of capital,
there were approximately 23,574,089 shares of common stock outstanding,
approximately 825,787 warrants outstanding exercisable until November 2002 at a
price of $1.00 per share, 5,523,204 warrants outstanding exercisable until
December 2002 at a price of $1.83 per share, 180,300 warrants outstanding
exercisable until March 31, 2005 at a price of $1.83 per share, 33,860 warrants
exercisable until March 31, 2001 at a price of $1.83 per share and 22,915
warrants exercisable until March 31, 2001 at a price of $5.00 per share. All
investors in the Company's recently completed private placement of common stock
and warrants that raised approximately $8,100,000 of capital, including
participating broker-dealers, were deemed to be shareholders of record for the
purpose of the Company's three-for-one forward stock split.
The Company has not declared or paid any cash dividends on its common stock
and does not anticipate paying dividends for the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED IN THIS
COMMENTARY ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS
CONCERNING ANTICIPATED TRENDS IN REVENUES, THE FUTURE MIX OF COMPANY REVENUES,
THE EXPECTED AMOUNT OF FUTURE RESEARCH AND
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DEVELOPMENT EXPENDITURES, THE ABILITY OF THE COMPANY TO EARN REVENUES AND
CONTROL COSTS, AND THE POTENTIAL INCREASE IN NET INCOME, CASH FLOW AND OPERATING
COSTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE BUT ARE NOT LIMITED TO THE INABILITY TO
OBTAIN THE SUBSTANTIAL ADDITIONAL CAPITAL NECESSARY TO COMMENCE AND COMPLETE
CONSTRUCTION OF THE AMPC OR TO COMPLETE THE RESEARCH AND DEVELOPMENT OF ITS
PLANNED PRODUCTS, THE POTENTIAL OBSOLENCE OF ITS PLANNED TECHNOLOGIES, FAILURE
TO OBTAIN CONTRACTS OR PROJECTS, INTENSE COMPETITION, FAILURE TO COMMERCIALIZE
ANY OF ITS PLANNED PRODUCTS OR TECHNOLOGIES, LOSS OF CLIENTS, THE COMPANY'S
BUSINESSES ARE RELATIVELY NEW AND SPECULATIVE, FAILURE TO DEVELOP AND MARKET ANY
PROPRIETARY PRODUCTS OR SERVICES, FAILURE TO ATTRACT AND RETAIN QUALIFIED
MANAGEMENT TO CONDUCT RESEARCH AND DEVELOPMENT AND OPERATIONS, MANY OF THE
COMPANY'S SUBSIDIARIES ARE DEVELOPMENT STAGE COMPANIES THAT HAVE INCURRED
OPERATING DEFICITS SINCE INCEPTION, AND OTHER SUBSTANIAL RISKS INHERENT IN THE
COMPANY'S BUSINESSES.
OVERVIEW
Effective July 1, 1999, the Company, which prior to that date was a public
reporting company with no tangible assets and less than $100,000 in liabilities,
acquired the assets of Zeros & Ones, Inc., a Delaware corporation ("Z0I-DE"),
and 100% of the issued and outstanding capital stock of Quantum Arts, Inc., a
California corporation ("QA"), Polygonal Research Corporation, a Delaware
corporation ("PRC"), EKO Corporation, a Delaware corporation ("EKO"), Wood Ranch
Technology Group, Inc., a Delaware Corporation ("WRTG"), and KidVision, Inc., a
California corporation ("KidVision"). During the period from July 1, 1999 to
November 5, 1999, the Company also acquired 100% of the issued and outstanding
common and preferred stock of Pillar West Entertainment, Inc., a California
corporation ("PWE"). The Company dissolved PWE in November 1999. The Company
reported 100% ownership of PWE for the entire third quarter ended December 31,
1999, although it acquired the outstanding capital stock of PWE gradually over
that period of time. While the Company presently intends to maintain QA as a
100% owned subsidiary, it may in the future operate the other businesses as
divisions rather than as separate corporations.
On November 17, 1999, the Company entered into an investment banking
relationship with Richmark Capital, Corporation, headquartered in Texas.
Beginning in January 2000, and ending in early March 2000, Richmark Capital
Corporation and the Company independently raised additional capital for the
Company through a Confidential Private Placement Memorandum ("CPPM") pursuant to
Rule 506 of Regulation D of the Securities Act of 1933, as amended. The total
amount of capital raised prior to termination of the offering was approximately
$8,100,000.00. The terms of the CPPM were for the sale of units of the Company's
securities. Each unit had a purchase price of $4.40, and consisted of one share
of the Company's common stock and one warrant to purchase one additional share
of common stock at $5.50 per share. The shares sold through the CPPM were issued
with a one year restriction under Rule 144 of SEC regulations. The offering was
terminated in favor of protecting existing shareholders from undue dilution when
the gap between the trading price on the open market and the price of the shares
of the CPPM suddenly grew. Although $8,100,000 was raised, the Company intends
to complete its original financing goal of total capital $20 million (less
broker fees and commissions). There is no assurance that the Company will raise
all or any portion of the additional capital that it seeks.
On February 25, 2000, the Company effected a three-for-one forward stock
split of its outstanding shares and increased its authorized common stock to
100,000,000 shares. In addition to the split, the Company changed its trading
symbol from ZOZO to ZROS, was issued a new CUSIP number, and issued a mandatory
recall and exchange of shares to reflect the new symbol and CUSIP number.
Management believes that the current capitalization of the Company and its
position in the market qualify the Company to apply for a listing on the NASDAQ
Small Cap Market. The Company is in the process of moving forward with its
NASDAQ application and expects to announce completion of its application in
the near future.
The year 1999 was a formation and early stage development year, which sets
the stage for execution of the Company's business plan beginning in the year
2000. With net capital of approximately $7 million (after offering costs and
commissions) raised through the CPPM, the Company is now capitalized at
adequate levels to execute certain portions of its plan.
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Management believes that adequate funding is now available to finance
development of the Company's 2D/3D real-time digital television project
(LiveCast 3DTM). Phase 1 of the LiveCast 3DTM project has recently been
completed. The achievements of Phase 1 included initial engineering
specifications leading to the filing of multiple provisional patents, the
beginning of discussions with corporations and individuals important to the
continuation of the project, further work on defining the Phase 2 plan for
LiveCast 3DTM, and the hiring of a well established director for the design and
production of the project marketing video. Keith Melton, the director of
multiple 3D films, who most recently directed the IMAX 3D film starring Cirque
du Soleil, has been signed to direct the marketing film for the LiveCast 3DTM
project. The capital raised through the recent CPPM has enabled the Company to
commence Phase 2 of the project. This phase includes developing the lens
prototype, writing the software and algorithms to enable the technology, filing
of patents to protect the Company's software and intellectual property, and
producing a marketing video to market the product and technology to the
commercial sector.
The recent receipt of investment capital has also allowed the Company to
escalate full development of the MovieShopping.com Website and business.
Strategic alliances and distribution arrangements are rapidly coming into place
to enable the execution of the MovieShopping.com plan.
FineItems.com, an early development and prototype Website to test the
Company's WebSuites e-commerce technology, will also be expanded. Management
believes that the estimated costs for expansion of FineItems.com are reasonable,
when compared to the potential revenue which the site may generate once it has
been expanded.
The receipt of capital from the CPPM has also enabled the Company to secure
the rights and a relationship to the popular characters created by Paul Frank
Industries, the well-known clothing company that is the holder of these rights.
The Company holds a four year exclusive right to develop the Paul Frank
characters in all forms of media, and also holds the shared rights to
merchandise licensing and development. An animated show is currently being
developed for the Internet and television. The Company has received interest
from companies that offer distribution of web-based animation, as well as from
major television networks for an animated show. The Company is currently in
negotiation for these shows, and plans to announce a distribution deal in the
near future.
Earlier this year, the Company began the next phase of its project with
National Legal Services ("NLS"). This project is part of the Company's Venture
Catalyst Initiative. The Company plans to create a complete on-line law firm
with a myriad of service offerings for NLS. As compensation for the Company's
efforts and involvement, NLS is paying the Company a production fee which covers
all of the Company's production costs, and is expected to result in a profit to
the Company. Additionally, the Company owns 3% of the outstanding common stock
of NLS. The Company believes that its efforts during the fourth quarter of 1999
led to this development work.
During 1999, the Company also developed a design and prototype for a
Website and CD-ROM interactive human physiology educational program. This work
was done under contract with McGraw Hill, Inc. Due to current financial
limitations placed on the project by McGraw Hill, the Company has elected not to
proceed with Phase 2 of this development work. This decision was made after a
careful analysis of the budget requirements necessary to design, develop, and
deliver to McGraw Hill a full program which would meet the quality standards
expected of all work produced by the Company.
During 1999 and continuing into 2000, the Company also developed a series
of fully interactive 3-D games under contract with Electronic Arts, Inc., a
leading interactive entertainment software company. Also used on the games
developed for Electronic Arts was the Company's own HuMotion(TM) software
processes, which the Company believes is an industry first in the translation of
completely human motion to a Web page. For this work, the Company received
development funding from Electronic Arts.
The games developed for Electronic Arts utilized a new web driver developed
by Wild Tangent, Inc. Wild Tangent was founded by Alex St. John, the creator of
Microsoft's DirectX technology. The Company recently developed a strategic
relationship with Wild Tangent whereby Wild Tangent will provide a flow of new
customers to the Company for projects that utilize Wild Tangent's
streaming 3-D driver technologies, heightened training in the use of new
technology developments, and early access to Wild Tangent's pre-
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alpha and beta development programs, and an aggressive co-marketing plan
designed to bolster the visibility of both companies.
Also used on the games developed for Electronic Arts was the Company's own
HuMotionTM software processes, which the Company believes is an industry first
in the translation of completely human motion to a Web page.
Management believes that, 1999 was a formation year for the Company. The
Company puts substantial work into the above mentioned projects in the
consolidation of the acquired companies, funding efforts, hiring of key industry
talent, and establishing deals for projects which the Company believes will lead
to financial and marketing success in the future. Some of the projects that were
started in 1999 will be ready for delivery to the market during the latter part
of 2000. Management believes that tehse projects will lead to ongoing revenue
streams will for the Company. The Company believes that its revenue streams
will grow as the Company releases more of its products into the market. As
a result of its recent capitalization, the Company is now positioned to
implement important aspects of its business plan creating the opportunity for
sustained growth. In 1999, the Company established additional key relationships
important to the Company's vision of a future which is rapidly evolving due to
broadband distribution coming of age in a world driven by technology. A future
where the lines between what is a television and what is a computer are
blurring. The Company will endeavor to continue to establish new alliances to
enable the Company to become a leading broadband technology and content
provider.
RESULTS OF OPERATIONS FOR FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL
YEAR ENDED DECEMBER 31, 1998.
The Company's subsidiaries are primarily development stage companies with
no revenue, other than Quantum Arts. Total revenue for the twelve month period
ending December 31, 1999 decreased by $91,335 to $291,882 from $383,217 in the
prior year. Operating and administrative expenses increased by $1,156,526 during
the twelve months ended December 31, 1999 to $1,730,235 from $573,709 in the
prior year. The substantial increase in operating expenses in 1999 as compared
to 1998 primarily reflects the costs of the Company's business combination with
its newly acquired subsidiaries and assets, including the costs of integrating
the subsidiaries with each other and with the Company. Operating costs are
expected to exceed revenue in the foreseeable future as the Company (1)
continues to integrate the businesses of the subsidiaries, (2) conducts
research, development, prototype construction and marketing of its three
dimensional television technology, digital video compression software, and its
e-commerce offerings of FineItems.com and MovieShopping.com, and (3) to the
extent additional funding becomes available, establishes the digital media
production center and acquires other companies. For the twelve months December
31, 1999, the Company's consolidated net loss was $3,578,711 as compared to a
consolidated net loss of $1,050,798 for the twelve months ended December 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had consolidated net cash of $80,848 at December 31, 1999 as
compared to net cash of $120,434 as of December 31, 1998. The Company had a net
working capital deficit (i.e. the difference between current assets and current
liabilities) of $533,612 at December 31, 1999 as compared to a working capital
surplus of $65,673 at December 31, 1998. Cash flow utilized for operating
activities increased from $442,142 during the twelve months ended December 31,
1998 to $1,374,123 during the twelve months ended December 31, 1999. Cash used
for investing activities increased from $571,929 during the twelve months ended
December 31, 1998 to $1,711,475 during the twelve months ended December 31,
1999. Cash provided by financing activities increased from $1,133,408 during the
twelve months ended December 31, 1998 to $3,046,011 during the twelve months
ended December 31, 1999. The substantial increase in cash flow utilized for
operating activities in 1999 as compared to 1998 primarily reflects the costs
incurred by the Company to complete the business combination with its newly
acquired subsidiaries and assets in 1999, and its continuing efforts to
integrate the businesses of those subsidiaries and assets. The substantial
increase in cash provided by financing activities in 1999 as compared to 1998
primarily reflects capital raised by PWE in 1999 prior to the completion of its
acquisition by the Company. PWE ceased raising capital and was dissolved.
Accordingly, no additional capital
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is expected to be available to the Company from PWE. Since July 1999,
the Company's capital needs have primarily been met from the proceeds of (i)
capital realized through the acquisition of PWE, including the exercise of
outstanding PWE warrants at an exercise price of $3.00 per share, (ii) project
based revenue from companies including McGraw Hill, Electronic Arts, National
Legal Services, and The Tech Museum of Innovation, and (iii) a private placement
of common stock made by the Company in 2000 which has raised gross proceeds of
approximately $8,100,000.
The Company expects to continue to have significant capital requirements in
2000 and 2001 to finance the construction of the Advanced Media Production
Center. The Company anticipates capital requirements of approximately $5 million
in fiscal 2000 to complete the construction of the AMPC. The Company will have
additional capital requirements during 2000 and 2001 if the Company continues
with its plan of acquisition and incubation of new companies and projects. There
is no assurance that the Company will have sufficient capital to finance its
growth and business operations or that such capital will be available on terms
that are favorable to the Company or at all. The Company is currently incurring
operating deficits which are expected to continue until its Internet project and
digital production consulting work grows in volume, if such growth is achieved.
RESULTS OF OPERATIONS FOR FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL
YEAR ENDED DECEMBER 31, 1997
The following information only refers to the Company prior to the business
combination as discussed in note 1 of the financial statement. The Company had
no business operations or revenues during its fiscal years ending December 31,
1998 or December 31, 1997. (not consistent w/stmt of operations) The Company
incurred $31,875 in officers' consulting fees and expenses in 1998 compared to
no expenses in 1997. The Company did not have assets, capital, or cash to pay
any of its accounts payable as of fiscal year ended December 31, 1998. Loss per
share for the period was ($.004) adjusted for reverse split, compared to zero in
1997.
LIQUIDITY AND CAPITAL RESOURCES:
The Company had a working capital deficit of $57,750 as of December 31,
1998, comprised of accounts payable for accounting and legal services rendered
for the Company and funds advanced by shareholders. As of December 31, 1998, the
Company had no tangible assets and total liabilities of $57,750. No operations
were conducted and no revenues were generated in the 1997 fiscal year. The
Company at December 31, 1997 had no capital, no cash, and no other assets.
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ITEM 7. FINANCIAL STATEMENTS
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
ASSETS DECEMBER 31, 1999
-----------------
Currents assets:
Cash $ 80,848
Accounts receivable 25,000
Prepaid expenses --
-----------------
Total current assets 105,848
-----------------
Property and equipment, net of
accumulated depreciation & amortization 99,728
Intangible asset, net of
accumulated amortization 186,750
Other assets
Deferred offering costs 258,000
Other assets 49,588
-----------------
$ 699,914
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 142,781
Accrued officers' salaries 107,500
Bank line of credit 10,919
Notes payable, related parties 358,223
Current portion of obligations under capital leases 20,037
-----------------
Total current liabilities 639,460
-----------------
Obligations under capital leases, less
current maturities 28,332
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.001 par value
2,000,000 shares authorized, 0 shares issued and
outstanding --
Common Stock, $.001 par value
50,000,000 shares authorized 5,834,498 shares issued
and outstanding 8,628,267
Paid-In capital 1,392,520
Less: accounts receivable from stockholder (292,300)
Accumulated deficit during development stage (9,696,365)
-----------------
Total stockholders' deficit 32,122
-----------------
$ 699,914
See accompanying independent auditors' report and notes to financial statements.
- --------------------------------------------------------------------------------
PAGE 18
<PAGE>
ZEROS & ONES, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
FROM INCEPTION (SEE NOTE 1)
DECEMBER 31, 1999 DECEMBER 31, 1998 TO DECEMBER 31, 1999
----------------- ----------------- ---------------------------
<S> <C> <C> <C>
Revenues $ 291,882 $ 383,217 $ 823,221
Cost of goods sold 235,831 195,217 431,048
----------------- ----------------- ---------------------------
Gross profit 56,051 188,000 392,173
Operating expenses:
General and administrative 1,730,235 573,709 4,977,113
Loss on investment in related party 1,512,770 607,021 3,564,651
Bad debt from related party 391,757 58,068 483,669
----------------- ----------------- ---------------------------
Total expenses 3,634,762 1,238,798 9,025,433
Net loss $(3,578,711) $(1,050,798) $(8,633,260)
================= ================= ===========================
Loss per share, basic and diluted (0.89) (0.45)
Average shares outstanding, basic
and diluted $ 5,100,018 $ 2,346,000
</TABLE>
See accompanying independent auditors' report and notes to financial statements
- --------------------------------------------------------------------------------
PAGE 19
<PAGE>
ZEROS AND ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------------- ---------------------
Number of Par Value Number of Additional Receivable
Shares $.001 Shares Paid in from Accumulated
Amount Amount Capital stockholder Deficit Total
--------- ---------- --------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Janurary 1, 1998 2,346,000 $ 55,000 504,010 $5,040,100 $(4,939,301) $ 155,799
Shares issued for cash 101,170 1,011,700 1,011,700
Additional capital contribution
Net loss for the year ended
December 31, 1998 247,932 (1,178,353) (930,421)
--------- ---------- --------- ---------- ---------- ----------- ----------- ----------
Balance at December 31, 1998 2,346,000 55,000 605,180 6,051,800 247,932 - (6,117,654) 237,078
Shares issued to shareholders
of CLMI 887,941
Shares issued for cash 252,128 2,521,284 2,521,284
Shares issued for assets
purchased at transferor's
basis 220,000 421,957 (292,300) 129,657
Exchange of preferred stock to
common stock at exchange
ratio 2,924,626 8,573,084 (857,308) (8,573,084)
Shares issued for services 40,908 61 191,870 191,931
Shares issued for deferred
offering cost 50,000 50 257,950 258,000
Shares issued from private
placement 40,909 41 179,959 180,000
Exercise of warrants 30,961 31 92,852 92,883
Cancellation of shares (706,847)
Net loss for the year ended
December 31, 1999 (3,578,711) (3,578,711)
--------- ---------- --------- ---------- ---------- ----------- ---------- ----------
Balance at December 31, 1999 5,834,498 $8,628,267 - $ - $1,392,520 $ (292,300) $(9,696,365) $ 32,122
========= ========== ========= ========== ========== =========== ========== ==========
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
- --------------------------------------------------------------------------------
PAGE 20
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) (3,578,711) (1,050,798)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization expense 175,291 7,078
Stock issued for services 191,889 -
Loss on investment in related party 1,512,770 607,021
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (1,559) (23,441)
Decrease in due from officers 143,800 -
Prepaid expenses 362 (362)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued expenses 74,535 18,360
Accrued officers' salaries 107,500 -
---------- ---------
TOTAL ADJUSTMENTS 2,204,588 608,656
---------- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (1,374,123) (442,142)
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Acquisition of property and equipment (34,517) (7,633)
Acquisition of goodwill (120,000) -
Investment in related party (1,512,770) (607,021)
Other assets (44,188) 42,725
---------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (1,711,475) (571,929)
----------- ---------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from line of credit 5,688 5,231
Proceeds from notes payable - stockholders 330,000 -
Proceeds from issuance of warrants and private placement 272,883 -
Proceeds from issuance of common stock 21,568 215,010
Payments on obligations under capitalized leases (15,133) (3,901)
Payments on notes payable - stockholders (59,277) -
Issuance of preferred stock 2,521,282 1,011,701
Dividends distributed - (21,633)
Draws by proprietor (31,000) (73,000)
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITES 3,046,011 1,133,408
---------- ---------
NET INCREASE (DECREASE) IN CASH (39,587) 119,337
CASH, beginning of year 120,435 1,098
---------- ---------
CASH, end of year $ 80,848 $ 120,435
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 5,116 $ -
========== =========
Income taxes paid $ - $ -
========== =========
See accompanying independent auditors' report and notes to financial statements
</TABLE>
- -------------------------------------------------------------------------------
PAGE 21
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of fixed assets under capitalized leases $ 50,728 $ 16,676
========== =========
Stocks issued for services $ 191,889
==========
Stock subscription for deferred offering cost $ 258,000
==========
Issuance of common stock for equipment $ 144,547
==========
Issuance of common stock for accounts receivable $ 292,300
==========
Issuance of common stock for accounts payable $ 5,459
==========
Notes payable issuance for goodwill $ 87,500
==========
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
- -------------------------------------------------------------------------------
PAGE 22
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(1) ORGANIZATION:
Zeros & Ones, Inc. (formerly Commercial Labor Management, Inc.) is a Nevada
corporation (the "Company") organized October 19, 1988. The Company was
originally incorporated in Nevada under the name Tokyo Raiders on October
19, 1988. In 1990, the Company acquired certain rights to a pizza franchise
and changed its name to Club USPN, Inc. In June 1993, the Company acquired
Sono International, Inc. ("Sono"), but those operations were discontinued
and the shares of Sono were sold to the original shareholders of Sono. In
March 1995 the Board approved the merger with Commercial Labor Management,
Ltd. which was handled as a reverse merger, and also approved a name change
to Commercial Labor Management, Inc. that the name change was made, but the
merger was rescinded and never completed.
Effective July 1, 1999, the Company entered into a Plan of Reorganization
and Asset Purchase Agreement to purchase 100% of the assets of Zero & Ones,
Inc., a Delaware corporation ("ZOI-DE"), and Plans of Reorganization and
Exchange Agreements to acquire 100% of the total issued and outstanding
shares of stock of (1) Quantum Arts Inc. ("QA"), (2) EKO Corporation
("EKO"), (3) Polygonal Research Corporation ("PRC"), (4) KidVision, Inc.
("KV"), and (5) Wood Ranch Technology Group, Inc. ("WRTG"), and in exchange
for the issuance of a total of 2,566,000 new shares of the Company's common
stock plus the issuance of a note in the amount of $300,000 payable to the
stockholder of QA for reimbursement of expenses. As part of the overall
reorganization, the Company also made an exchange offer to the shareholders
of Pillar West Entertainment, Inc. ("PWE") to acquire 100% of the total
issued and outstanding capital stock of PWE in consideration for the
issuance to the shareholders of PWE of (a) approximately 2,380,000 new
shares of the the Company's common stock, and (b) approximately 370,000
warrants to purchase approximately 370,000 additional shares of the the
Company's common stock at $3.00 per share. The original majority
stockholders of the Company also surrendered to the Company for
cancellation 3,700,000 shares of the Company's common stock and received
cash consideration of $207,500, of which $120,000 was paid before July 1,
1999 and a promissory note in the amount of $87,500 was paid in March 2000.
Under the plan of reorganization, QA, EKO, PRC, KV, WRTG, PWE, and assets
acquired from ZOI-DE, refered as "the Group", are merged into one company
and are accounted for in a manner similar to a pooling of interest as if
they are under common control. Some stockholders are stockholders in
various entities within the group. After the effective date of the business
combination of the Group and the Company, the original stockholders of the
Group own a majority of the shares of common stock of the Company. The
Group is treated as the acquirer in this business combination under the
Accounting Principal Board Pronouncement No. 16, paragraph 70, referred
to as a reverse merger. The business combination of the Group and the
Company is accounted for under the purchase method in which the purchase
price of $207,500 cash paid and liabilities assumed of the Company are
allocated to the fair market value of assets and liabilities acquired. The
excess of the purchase price over the fair values of the net assets
acquired has been recorded as goodwill.
See accompanying independent auditors' report.
- -------------------------------------------------------------------------------
PAGE 23
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY:
The Company designs and develops entertainment and educational
interactive software for distributors and publishers of software
products. In addition to fees generated from development of software
products, the Company also receives royalty income from sales of
certain software products developed for others. Steve, check
description for accuracy.
DEVELOPMENT STAGE ENTERPRISE:
The Company is a development stage enterprise company as defined in
Statement of Financial Accounting Standards No. 7, "Accounting and
Reporting by Development Stage Enterprises." All losses accumulated
since inception of Zeros and Ones, Inc. have been considered as part
of the Company's development stage activities.
The unaudited cumulative statements of operations during the
development stage consist of results from operations from various
entities within the group. The date of inception of each entity within
the Group is varied with dates of inception ranging from January 19,
1996 to April 1, 1998.
See accompanying independent auditors' report.
- -------------------------------------------------------------------------------
PAGE 24
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION:
WORK FOR HIRE AGREEMENTS
The Company recognizes revenues at various stages of a project upon
delivery of the completed work product of the respective particular
stage as set forth in the "Work for Hire" agreements.
ROYALTY INCOME
The Company earns royalty income from the net revenues of products
designed and developed by the Company at various royalty rates ranging
from 5% to 30% of net revenues using various tiered methods of
computation as set forth in the development agreements. Pursuant to
some agreements, the Company also receives non-refundable advances
that will be offset against future royalty income. Royalty income is
recorded when reported by the payer on a periodic basis. The
distributors of the products have the right to recoup any and all
justifiable distribution costs prior to making payments to the
Company.
PRINCIPLE OF CONSOLIDATION
The consolidated financial statements include the accounts of its
wholly owned subsidiaries of Quantum Arts, Inc., EKO Corporation,
Polygonal Research Corporation, KidVision, Inc., Wood Ranch Technology
Group, Inc. and Pillar West Entertainment. All significant
intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents include
all highly liquid debt instruments with original maturies of three
months or less which are not securing any corporate obligations.
PROPERTY AND EQUIPMENT:
Property and equipment, recorded at cost, are depreciated or amortized
using the straight-line and accelerated methods over the estimated
useful lives of the assets, which are generally three to seven years.
Leasehold improvements are amortized using the straight-line method
over the shorter of their estimated lives or the lease.
See accompanying independent auditors' report.
- -------------------------------------------------------------------------------
PAGE 25
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
The Company has adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS No. 121"). SFAS No. 121
requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amounts of the assets exceed the fair
values of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Adoption of this statement did not materially impact the Company's
financial position, results of operations or liquidity.
GOODWILL:
Goodwill represents the excess of purchase price over the fair value
of the net assets of acquired businesses. Goodwill is stated at cost
and is amortized on a straight-line basis over 5 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments principally consist of accounts
receivable, accounts payable, line of credit, note payable to a bank,
and notes payable to a related party as defined by Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value
of Financial Instruments." The carrying value of accounts receivable
and accounts payable approximate their fair value due to the
short-term nature of these instruments. The carrying value of the line
of credit and note payable to a bank approximates its fair market
value since these financial statements carry a floating interest rate.
The fair market value of the note payable to a related party
approximated its carrying value based on current market rates for such
debt.
NET LOSS PER SHARE:
The Company has adopted Statement of Financial Accounting Standard No.
128, Earnings per Share ("SFAS No. 128"), which is effective for
annual and interim financial statements issued for periods ending
after December 15, 1998. In accordance with SFAS No. 128, prior years
per share amounts have been restated. SFAS No. 128 was issued to
simplify the standards for calculating earnings per share ("EPS")
previously in APB No. 15, Earnings Per Share. SFAS No. 128 replaces
the presentation of primary EPS with a presentation of basic EPS. The
new rules also require dual presentation of basic and diluted EPS on
the face of the statement of operations.
See accompanying independent auditors' report.
- -------------------------------------------------------------------------------
PAGE 26
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
For the year ended December 31, 1999, the per share data is based on
the weighted average number of common and common equivalent shares
outstanding, and are calculated in accordance with Staff Accounting
Bulletin of Securities and Exchange Commission (SAB) No. 98 whereby
common stock, options or warrants to purchase common stock or other
potentially dilutive instruments issued for nominal consideration must
be reflected in basic and diluted per share calculation for all
periods in a manner similar to a stock split, even if anti-dilutive.
COMPREHENSIVE INCOME
Comprehensive loss consists of net loss only.
See accompanying independent auditors' report.
- -------------------------------------------------------------------------------
PAGE 27
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
DEFERRED TAX:
Deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
RECENT PRONOUNCEMENTS EFFECTIVE SUBSEQUENT TO 1998:
In April 1998, Statement of Position 98-5 "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5") was issued. SOP 98-5 provides
guidance on the financial reporting of start-up costs and organization
costs. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The adoption of this statement did
not have a material effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", the effective date for which was
deferred by SFAS No. 137 until fiscal years beginning after June 15,
1999. The Company anticipates that due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a
material effect on its financial statements.
See accompanying independent auditors' report.
- -------------------------------------------------------------------------------
PAGE 28
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(3) ACCOUNTS RECEIVABLE FROM STOCKHOLDER:
The Company received $292,300% accounts receivable from stockholder as
part of assets purchased from ZOI-DE as described in Note 1 and
accordingly, these accounts receivable from stockholder are classified
as contra account to stockholders' equity.
(4) DUE FROM AFFILIATES:
Amounts represent unsecured, non-interest bearing short-term advances
from entities affiliated through common ownership and management.
(5) PROPERTY AND EQUIPMENT:
A summary is as follows:
Computer and Equipment $888,938
Furniture and fixtures 14,607
Auto 46,861
Equipment under capitalized leases 65,100
---------
1,015,506
Less accumulated depreciation and amortization 915,778
---------
$99,728
=========
Depreciation and amortization expense totaled $154,541 and $7,078 for
the years ended December 31, 1999 and 1998, respectively.
(6) INTANGIBLE ASSETS
Goodwill $207,500
Less: accumulated amortization (20,750)
--------
$186,750
========
Amortization expenses totaled $20,750 for the year ended December 31,
1999.
(7) DEFERRED OFFERING COSTS
Deferred offering costs represents specific incremental costs directly
attributable to the sale of the Company's securities and will be
charged against the proceeds from the planned private placement.
See accompanying independent auditors' report.
- -------------------------------------------------------------------------------
PAGE 29
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(8) NOTES PAYABLE, RELATED PARTIES:
<TABLE>
<S> <C>
Note payable to related parties in connection with the business $87<5000
combination as described in note 1, payable as of July 31, 1999 with
interest at 10% per annum. The note has been extended and
subsequently paid off in March 2000.
Note payable to stockholder in connection with the business combination 240,723
as described in Note 1, payable, $100,000 with interest
at 4% per annum from July 31, 1999 to December 31, 1999. The note has
been extended and was paid off in March 2000.
Due to related parties, non-interest bearing, due on demand. 30,000
--------
$358,223
========
</TABLE>
Interest expenses totaled $4,392 and $0 for the year ended December
31, 1999 and 1998, respectively.
(9) OBLIGATIONS UNDER CAPITALIZED LEASES:
The Company leases computer equipment from unrelated parties under
capitalized leases which are secured by the related assets. The
following is a schedule by year of future minimum lease payments
required under capitalized leases together with the present value of
the minimum lease payments as of December 31, 1999:
Year ended December 31,
2000 $24,451
2001 18,890
2002 677
2003 2,477
2004 1,239
------
Total minimum lease payments 55,734
Less amounts representing interest 7,365
-------
Present value of minimum lease payments 48,369
Less current maturities 20,037
-------
$28,332
=======
See accompanying independent auditors' report.
- -------------------------------------------------------------------------------
PAGE 30
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(10) PAID IN CAPITAL:
Paid in capital is made up in part by contributions of office furniture &
equipment, manufacturing equipment, trade receivables, and accounts payable
in exchange for common stock. Common stock was issued to stockholders' of
record in exchange for these net assets at transferor's carryover basis.
(11) CAPITAL STOCK:
PREFERRED STOCK
The authorized capital stock of the Company includes 2,000,000 shares of
preferred stock, par value $.001 per share, none of which is issued or
outstanding.
COMMON STOCK
The authorized capital stock of the Company includes 50,000,000 shares of
common stock, par value $.001 per share. As of December 31, 1999, 5,834,499
shares of the Company's Common Stock were outstanding.
In 1997 and 1998, the Company effected two reverse stock splits, a one for
twenty reverse split and a one for five reverse split. On November 3, 1998,
the NASDAQ Stock Market, Inc. issued a Uniform Practice Advisory (UPC
#084-98) advising NASDAQ members that the effective date of the one for
twenty reverse stock split for settlement purposes would be revised to
occur on October 14, 1998 rather than September 22, 1998, because NASDAQ
believes that "a sufficient lack of information and uncertainty existed in
the marketplace to warrant a revision." Certain members of the NASDAQ
disagreed with the NASDAQ's ruling. There is no assurance regarding the
final outcome of the NASDAQ's UPC #084-98, or the effect that the ruling
and dispute will have on the Company. In addition, the Company entered into
a Plan of Reorganization and Stock Exchange Agreement with CNG
Communications and the sole shareholder of CNG Communications, Inc. ("CNG")
pursuant to which the Company planned to issue 4,200,000 shares of its
common stock to the sole shareholder of CNG, and cancel a sufficient number
of outstanding shares to result in the CNG shareholder owning an agreed
upon percentage of the Company on the closing of the transactions. As a
result of the breach of that agreement by CNG and the CNG shareholder, the
Company did not issue any shares of its common stock to the CNG
shareholder. Shares, which were surrendered have been reissued and are
being held by the principal shareholders of the Company, pending another
business combination. (See Note 19 to Consolidated Financial Statements -
"Subsequent Events.")
See accompanying independent auditors' report.
- --------------------------------------------------------------------------------
PAGE 31
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(13) INCOME TAXES:
For federal income tax return purposes, the Company has available net
operating loss carryforwards of approximately $ 8,633,260. The net
operating loss carryforwards expire through 2012 and are available to
offset future income tax liabilities.
Temporary differences which give rise to deferred tax assets and
liabilities at December 31, 1999 are as follows:
Net operating loss carryforwards $ 3,465,300
Valuation allowance 3,465,300
----------------
Net deferred taxes $ 0
================
A full valuation allowance has been established for the Company's net
deferred tax assets since the realization of such assets through the
generation of future taxable income is uncertain.
Under the Tax Reform Act of 1986, the amounts of benefit from, net
operating losses and tax credit carryforwards may be impaired or limited in
certain circumstances. These circumstances include, but are not limited to,
a cumulative stock ownership change of greater than 50%, as defined, over a
three year period. During 1999, the Company experienced stock ownership
changes as described in Note 1 which could limit the utilization of its net
operating loss carryforwards in future periods.
(14) COMMITMENTS:
The Company leases its office facility under an operating lease expiring
March 31, 2000. Upon the lease expiring, the Company will rent its office
facility on a month to month basis. The Company is in the process of
negotiating a new lease.
Rent expense totaled $33,559 and $8,520 for the years ended December 31,
1999 and 1998 respectively.
(16) CONTINGENCIES:
The Company is the plaintiff in a lawsuit it filed with Mark Richardson and
Edward Torres as co-plaintiffs, against CNG Communications, Inc. and Paul
Bishop, the prior sole shareholder of CNG Communications, Inc. ("CNG"),
pursuant to which the Company, Mr. Richardson and Mr. Torres are claiming
that CNG and Mr. Bishop committed breach of contract and fraud, causing the
Company, Mr. Richardson and Mr. Torres to incur substantial damages. The
lawsuit and the sharing agreement among the plaintiffs are described in
greater detail in the Company's Report on Form 8-K, dated July 7, 1999.
See accompanying independent auditors' report.
- --------------------------------------------------------------------------------
PAGE 32
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(17) INVESTMENT IN RELATED PARTY:
During January of 1996, Pillar West Entertainment, Inc. entered into a
Production and Licensing agreement with Randall Overton Productions, Inc.
(Randall Overton) in which the 100% stockholder of PWE is also a major
stockholder of Randall Overton. Pursuant to this agreement, 60% of gross
proceeds raised from the issuance and sale of PWE convertible preferred
stock was contributed to Randall Overton for the production, marketing,
sale, and distribution of certain products and programs. As of December 31,
1999 and 1998, losses from this investment in related party were $1,512,770
and $607,021, respectively.
(18) PRIOR PERIOD ADJUSTMENTS
Preferred stock and accumulated deficit for the year ended December 31,
1998 and 1997 has been restated. Bad debt losses and losses from investment
in a related party from January 1997 through December 31, 1998 from one of
the entities (PWE) in the combined group were presented as preferred stock
distribution to shareholders rather than a loss from operations. The net
effect of this prior period adjustment to preferred stock and accumulated
deficit during development stage are as follows:
<TABLE>
<CAPTION>
Accumulated
Preferred deficit during
Stock Development Stage
----------------------------------------------
<S> <C> <C>
Balance reported as of December 31, 1997 $ 3,561,396 $ (3,460,327)
Adjustments:
Loss from investment in related party, net of tax 1,444,860
Bad debt loss from related party, net of tax 33,844
To reinstate preferred stock balance for
above losses that were treated as distribution (1,478,704)
----------------------------------------------
Adjusted balance as of December 31, 1997 $ 5,040,100 $ (4,939,031)
==============================================
Balance reported as of December 31, 1998 $ 5,386,712 $ (5,452,565)
Adjustments:
Loss from investment in related party, net of tax (607,021)
Bad debt loss from related party, net of tax (58,068)
To reinstate preferred stock balance for
above losses that were treated as distribution 665,088
----------------------------------------------
Adjusted balance as of December 31, 1998 $ 6,051,800 $ (6,117,654)
==============================================
</TABLE>
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PAGE 33
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(19) SUBSEQUENT EVENTS:
A) During the first quarter of 2000, pursuant to a Confidential Private
Placement Memorandum, the Company sold 1,841,068 pre-split shares of
the Company's common stock at a purchase price $4.40 per share and
1,841,068 pre-split warrants at an exercise price of $5.50 per share.
The Confidential Private Placement was exempt from the registration
provisions of the Act pursuant to Section 4(2) of the Act, as
transactions by an issuer not involving any public offering. The
securities issued pursuant to the Confidential Private Placement were
restricted securities as defined in Rule 144. The offering generated
gross proceeds of approximately $8,100,000. An additional 50,000
pre-split shares of the Company's common stock was issued for services
rendered in connection with this confidential private placement, which
was valued at $4.40 per share.
B) During February 2000, the Company entered into a Website Development
and License Agreement with National Legal Services, Inc.(NLSI).
Additionally, provided that NLSI is current on all payment
obligations, the Company agreed to purchase $50,000 worth of NLSI
Series A Preferred Stock at the price specified in the current
offering of said stock.
C) During March 2000, the Company entered into two employment agreements
pursuant to which the Company has agreed to issue 250,000 stock
options to purchase 250,000 shares of the Company's common stock and
50,000 stock options to purchase 50,000 shares of the Company's common
stock, respectively, pursuant to the stock option plan the Company
plans to adopt in the near future. One of the employment agreements
specifies a stock option guarantee that the shares underlying the
options will be valued at $1,000,000 at the end of the employee's four
year vesting period.
D) Subsequent to the year ended December 31, 1999, the Company amended
its Articles of Incorporation to provide for an increase in the number
of authorized shares of common stock to 100,000,000. The Company also
declared a three-to-one forward stock split. The forward stock split
will be effective on February 25, 2000. The financials statements as
of December 31, 1999 and 1998 do not reflect the effect of the forward
stock split.
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<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
See accompanying independent auditors' report.
- --------------------------------------------------------------------------------
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<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF EXCHANGE ACT
NAME AGE POSITION
- ---- --- --------
Robert J. Holtz 29 Director, Chairman of the Board of Directors
and President
Steve Schklair 45 Director, Chief Executive Officer and
Chief Financial Officer
William Burnsed 53 Director and Vice President of Advanced
Media Group
Bernie Butter-Smith 45 Director and Vice President of Imaging
Technology
Allen Crawford 46 Vice President of Strategic Development
Obie Scott Wade 35 Vice President of Creative Affairs
ROBERT J. HOLTZ is the Chairman of the Board of Directors and President of
the Company. Mr. Holtz has also been the Chairman of the Board of Directors,
President, and Founder of Zeros & Ones, Inc., a Delaware corporation ("ZOI"),
since its inception in April 1994. Holtz established strategic relationships
with Fortune 100 companies, engaged in contract negotiations, coordinated
marketing and public relations, and managed client/developer relationships. Mr.
Holtz is also the Founder of EKO Corporation and Co-Founder of both Polygonal
Research Corporation and Wood Ranch Technology Group. From October 1991 until
founding ZOI in April 1994, Mr. Holtz was the Director of Special Projects for
Action Video, Inc., a television post-production facility. During that tenure,
Mr. Holtz developed several key techniques and technologies utilized by the
entertainment industry to digitize and share video clips in collaborative
projects. From January 1989 until October 1991, Holtz headed a small business
that created custom hardware and software solutions. In the early 1990's, Mr.
Holtz participated in Microsoft's Win32 Group which guided the development of
Win32; the core of the Microsoft Windows operating system shared in Windows 95,
Windows 98, Windows NT, and Windows 2000. Mr. Holtz's accomplishments also
include the creation of the first completely automated credit card clearing and
merchant protection service center for an independent processor, the creation of
an Emergency Response Locator system which locates physicians and specialists by
geographical proximity for emergency response, and the creation of one of the
first fully automated credit card commerce system for the nationwide sale of
movie theater admission tickets. Mr. Holtz is an active member of the Society of
Motion Picture and Television Engineers, the Institute of Electrical and
Electronic Engineers, the Society of Television Engineers, the Association of
Computing Machinery, and the International Multimedia Association (Charter
Member).
STEVE SCHKLAIR is the Chief Executive Officer and Chief Financial Officer
of the Company and has been a director of the Company since August 24, 1999. Mr.
Schklair has also been Chairman of the Board of Directors, Chief Executive
Officer, and President of Quantum Arts, Inc., a subsidiary of the Company, since
the inception of its predecessor-in-interest in December 1997. From 1995 to
1997, Mr. Schklair was the Vice President and General Manager of New Media for
Digital Domain, a special effects company in Venice, California. His
responsibilities at Digital Domain included co-managing the facility,
streamlining development and production processes, overseeing asset development
and management, staffing key positions, managing contract negotiations, managing
marketing and public relations, and managing client, partner, and publisher
relationships. At Digital Domain, Mr. Schklair co-negotiated a joint venture
with Mattel to create CD-ROM titles
- --------------------------------------------------------------------------------
PAGE 36
<PAGE>
based on Mattel's licensed properties. The first title, BARBIE FASHION DESIGNER,
sold over 2,000,000 units, which makes it one of the best-selling children's
titles of all time. From 1993 to 1995, Mr. Schklair was an Executive Producer
and Creative Director at R/Greenberg Associates, a commercial production company
with offices in Los Angeles, California and New York, New York. He joined
R/Greenberg as a visual effects and process consultant providing creative
direction on TERMINATOR 2: 3D for Universal Studios. At R/Greenberg, he designed
and produced interactive projects for clients such as AT&T, FCB, Levis, Silicon
Graphics, Activation, Phillips, IBM, Universal Studios, and Princess Cruises.
From 1990 to 1993, Mr. Schklair was an Executive Producer and Project Manager
for Synapse Technologies, a computer graphics company in Los Angeles,
California. At Synapse Technologies, he developed and produced several
interactive multimedia titles, including COLUMBUS: ENCOUNTER, DISCOVERY AND
BEYOND, EVOLUTION AND REVOLUTION, and AIR POWER. In 1981, Mr. Schklair
co-founded Infinity Filmworks. During his ten years as President of Infinity
Filmworks, he produced and photographed several films, music videos, and
commercials, including the award winning SENSORIUM for Six Flags Power Plant in
Baltimore, Maryland and the award winning TO DREAM OF ROSES, created for the
1990 Osaka World Exposition. Mr. Schklair received a Bachelor of Fine Arts from
California State University in 1979 and a Master in Fine Arts from the
University of Southern California School of Cinema/Television in 1982.
WILLIAM BURNSED has been a director and Executive Vice President of the
Company since August 24, 1999. Mr. Burnsed has also been the Chairman and Chief
Executive Officer of Wood Ranch Technology Group, Inc., a subsidiary of the
Company, since its inception in 1998. In 1995, Mr. Burnsed founded Digital Video
Engineering, a sole proprietorship engaged in computer systems design and
installation for television and film special effects. Digital Video Engineering
has been combined with Wood Ranch Technology Group, Inc. From January 1996 until
July 1996, Mr. Burnsed was the Director of New Business Development for Discreet
Logic Systems in North and South America. While with Discreet Logic Systems and
Digital Video Engineering, Mr. Burnsed built online random access edit rooms for
the Fox Network and high level telecine for Advanced Digital. In August 1991 he
founded Hollywood Digital, a television post production company which Mr.
Burnsed operated through 1994. In February 1982, Mr. Burnsed founded B&B
Systems, Inc., an equipment manufacturing and turn key television systems
engineering and construction contracting company. During his eleven year tenure
as President of B&B, B&B designed and built several large facilities, including
the J.C. Penny World Headquarters, 525 Post Production, the Financial News
Network, Lorimar Studios, Post Pro Video, Multimedia Services, the Shop
Television Network, and the California State Assembly Television Network. From
May 1979 to February 1982, Mr. Burnsed was the Director of Engineering for
Editel where he was responsible for the design and construction of five online
edit bays, three rank telecines, one audio mixing room, and one insert stage.
From 1976 to 1979, he was the Engineering Supervisor for TAV/Merv Griffin
Productions where he supervised a department of engineers who were responsible
for the installation and maintenance of television equipment used for
videotaping the Merv Griffin Show. From 1973 to 1976, Mr. Burnsed was the
General Manager of Shelter Vision Mobile Video where he was responsible for the
video systems operation of a television mobile truck which traveled to various
cities videotaping musical shows. From 1971 to 1973, he was the Director of
Studio Operations for Transworld Communications, a division of Columbia
Pictures. At Transworld, Mr. Burnsed was responsible for the design,
installation, and operation of seven custom studios in cities from Honolulu to
London. Mr. Burnsed has not yet commenced working for the Company. Mr. Burnsed
plans to join the Company once the Company has adequate capital to commence
construction of its planned Advanced Media Production Center.
BERNIE BUTLER-SMITH has been a director and Executive Vice President of the
Company since August 24, 1999. Mr. Butler-Smith has also been the Chairman and
Chief Executive Officer of Polygonal Research Corporation, a subsidiary of the
Company, since its inception in August 1998. For the past twelve years Mr.
Butler-Smith has designed real-time image processing products for various
applications. In May 1998, Mr. Butler-Smith formed a research and development
company called ICU Security. Prior to co-founding Polygonal Research
Corporation, he was the Vice President of Engineering at Digi-Spec Corporation
for eleven years. At Digi-Spec Corporation he designed 35 image processing
products, including pixel level video motion detectors, time lapse recorders,
and digital switching and routing equipment. In an independent study conducted
by Sandia National Labs and commissioned by the U.S. Department of Energy, Mr.
Butler-Smith's motion detector products received the highest ranking. Mr.
Butler-Smith has also done research in several disciplines of mathematics and
high performance digital pipelining structures. Among the companies that
currently use his designs are Microsoft for external security, Pheizer
Pharmaceutical for security, the U.S. Department of Defense for strategic
applications, the U.S. Navy for
- --------------------------------------------------------------------------------
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<PAGE>
strategic applications, the Hoosier Dome for security, Boeing for employee
safety, the Environmental Protection Agency for detecting pollution leakage, and
the Federal Aviation Agency for detection functions at airports. Mr.
Butler-Smith has not yet commenced working for the Company. He is in discussions
to terminate his employment with un unaffiliated company before commencing
full-time employment with the Company.
ALLEN CRAWFORD accepted a position with the Company as the Vice President
of Strategic Development in March 2000 after a two-month consulting engagement
that started in January 2000. Prior to joining the Company, Mr. Crawford was the
Executive Vice President of Production Development and Corporate Affairs and a
board member of Station X Studios, LLC, a digital effects and animation studio
that he co-founded in 1998 to produce extreme photo-real computer generated
imagery for feature films and television commercials. From 1995 to 1998 he was
the Director of Business Affairs for Digital Domain where he was responsible for
negotiating studio deals including FX deals for such feature films as "Apollo
13", "The Fifth Element", "Dante's Peak" and "Titanic", as well as deals for
major location based and CD-ROM based projects, music videos, and national
commercial spots. Prior to 1995, Mr. Crawford was an executive in the computer
industry specializing in mergers and acquisitions for Tandon Corporation from
1986 to 1995, and business affairs for Autologic, Inc. and Automatic Data
Processing, Inc. from 1979 to 1986 and from 1977 to 1979, respectively.
OBIE SCOTT WADE has been the Vice President of Creative Affairs of the
Company since February 15, 2000. From August 17, 1999, until his promotion to
Vice President of Creative Affairs, Mr. Wade was a Creative Director of the
Company. Mr. Wade has served as a Creative Consultant and Director for numerous
location-based projects such as: Space Park Bremen, a space-themed visitor
complex in Bremen, Germany; Discovery World theme park in Taichung, Taiwan; a
major, new corporate identity center in Europe for Volkswagen; and a new,
multi-sensory exhibit on the subject of toys and technology for The Tech Museum
of Innovation in San Jose, California. Mr. Wade began his career in 1986 as a
writer and producer for the ACE-award-winning 5-2-6 SHOW created by the
California State Board of Education and Apple Computer. He later served as the
head of Creative Development for the West Coast Office of PBS station
WQED/Pittsburgh - the home of Mr. Rogers and Carmen San Diego. While at WQED,
Mr. Wade worked closely with Dr. Donna Mitroff to spearhead the station's entry
into the realm of content-based themed entertainment. His credits for WQED
include: writing and directing several titles in the TURBO TEACHER educational
ride-film series for Iwerks Entertainment; creating concepts for multimedia
presentations on the subject of biodiversity for the National Park Service; and
developing interactive theater attractions for Legoland USA. In 1997, Mr. Wade
worked with Jim Henson Productions to develop WEB WARRIORS, the first
interactive children's game show to be played simultaneously on TV and in
cyberspace. Mr. Wade has recently worked on other projects including the
development of an animated feature for Klasky-Csupo, and content direction for
the DRAGON BALL Z on-line children's game produced by Pioneer Entertainment.
Presently, Mr. Wade oversees the branded content group for the Company where he
is currently developing and producing a slate of original animated and
live-action youth oriented programming for the Company's web and television
content offerings.
Under the Nevada General Corporation Law and the Company's Articles of
Incorporation, the Company's directors will have no personal liability to the
Company or its stockholders for monetary damages incurred as the result of the
breach or alleged breach by a director of his "duty of care." This provision
does not apply to the directors' (i) acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) acts or omissions
that a director believes to be contrary to the best interests of the corporation
or its shareholders or that involve the absence of good faith on the part of the
director, (iii) approval of any transaction from which a director derives an
improper personal benefit, (iv) acts or omissions that show a reckless disregard
for the director's duty to the corporation of its shareholders in circumstances
in which the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of serious injury to the
corporation or its shareholders, (v) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the corporation or its shareholders, or (vi) approval of an unlawful
dividend, distribution, stock repurchase or redemption. This provision would
generally absolve directors of personal liability for negligence in the
performance of duties including gross negligence.
Insofar as an indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted for directors, officers or persons
controlling the
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<PAGE>
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission each indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors receive no cash compensation for their services to the Company as
directors, but are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors.
EXECUTIVE OFFICER COMPENSATION
The following table sets forth cash compensation paid for services rendered
to the Company by the Company's executive officers during its last fiscal year
ended December 31, 1999. During the third quarter and the fourth quarter of last
fiscal year no executive officer received actual cash compensation from the
Company that exceeded $100,000. This amount includes deferred salary
compensation in the amount of $58,500 to Mr. Holtz, and $49,000 to Mr. Schklair.
No cash bonuses were paid by the Company. The Company plans to establish a stock
incentive program for the directors, executive officers and employees of the
Company pursuant to which authorized and unissued common stock will be reserved
for issuance to the directors, officers, employees and key consultants of the
Company, as determined by the Compensation Committee (to be formed) of the Board
of Directors. The Company expects to authorize 3,000,000 shares of the Company's
common stock to be reserved for issuance upon the exercise of up to 3,000,000
stock options which may be granted in the future pursuant to the Company's
planned management incentive stock option plan.
NAME POSITION CASH COMPENSATION
- ---- -------- -----------------
Steve Schklair(1) Chief Executive Officer,
Chief Financial Officer, $ 97,500(3)
Secretary
Robert Holtz(2) President $ 97,500(3)
All executive officers $195,000(3)
as a group (4 persons)
- ------------------------------
(1) In connection with the Company's business combination with its
wholly owned subsidiaries in July 1999, Mr. Schklair was issued 850,000
shares of the Company's common stock and a cash payment totaling $300,000,
payable in installments. The Company paid $60,000 of its obligation to
Schklair in 1999 and paid the remaining balance plus simple interest at the
rate of 4% per annum during the first quarter of 2000.
(2) In connection with the Company's business combination with its wholly owned
subsidiaries in July 1999, Mr. Holtz was issued 900,000 shares of the
Company's common stock, 50,000 of which he conveyed to Charles Overton in
January 2000.
(3) This amount covers the period from July 1, 1999 to December 31, 1999 and
includes $58,500 deferred salary payable to Robert Holtz and $49,000
deferred salary payable to Steve Schklair.
EMPLOYMENT AGREEMENTS
The Company has not entered into any employment agreements with its
executive officers to date. The Company may enter into employment agreements
with them in the future.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the names and addresses of the executive
officers and directors of the Company and all persons known by the Company to
beneficially own 5% or more of the issued and outstanding common stock of the
Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED NUMBER OF SHARES PERCENTAGE OF
TITLE OF CLASS NAME & ADDRESS OF SHAREHOLDER BEFORE FORWARD SPLIT BENEFICIALLY OWNED OUTSTANDING SHARES
AFTER STOCK SPLIT BENEFICIALLY OWNED(5)
- ----------------- ------------------------------ ---------------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
Common Stock Steve Schklair(1) 850,000 2,550,000 14.6%
39 East Walnut Street
Pasadena, California 91103
Common Stock Robert Holtz(2) 850,000 2,550,000 14.6%
39 East Walnut Street
Pasadena, California 91103
Common Stock William Burnsed(3) 500,000 1,500,000 8.6%
39 East Walnut Street
Pasadena, California 91103
Common Stock Bernie Butler-Smith(4) 300,000 900,000 5.2%
39 East Walnut Street
Pasadena, California 91103
Common Stock All officers and directors 2,500,000 7,500,000 43%
as a group (4 persons)
39 East Walnut Street
Pasadena, California 91103
</TABLE>
- ------------------------------
(1) Mr. Schklair is the Chief Executive Officer, Chief Financial Officer,
Secretary and a director of the Company.
(2) Mr. Holtz is the Chairman of the Board of Directors and President of the
Company.
(3) Mr. Burnsed is a director and Executive Vice-President of the Company.
(4) Mr. Butler-Smith is a director and Executive Vice-President of the Company.
(5) A three for one forward stock split became effective on February 25, 2000.
Prior to the forward stock split the Company had a total of approximately
5,816,876 shares issued and outstanding. After the effective date of the
forward stock split the Company had a total of approximately 17,450,630
shares issued and outstanding, not including approximately 5,523,204 shares
(after taking into account the three-for-one forward stock split) and
5,523,204 warrants issued in the Company's private placement of securities
that recently resulted in gross proceeds of approximately $8,100,000 and
not including the exercise of 120,255 warrants at an exercise price of
$3.00 per share ($1.00 per share after the stock split) which have been
exercised since February 7, 2000. The Company is also obligated to issue
approximately 480,000 additional shares of its common stock to a
broker-dealer firm and consultants. The Company is also obligated to issue
approximately 237,075 warrants at an exercise price of $1.83 per share to
broker-dealer firms and consultants. The percentages on the table are
calculated based on 17,450,630 shares outstanding.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was initially incorporated as Tokyo Raiders, Inc. It
subsequently changed its name to Club USPN, Inc. then to XL Corp., then to
Commercial Labor Management, Inc., and then to Zeros & Ones, Inc. The Company
was incorporated for the purpose of engaging in any lawful business, with its
original purpose to evaluate and acquire one or more unspecified businesses or
properties. In June 1997, all issued and outstanding shares of the Company's
Series A Convertible Preferred Stocks were converted by their holders into
7,200,000 shares of the Company's common stock.
In December 1997, the Company, by the written consent of its majority
shareholders representing approximately 82.6% of the total issued and
outstanding common stock of the Company, (i) amended its Articles of
Incorporation to increase the authorized common stock from 15,000,000 to
50,000,000 shares, par value $.001 per share, and (ii) effected a one for twenty
reverse stock split to result in a total of 643,804 shares of common stock
issued and outstanding. On December 31, 1997, an additional 7,530,600 shares of
the common stock were issued, resulting in a total of 8,173,804 shares of the
Company's common stock issued and outstanding as of December 31, 1997. In July
1998, the Company, by the written consent of its majority shareholders
representing approximately 87% of the total issued and outstanding common stock
of the Company, effected a one for five reverse stock split.
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<PAGE>
On August 6, 1998, the Company entered into a Plan of Reorganization and
Stock Exchange Agreement with CNG Communications, Inc. and the sole shareholder
of CNG Communications, Inc. ("CNG") pursuant to which the Company was to acquire
100% of the issued and outstanding stock of CNG in consideration for the
issuance of 4,200,000 shares of the Company's Common Stock (i.e., to result in
the CNG shareholder owning an agreed upon percentage of the Company's total
issued and outstanding stock on the closing of the transaction). The proposed
acquisition of CNG did not close. Management believes that CNG and its
shareholder breached the Agreement. Accordingly the Company filed a lawsuit
against CNG and its sole shareholder in 1999 for breach of contract, intentional
interference with business relationship and related claims. The Company has not
yet specified the amount of its damages. There is no assurance that the Company
will prevail in its filed lawsuit against the defendants, or that it will
recover any of its claimed damages.
Pursuant to a Confidential Private Placement Memorandum dated December 15,
1999, the Company recently sold 5,523,204 shares of common stock and 5,523,204
warrants, for an aggregate amount of approximately $8,100,000 in cash. These
securities were sold pursuant to Rule 506 of Regulation D under the Securities
Act of 1933, as amended to "accredited investors" as defined in the Securities
Act of 1933, as amended. The warrants are exercisable until December 31, 2002 at
an exercise price of $1.83 per share. The Company has the right to call the
warrants at any time that the bid price of the Company's common stock on the OTC
Bulletin Board, NASDAQ or other public trading market is equal to or greater
than $2.50 per share for 20 consecutive trading days. If the Company has the
right to and does call the warrants, warrantholders will have a period of 30
days from the date of notification of the call to exercise the warrants or they
will expire unexercised. If the Company calls the warrants, it will then proceed
to file a registration statement with the Securities and Exchange Commission to
register the shares issuable upon the exercise of the warrants in order for
those shares to become free trading.
The principal broker-dealer for this offering was Richmark Capital
Corporation. Richmark Capital Corporation raised approximately $2,650,000 of the
capital and received (i) 14% of the proceeds of sales all securities sold by
Richmark Capital Corporation, (ii) 150,000 shares of the Company's common stock,
and (iii) 180,300 warrants to purchase common stock exercisable until February
24, 2005 at an exercise price of $1.83 per share.
The Company also issued a total of approximately 370,000 warrants to the
shareholders of Pillar West Entertainment, Inc. to purchase 370,000 shares of
the Company's Common Stock for a purchase price of $3.00 per share, exercisable
for a period of three years from the date of the issuance of the warrants, which
occurred on or about November 9, 1999. The warrants include customary
anti-dilution provisions providing for price and amount adjustments in the event
of stock splits, reverse stock splits, recapitalizations, stock dividends and
similar transactions. No adjustments are made for the issuance of additional
shares of capital stock by the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
3.1 Articles of Incorporation(1)
3.2 Amendments to Articles of Incorporation(1)
3.3 Bylaws(1)
4.1 Specimen Certificate for Common Stock
4.3 Specimen Warrant Certificate
10.1 Plan of Reorganization and Asset Purchase Agreement with Zeros &
Ones, Inc.(2)
10.2 Plan of Reorganization and Exchange Agreement with Quantum Arts,
Inc.(2)
10.3 Plan of Reorganization and Exchange Agreement with KidVision,
Inc.(2)
10.4 Plan of Reorganization and Exchange Agreement with Wood Ranch
Technology Group, Inc.(2)
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.5 Plan of Reorganization and Exchange Agreement with Polygonal
Research Corporation(2)
10.6 Plan of Reorganization and Exchange Agreement with EKO
Corporation(2)
10.7 Plan of Reorganization with Pillar West Entertainment, Inc.(2)
10.8 Amendment to Plans of Reorganization and Exchange and Asset
Purchase Agreements dated March 30, 2000(1)
10.9 Amendment to Plans of Reorganization and Exchange and Asset
Purchase Agreements dated March 30, 2000
10.10 Deal Memorandum with Paul Frank Industries, Inc. dated February
1, 2000(3)
10.11 Website Development and License Agreement with National Legal
Services dated December 20, 1999(3)
10.12 Developers Work For Hire Agreement with McGraw Hill Companies,
Inc. dated August 31, 1999(3)
10.13 Master Development Agreement with Electronic Arts, Inc. dated
July 31, 1999(3)
21.1 List of Subsidiaries
23.1 Independent Auditors' Report of Stonefield Josephson, Inc.
Independent Certified Public Accountants
</TABLE>
- --------------------
(1) Incorporated by reference from the exhibits included with the Company's
Registration Statement on Form S-18 declared effective by the Securities and
Exchange Commission on December 17, 1993, or from the exhibits included with the
Company's prior Reports on Form 8-K filed with the Securities and Exchange
Commission since December 1993.
(2) Incorporated by reference from the exhibits included in the Company's Report
on Form 8-K filed with the Securities and Exchange Commission on July 11, 1999.
(3) A copy of this exhibit is not filed on the basis that it contains
confidential material information and therefore may be excluded from the
Company's public reports pursuant to Rule 406 of the Securities Act of 1933, as
amended. The Company may file a request for confidential treatment for these
agreements with the Securities and Exchange Commission in the future under Rule
406.
(b) The following is a list of Current Reports on Form 8-K filed by the
Company during and subsequent to the last quarter of the fiscal year ended
December 31, 1999.
Report on Form 8-K dated February 8, 2000, relating to the forward
stock split and Amendment to the Articles of Incorporation.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 2000 ZEROS & ONES, INC.
By: /s/ Steve Schklair
------------------------
Steve Schklair, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ Robert Holtz Chairman of the Board and March 31, 2000
- ---------------------- President
Robert Holtz
- --------------------------------------------------------------------------------
PAGE 42
<PAGE>
/s/ Steve Schklair Director and Chief Executive March 31, 2000
- ---------------------- Officer
Steve Schklair
/s/ Bernie Butler-Smith Director March 31, 2000
- ----------------------
Bernie Butler-Smith
/s/ William Burnsed Director March 31, 2000
- ----------------------
William Burnsed
ZEROS & ONES, INC.
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NO. EXHIBIT NUMBERED PAGE
- ----------- -------- -------------
4.1 Specimen Certificate of Common Stock
4.2 Specimen Warrant Certificate
10.8 Amendment to Plans of Reorganization and Exchange and
Asset Purchase Agreements dated March 30, 2000
21.1 List of Subsidiaries
23.1 Independent Auditors' Report of Stonefield Josephson, Inc.
- --------------------------------------------------------------------------------
PAGE 43
<PAGE>
EXHIBIT 4.1
[STOCK CERTIFICATE FRONT]
- -------------------------------------------------------------------------------
COMMON STOCK COMMON STOCK
NUMBER "THIS CERTIFICATE IS RESTRICTED FROM SHARES
TRANSFER AS INDICATED ON REVERSE SIDE."
[ ] [ ]
CUSIP 989493_[illegible] 107 SEE REVERSE FOR
CERTAIN DEFINITIONS
ZEROS & ONES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
THIS CERTIFIES THAT:
IS THE RECORD HOLDER OF *** ***
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, WITHOUT PAR VALUE
ZEROS & ONES, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimilie seal of the Corporation and the facsimilie
signatures of its duly authorized officers.
Dated:
08-13-99
/s/ CHARLES [ILLEGIBLE] /s/ STEVE SCHKLAIR
------------------------- ------------------------
SECRETARY PRESIDENT
[illegible]
U.S. STOCK TRANSFER CORPORATION
(Glendale, California)
Transfer Agent and Registrar
By [illegible]
Authorized Officer
[CORPORATE SEAL]
- -------------------------------------------------------------------------------
<PAGE>
[STOCK CERTIFICATE BACK]
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S><C>
TEN COM --as tenants in common UNIF GIFT MIN ACT -- Custodian
TEN ENT --as tenants by the entireties -------------------------
JT TEN --as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts to Minors
tenants in common
Act
----------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED __________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------SHARES
REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND
APPOINT
- -----------------------------------------------------------------------ATTORNEY
TO TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PROMISES.
DATED
-----------------------------
-------------------------------------------
SIGNATURE
SIGNATURE GUARANTEED:
BY
--------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15.
"THE HOLDER REPRESENTS THAT THESE SHARES HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO RESALE
OR DISTRIBUTION THEREOF WITHIN THE MEANING OF THE
SECURITIES ACT THESE SHARES MAY BE TRANSFERRED ONLY
UNDER AN EFFECTIVE REGISTRATION STATEMENT, OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
RULE 144 OF THE GENERAL RULES AND REGULATIONS UNDER
THE SECURITIES ACT OF 1933, AS AMENDED OR PURSUANT TO
A 'NO-ACTION' LETTER ISSUED BY THE SECURITIES AND
EXCHANGE COMMISSION."
<PAGE>
EXHIBIT 4.2
NO. WARRANTS
------------- -----------
Initial Date: February 29, 2000
Warrants to Purchase Common Stock of Zeros & Ones, Inc.
Zeros & Ones, Inc., a Nevada corporation (hereinafter called the "Company"),
for value received, hereby certifies that
or registered assigns, is the owner of the number of Warrants set forth above,
each of which represents the right, at any time commencing on the Initial Date
(the "Initial Date") first above written and ending on or before 5:00 p.m., Los
Angeles time, on December 31, 2002, on which date such Warrants expire,
initially to purchase one share of Common Stock, no par value per share, of the
Company (hereinafter called the "Common Stock") at the price of $1.83 per share
(the "Warrant Price"), subject to adjustment and to the terms of this Warrant.
Each such purchase is deemed effective only upon surrender of this Warrant to
the Company at its office with the form of Election to Exercise duly filled in
and signed, and upon payment in full to the Company of the Warrant Price (i) in
cash or (ii) by certified or official bank check. This Warrant may only be
exercised in conjunction with other Warrants such that only full shares of
Common Stock are issued upon the simultaneous exercise of all such Warrants.
The Warrant Price and, at the Company's option, either (y) the number of
shares of Common Stock purchasable on the exercise of each Warrant or (z) the
number of Warrants outstanding (i.e. the Company must choose one of the
options), are subject to proportionate adjustment in the event of a
recapitalization, reorganization, stock split, reverse stock split, or similar
transaction. In the event the Company elects to adjust the number of Warrants
outstanding rather than the number of shares of Common Stock purchasable on the
exercise of each Warrant, the Company will distribute to registered holders of
Warrant Certificates either Warrant Certificates representing any additional
Warrants issuable pursuant to the adjustment or substitute Warrant Certificates
to replace all outstanding Warrant Certificates.
The Company shall not be required upon the exercise of the Warrants, or
upon any adjustment, to issue fractions of shares of Common Stock, to distribute
stock certificates that evidence fractional shares of Common Stock, or to issue
Warrant Certificates representing fractional Warrants, but shall make
adjustments in cash for any fraction of a share or Warrant. If the Warrants
represented by this Warrant Certificate are exercised in part, the registered
holder hereof shall be entitled to receive, upon surrender hereof, another
Warrant Certificate for the balance of the number of whole Warrants not
exercised as provided in the Warrant Agreement.
This Warrant Certificate may be exchanged or transferred either separately
or in combination with other Warrant Certificates at the Company's office for
new Warrant Certificates representing the same aggregate number of Warrants as
were evidenced by the Warrant Certificate exchanged, upon surrender of this
Warrant Certificate and upon compliance with the conditions of this Warrant.
Upon any such transfer, a new Warrant Certificate or new Warrant
Certificates of different denominations, representing in the aggregate a like
number of Warrants, will be issued to the transferee. Every holder of Warrants,
by accepting this Warrant Certificate, consents and agrees with the Company and
with every subsequent holder of this Warrant Certificate, that until due
presentation for the registration of transfer of this Warrant Certificate on the
Warrant Register maintained by the Company, the Company may treat the person in
whose name this Warrant Certificate is registered as the absolute and lawful
owner for all purposes whatsoever and the Company shall not be affected by any
notice to the contrary.
Nothing contained in this Warrant Certificate shall be construed as
conferring on the holder of any Warrants or his transferee any rights whatsoever
as a shareholder of the Company.
This Warrant Certificate shall be deemed a contract made under the laws of
the State of California and for all purposes shall be construed in accordance
with the laws of the State of California without giving effect to the principles
of conflicts of laws thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
[CORPORATE SEAL]
Dated: February 29, 2000 ZEROS & ONES, INC.
By: /s/ ROBERT J. HOLTZ By: /s/ STEVE SCHKLAIR
---------------------------- -------------------------------
Robert J. Holtz, Chairman Steve Schklair, Chief Executive
& President Officer
<PAGE>
EXHIBIT 10.9
AMENDMENT TO PLANS OF REORGANIZATION
AND EXCHANGE AND ASSET PURCHASE AGREEMENTS
The undersigned, signatories to those certain plans of reorganization and
exchange and asset purchase agreements (collectively, the "Agreements"), by and
among Zeros & Ones, Inc. (formerly Commercial Labor Management, Inc.), a Nevada
corporation (the "Corporation"), Zeros & Ones, Inc., a Delaware corporation,
Quantum Arts, Inc., a California corporation, Kidvision, Inc., a California
corporation, Wood Ranch Technology Group, Inc., a Delaware corporation, EKO
Corporation, a Delaware corporation, Polygonal Research Corporation, a Delaware
corporation, and Pillar West Entertainment, Inc., a California corporation,
dated as of July 1, 1999, hereby agree to amend the Agreements on March 30,
2000, to be effective as of July 1, 1999, as follows:
1. The number of shares of the Corporation's Common Stock issued to
Robert Holtz, the sole shareholder of Zeros & Ones, Inc., a Delaware
corporation, in consideration for 100% of the assets of Zeros & Ones,
Inc., a Delaware corporation, is 220,000 rather than 512,000.
2. The number of shares of the Corporation's Common Stock issued to
Robert Holtz, the owner of 98.3% of the total issued and outstanding
stock of EKO Corporation, a Delaware corporation, in consideration for
98.3% of the assets of EKO Corporation, is 297,000 to Robert Holtz
rather than 5,000.
3. The Agreements will remain in full force and effect without
modification except as amended by this Amendment to Plans of
Reorganization and Exchange and Asset Purchase Agreements
IN WITNESS WHEREOF, the undersigned hereby execute this Amendment to Plans
of Reorganization and Exchange and Asset Purchase Agreements in their same
capacity as they executed the original Agreements .
/s/ Robert Holtz
---------------------------------------
Robert Holtz
/s/ Steve Schklair
---------------------------------------
Steve Schklair
/s/ Mark J. Richardson
---------------------------------------
Mark J. Richardson
/s/ Edward L. Torres
---------------------------------------
Edward L. Torres
<PAGE>
EXHIBIT 21.1
LIST OF COMPANY SUBSIDIARIES
1. Quantum Arts, Inc., a California corporation.
2. EKO Corporation, a Delaware corporation.
3. Polygonal Research Corporation, a Delaware corporation.
4. Wood Ranch Technologies Group, Inc., a Delaware corporation.
5. KidVision, Inc., a California corporation.
- -------------------------------------------------------------------------------
PAGE 45
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Zeros and Ones, Inc. and subsidiaries
Pasadena, California
We have audited the accompanying balance sheet of Zeros and Ones, Inc. and
subsidiaries, a Nevada Corporation (a development stage enterprise) as of
December 31, 1999, and the related statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1999 and 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Zeros and Ones, Inc. and
subsidiaries as of December 31, 1999, and the results of its operations and its
cash flows for the years ended December 31, 1999 and 1998 in conformity with
generally accepted accounting principles.
Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
March 24, 2000
