<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended: June 30, 1999
Commission File Number:33-385-11-FW
CHEQUEMATE INTERNATIONAL, INC.
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Utah 76-0279816
-------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
57 West 200 South, Suite 350; Salt Lake City, Utah 84101
---------------------------------------------------------
(Address of principal executive offices)
(801) 322-1111
--------------------
(Issuer's Telephone Number)
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirement for the past 90 days .
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's
common equity, as of the latest practicable date: August 12, 1999: 22,815,882
Transitional Small Business Format: YES NO X
----- -----
<PAGE>
TABLE OF CONTENTS
PART I-FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
UNAUDITED CONSOLIDATED BALANCE SHEETS................................................3
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS......................................5
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS.......................................6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation................................17
GENERAL INFORMATION
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
YEAR 2000 COMPLIANCE
FORWARD LOOKING STATEMENTS
PART II-OTHER INFORMATION
Item 1. Legal Proceedings...........................................................20
Item 2. Changes in Securities.......................................................21
Item 5. Other Information...........................................................22
Item 6. Exhibits and Reports on Form 8-K............................................22
</TABLE>
Page 2 of 22
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 311,602 $ 1,732,199
Accounts receivable - net of allowances
of $53,820 and $53,820 323,567 197,922
Prepaid expenses 318,979 198,349
Inventory (Note 2) 3,433,109 3,115,763
-------------- --------------
Total Current Assets 4,387,257 5,244,233
-------------- --------------
PROPERTY AND EQUIPMENT (Note 3) 989,677 622,717
-------------- --------------
OTHER ASSETS
Note receivable 65,000 65,000
Product rights (Note 1) 3,570,261 2,534,532
Secured interest (Note 14) - 1,198,530
Refundable deposits 15,704 15,704
Investments 3,000 3,000
-------------- --------------
Total Other Assets 3,653,965 3,816,766
-------------- --------------
TOTAL ASSETS $ 9,030,899 $ 9,683,716
============== ==============
</TABLE>
The accompanying notes are an integral part of this financial statement.
Page 3 of 22
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,052,975 $ 896,408
Accrued expenses 50,220 38,672
Income tax payable 500 500
Accrued interest - related party 79,943 79,943
Accrued interest payable 95,565 39,791
Current portion related party (Note 5) 140,000 140,000
Current portion long-term debt (Note 6) 167,864 227,610
Current portion capital lease (Note 7) - 13,602
----------------- -----------------
Total Current Liabilities 1,587,067 1,436,526
----------------- -----------------
LONG-TERM LIABILITIES
Long-term debt (Note 6) 3,690,000 3,190,000
----------------- -----------------
Total Long-Term Liabilities 3,690,000 3,190,000
----------------- -----------------
Total Liabilities 5,277,067 4,626,526
----------------- -----------------
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value 500,000,000 shares
authorized, 22,815,882 and 22,358,646 shares
outstanding, respectively 2,282 2,236
Capital in excess of par 25,108,017 24,461,440
Accumulated deficit (21,356,467) (19,406,486)
----------------- -----------------
Total Stockholders' Equity 3,753,832 5,057,190
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,030,899 $9,683,716
================= =================
</TABLE>
The accompanying notes are an integral part of this financial statement.
Page 4 of 22
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the three Months Ended
June 30,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
REVENUES $ 767,009 $ 89,748
COST OF SALES 332,949 28,134
-------------- --------------
GROSS PROFIT 434,060 61,614
-------------- --------------
EXPENSES
Selling expenses 810,875 129,635
General and administrative 1,515,306 443,156
-------------- --------------
Total Expenses 2,326,181 572,791
-------------- --------------
OTHER INCOME (EXPENSE)
Interest income 7,481 -
Interest expense (90,486) (2,804)
-------------- --------------
Net Other Expense (83,005) (2,804)
-------------- --------------
NET (LOSS) BEFORE INCOME TAXES (1,975,126) (513,981)
INCOME TAX PROVISION - -
-------------- --------------
NET (LOSS) $ (1,975,126) $ (513,981)
============== ==============
(LOSS) PER SHARE $ (0.09) $ (0.03)
============== ==============
AVERAGE NUMBER OF SHARES OUTSTANDING 22,656,646 16,050,274
============== ==============
</TABLE>
The accompanying notes are an integral part of this financial statement.
Page 5 of 22
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (1,975,126) $ (513,981)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 113,783 28,070
(Increase) decrease in accounts receivable (12,645) (13,592)
(Increase) decrease in inventory (317,346) 28,429
(Increase) decrease in prepaid expense (120,630) (154)
Increase (decrease) in accounts payable 156,567 (53,131)
Increase (decrease) short-term debt - (21,756)
Increase (decrease) in accrued expenses 11,548 (1,523)
Increase (decrease) in accrued interest 55,774 -
---------------- ---------------
Net Cash (Used) by Operating Activities (2,201,075) (547,638)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment purchase (112,154) (23,602)
---------------- ---------------
Net Cash (Used) by Investing Activities (112,154) (23,602)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock 465,980 375,044
Proceeds from debt 500,000 -
Payments of capital leases (13,602) (654)
Payments of long-term debt (59,746) (3,928)
---------------- ---------------
Net Cash Provided by Financing Activities $ 892,632 $ 370,462
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
Page 6 of 22
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
---------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
NET (DECREASE) IN CASH $ (1,420,597) $ (200,778)
CASH AT BEGINNING PERIOD 1,732,199 220,840
---------------- --------------
CASH AT END OF PERIOD $ 311,602 $ 20,062
================ ==============
</TABLE>
The accompanying notes are an integral part of this financial statement.
Page 7 of 22
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Notes to Consolidated Financial Statements
June 30, 1999 and March 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies reflect practices of the
software sales, 3-D electronic devices and services industries and
conform to generally accepted accounting principles. Certain prior
year amounts have been reclassified to be consistent with the
March 31, 1999 presentation. The following policies are considered
to be significant:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries, Chequemate Electronic, Inc.,
Families in Focus, Inc., Strata, Inc., AC&T Direct, AC&T and
Chequemate Tele-Services, Inc. All significant intercompany
accounts and transactions have been eliminated.
REVENUE RECOGNITION
Revenue is recognized on an accrual basis upon deliver of the
software or product. Revenue consists of software sales, product
sales, license fees, and monthly service fees.
PRODUCT RIGHTS
Cost to acquire rights have been capitalized and amortized over
five years using a straight line method. The total amortization of
product costs for the three months ended June 30, 1999 and the
year ended March 31, 1999, amounted to $61,600 and $314,873,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost with depreciation and
amortization computed on the straight line method. Property and
equipment are depreciated over the following estimated useful
lives:
<TABLE>
<CAPTION>
Years
---------
<S> <C>
Office equipment 5
Office furniture 5-7
Machinery and equipment 5
Leasehold improvements 3-5
Capital leases 3-5
</TABLE>
ORGANIZATION COSTS AND PRODUCT RIGHTS
<TABLE>
<CAPTION>
Net Book Value
---------------------------
June 30, March 31,
Term Cost Amortization 1999 1999
----------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Product rights 4-5 years $ 3,927,310 $ 718,474 $ 3,208,836 $ 2,423,399
Contract/movie
rights 2 years 391,896 30,471 361,425 111,133
Organization cost 5 Years 17,261 17,261 - -
--------- ----------- ---------- ----------- ------------
$ 4,336,467 $ 766,206 $ 3,570,261 $ 2,534,532
=========== ========== =========== ============
</TABLE>
Page 8 of 22
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ORGANIZATION COSTS AND PRODUCT RIGHTS (Continued)
The Company evaluates the recoverability of intangibles and
reviews the amortization period on an annual basis. Several
factors are used to evaluate intangibles. Including, but not
limited to, management's plans for future operations, recent
operating results and projected, undiscounted cash flows.
BASIC LOSS PER SHARE
Basic loss per share is calculated using a weighted average for
common stock.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and cash on deposit with banks.
INCOME TAXES
The Company's tax basis is the same as the Company's financial
statement basis. The Company has net operating loss carryforwards
of approximately $19,000,000 available to offset future federal
and state income tax through 2014. The Company has not recorded a
tax benefit attributable to the carryforwards because realization
of such has been offset by a valuation allowance for the same
amount.
COMPUTER SOFTWARE COSTS
The Company classifies the costs of planing, designing and
establishing the technological feasibility of computer software
product as software development costs and charges those costs to
expense when incurred. Costs incurred for duplicating computer
software from product masters, documentation and training
materials and packaging costs are capitalized as inventory and
charged to cost of sales when revenue is recognized. Costs of
maintenance and customer support are charged to expense when costs
are incurred.
ADVERTISING
The Company follows the policy of charging the costs of
advertising to expense as incurred.
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 revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Page 9 of 22
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CHANGE IN ACCOUNTING PRINCIPLES
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share" during the year ended March
31, 1999. In accordance with SFAS No. 128, diluted earnings per
share must be calculated when an entity has convertible
securities, warrants, options, and other securities that represent
potential common shares. The purpose of calculating diluted
earnings (loss) per share is to show (on a pro forma basis) per
share earnings or losses assuming the exercise or conversion of
all securities that are exercisable or convertible into common
stock and that would either dilute or not affect basis of EPS. As
permitted by SFAS No. 128, the Company has retroactively applied
the provisions of this new standard by showing the fully diluted
loss per common share for all years presented.
The Company adopted Statement of Financial Accounting Standards
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), which
requires the Company to determine compensation costs for the
Company's stock option plans and other stock awards in accordance
with the fair value based method prescribed in SFAS No. 123. The
Company recognized approximately $180,000 and $405,100 of a
stock-based compensation expense for the three months ended June
30, 1999 and the year ended March 31, 1999, respectively.
The Company also adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income" during
the year ended March 31, 1999, SFAS No. 130 established standards
for reporting and display of comprehensive income (loss) and its
components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. This statement requires that
an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a
balance sheet. The adaption of SFAS 130 had no material effect on
the Company's financial statements.
PRIOR PERIOD RECLASSIFICATION
Certain 1998 balances have been reclassified to conform to the
presentation of the 1999 consolidated financial statements.
NOTE 2 - INVENTORY
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
-------------- -------------
<S> <C> <C>
Finished goods $ 1,412,771 $ 1,035,682
WIP 849,872 1,076,880
Raw goods 1,140,466 1,003,201
Prepaid inventory 30,000 -
-------------- -------------
$ 3,433,109 $ 3,115,763
============== =============
</TABLE>
Page 10 of 22
<PAGE>
NOTE 2 - INVENTORY (Continued)
The Company inventories are stated at the lower of cost or market,
using the first-in, first-out (FIFO) method. Inventories consist
mainly of components related to the 3-D electronic devices product
and pay-per-view operations.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1999 and March 31, 1999 are
detailed in the following summary:
<TABLE>
<CAPTION>
Net Book Value
-------------------------
Accumulated June 30, March 31,
Cost Depreciation 1999 1998
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Office furniture and fixtures $ 62,427 $ 39,840 $ 22,487 $ 24,320
Machinery and equipment 1,158,915 219,506 939,409 569,488
Capital leases 29,895 3,887 26,008 26,905
Leasehold improvements 4,581 2,808 1,773 2,004
---------- ------------ ---------- ----------
Total $1,255,818 $ 266,141 $ 989,677 $ 622,717
========== ============ ========== ==========
</TABLE>
Depreciation expense is computed principally on the straight line
method in amounts sufficient to write off the cost of depreciable
assets over their estimated useful lives. Depreciation expense for
the three months ended June 30, 1999 and the year ended March 31,
1999 amounted to $52,414 and $79,599, respectively.
NOTE 4 - STOCKHOLDERS' EQUITY
The Company is authorized to issue 500,000,000 shares of common
stock, par value $.0001. As of June 30, 1999 and March 31, 1999,
the Company has issued 22,815,882 and 22,358,646 shares of common
stock.
The Company continued the placement of Regulation D and Regulation
S stock in the year ended March 31, 1999 and issued 2,729,526
shares to investors. The Company's plans are to continue placing
common stock through private placements to fund the growth
requirements of the Company.
Page 11 of 22
<PAGE>
NOTE 5 - RELATED PARTIES
Notes payable to related parties as of June 30, 1999 and March 31,
1999 are detailed in the following summary:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1998
--------------- --------------
<S> <C> <C>
Note payable to CEO; due on demand, with an
interest rate of 10.4%; unsecured; accrued
interest of $79,943 is due on demand. $ 140,000 $ 140,000
--------------- --------------
Total related party notes payable 140,000 140,000
Less: current portion (140,000) (140,000)
--------------- --------------
Long-term portion $ - $ -
=============== ==============
Maturities of the related party notes payable are as follows:
Period ending June 30, 2000 $ 140,000
2001 -
--------------
Total $ 140,000
==============
</TABLE>
NOTE 6 - LONG-TERM DEBT
Notes payable as of June 30, 1999 and March 31,1999 are detailed
in the following summary:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1998
------------ -----------
<S> <C> <C>
Note payable to a company; due in monthly
installments of $3,244 which includes
interest at 8%; due July, 1999, unsecured. $ 50,990 $ 53,907
Convertible debentures to a company; due
December 22, 2001, with interest at 8%. 750,000 750,000
Convertible debentures to a company; due
February 22, 2002, with interest at 8%. 2,000,000 2,000,000
Convertible debenture to a company, due
April, 2002, with interest at 8% 500,000 -
------------ -----------
Balance Forward $ 3,300,990 $ 2,803,907
------------ -----------
</TABLE>
Page 12 of 22
<PAGE>
NOTE 6 - LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Balance Forward $ 3,300,990 $ 2,803,907
Note payable to a company; due June 8, 2000,
interest at 10% due monthly, secured by
equipment and inventory. 440,000 440,000
Note payable to a company; unsecured, due in
monthly installments of $19,654, which includes
interest at 6%; due October 1999. 116,874 173,703
--------------- ---------------
Total long-term debt 3,857,864 3,417,610
Less: current portion (167,864) (227,610)
--------------- ---------------
Long-term portion $ 3,690,000 $ 3,190,000
=============== ===============
Maturities of long-term debt are summarized below:
Period ending June 30, 2000 $ 167,864
2001 440,000
2002 2,750,000
2003 500,000
2004 -
--------------
Total $ 3,857,864
==============
</TABLE>
NOTE 7 - LEASES
All noncancelable leases with an initial term greater than one
year have been categorized as capital or operating leases in
conformity with the definitions in Financial Accounting Standards
Board Statement No. 13, "Accounting for Leases".
The following analysis represents property under capital lease at
June 30, 1999 and March 31, 1999:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
-------------- --------------
<S> <C> <C>
Equipment $ 29,895 $ 29,895
Less: accumulated depreciation (3,88) (2,990)
-------------- --------------
Net property under capital lease $ 26,008 $ 26,905
============== ==============
</TABLE>
Page 13 of 22
<PAGE>
NOTE 7 - LEASES (Continued)
At June 30, 1999, the Company is liable under the terms of
non-cancelable leases for the following minimum lease commitments:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------------- -------------
<S> <C> <C>
Period ended June 30,
2000 $ - $ 147,099
2001 - 113,987
2002 - 76,687
2003 - -
later years - -
------------- -------------
Total minimum lease payments - $ 337,773
=============
Less: interest -
-------------
Present value of net minimum lease payment -
Less: current portion -
-------------
Capital lease obligations payable long-term $ -
=============
</TABLE>
Rental expense for the three months ended June 30, 1999 and the
year ended March 31, 1999, amounted to $77,809 and $135,580,
respectively.
NOTE 8 - CASH FLOW AND NON CASH INVESTING AND FINANCING ACTIVITIES
CASH FLOW INFORMATION
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------ ------------
<S> <C> <C>
Interest paid $ 35,486 $ 34,535
Income taxes paid $ - $ 500
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
For the three months ended June 30, 1999 and the year ending March
31, 1999, the Company incurred the following non-cash investing
and financing activities.
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------- -------------
<S> <C> <C>
Capital lease obligations incurred $ - $ 29,895
Issuance of stock and options for services rendered $ 180,000 $ 448,547
Issuance of stock for assets $ - $ 1,533,000
Increase in debt for assets $ - $ 440,000
</TABLE>
Page 14 of 22
<PAGE>
NOTE 9 - FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade
receivables. The Company provides credit to its customers in the
normal course of business. However, the Company performs ongoing
credit evaluations of its customers and maintains allowances for
potential credit losses. The Company places its temporary cash
with high quality financial institutions. At times such cash
accounts may be in excess of the FDIC insurance limit.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement to maintain a satellite
transponder and uplink for broadcasting its three dimensional
cable channel. The agreement requires the Company to make monthly
payments of $100,000 to retain these services.
The Company is the defendant in a pending lawsuit. The ultimate
outcome of this litigation is unknown at the present time.
Accordingly, no provision for any liability that might result has
been made in the accompanying financial statements. In the opinion
of management, the existing litigation is not considered to be
material in relation to the Company's financial position.
NOTE 11 - ACQUISITIONS
In December 1998, the Company purchased assets to supplement the
hotel movie pay-per-view operations. The assets included existing
contracts with several hotels to provide pay-per-view movies. The
Company issued 250,000 shares of common stock, a convertible note
and cash for the assets.
NOTE 12 - GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has
incurred losses from its inception through June 30, 1999. The
Company does not have an established source of revenues sufficient
to cover its operating costs. It is the intent of the Company to
seek additional financing through private placements of its common
stock.
Management has formulated a plan to raise additional funding
through stock issuances and increase in debt. In addition, the
Company's projected increase in revenue from the establishment of
its three dimensional cable channel will provide sufficient
capital for operations.
Page 15 of 22
<PAGE>
NOTE 13 - COMMON STOCK AND WARRANTS
Effective May 17, 1995, the stockholders approved an Incentive
Stock Option Plan granting to key employees options to purchase
Company common stock over a ten year period, at the fair market
value at time of grant. The aggregate number of common shares of
the Company which may be granted under the plan is 800,000
shares. The plan expires on March 23, 2004.
The convertible debentures entered into by the Company carry
warrants allowing the debtor to acquire stock. The December 1998
convertible debentures of $750,000 are in $250,000 incremental
units and carry warrants equal to 24,753 shares per unit. The
February 1999 convertible debentures of $2,000,000 are in
$250,000 increments and carry warrants equal to 8,475 shares per
unit. The June 1999 convertible debentures of $500,000 are in
$250,000 increments and carry warrants equal to 8,475 shares per
unit.
NOTE 14 - ACQUISITION OF SECURED INTEREST
In December 1998, the Company purchased from a financing
institution the secured interest on a line of credit against
Strata, Inc. (Strata). The Company continued to advance credit to
Strata and as of March 31, 1999 had recorded a note receivable of
$465,530. Also, on March 31, 1999, the Company obtained the
secured interests of several other promissory notes held by
several investors against Strata by exchanging stock for the
notes. The Company exchanged 333,333 shares of common stock for the
notes. The above notes hold a secured interest in the tangible
assets, accounts receivable, intellectual property and other assets
of Strata. Strata is in the business of providing 3D centric
graphical software applications. In June 1999, the Company
foreclosed upon Strata and acquired all of the assets of Strata.
Page 16 of 22
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
For more detailed information regarding the financial position of
the Company, please refer to the Unaudited Financial Statements for the three
month periods ending June 30, 1999 and June 30, 1998. A copy of these
Financial Statements are included in Item 1 of this report.
During the quarter ended June 30, 1999 the Company continued to
aggressively pursue its position in 3D entertainment on television and the
internet. The Company's cable channel continues to operate 24 hours a day
with new content being added on an almost continuous basis. The securing of
the assets and intellectual property owned by Strata, Inc. has not only added
significantly to the Company's revenues, but has also put in place the
groundwork for its 3D entertainment website portal.
The Company has been operating its own cable channel since January
1, 1999. The channel is currently accessible by owners of C-Band satellite
dishes which are the large 8 to 12 foot backyard dishes. The satellite space
which is used to broadcast the channel is on the GE Spacenet 3 satellite at
Transponder 9. The programming on the channel continues to increase and
consists of movies which have been licensed for use by the Company as well as
video content which was specifically contracted for production by the
Company. Content acquisition and development is coordinated through the
Company's Los Angeles office.
The channel signal is currently broadcast without any encryption,
meaning that any C-Band satellite dish owner can tune in and receive the
Company's channel. However, the picture they see has two different images and
appears shadowed and out of focus when viewed without the proprietary 3D
equipment available from the Company. This equipment consists of a pair of
high speed shutter glasses and either the Company's original Realeyes product
or the new Channel Player. The difference between the two products is that
the original Realeyes product will not only allow the viewer to see the 3D
cable channel clearly, but will also convert existing 2D content from
whatever video source, be it other television channels, videos or video
games, to a 3D image. The Channel Player can be used to view the Company's
channel but cannot convert normal 2D images to 3D like the more expensive
Realeyes unit.
The Company is actively marketing its channel to cable operators
across the United States and recently returned from the National Cable
Television Association (NCTA) show in Chicago. At the show, the Company was
able to introduce the channel to numerous cable operators, hardware
manufactures and others involved in the cable industry. VisionComm, a cable
operator in Dallas, Texas, has successfully pulled the channel into its
system and will be marketing it to their subscribers beginning July 1st. The
Company is optimistic that many other cable operators will follow suit and
begin offering the channel to their subscribers in the near future. The
channel will begin as a premium channel with the cable operator and the
Company sharing in the revenue which will be generated.
Another key business segment of the Company is its hotel
pay-per-view business. The Company became involved in this business area
through acquisitions from Alpha Broadcasting Corporation and Hotel Movie
Express. In the acquisitions the Company purchased a combination of inventory
to outfit hotels for a pay-per-view service, equipment that had already been
installed
Page 17 of 22
<PAGE>
in hotels, and contracts to provide the pay-per-view service where this
equipment was in place. The Company is interested in the hotel market as
another revenue source from its 3D technology. Currently the hotel
properties, consisting of more than 5,800 rooms, continue to operate as a
traditional pay-per-view system, but steps have been taken which will make it
possible for hotel guests to enjoy a 3D experience right in their own room.
The properties are located in Arizona, California, Idaho, New Mexico, Texas,
Utah and Washington.
The Company completed on June 16, 1999 the process of acquiring the
assets and technology previously owned by Strata, Inc. The Company has hired
former Strata, Inc. employees to support and sell the Strata products for the
Company. Strata, Inc. was one of the early pioneers in 3D software. The
Strata tool line has been used for such well-known projects as the game
"MYST"-C-; television shows like the "'98 MTV Movie Awards"-C-,"Hercules"-C-
and "Xena"-C-; the NBC dancing peacocks; the Warner Bro.'s and Blockbuster
web sites; the films "Contact"-C-, "5th Element"-C-, "Batman Forever"-C-, and
many others. These tools will provide the Company with some of the most
advanced 3D technology available and should enhance the Company's position in
3D media and technology.
The Company also recently announced the formation of a new wholly
owned subsidiary company named 3D.COM. Created from the Company's recent
Strata acquisition and its own internal web division, 3D.COM will be
launching the world's first Virtual Reality Portal. The portal, planned for a
fall 1999 debut, is designed to allow visitors to "go in" rather than just
"go to" the web. The plan is patterned after Real Networks-TM- which is both
a technology company and a media portal. Similarly, 3D.COM will be providing
a web portal and technology products, but with the focus being on 3D and
virtual reality. Revenue will be generated for the subsidiary by ad placement
on the website or by a fee being charged to explore the different virtual
reality worlds.
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED JUNE 30, 1999 AND 1998
Gross Revenue
The Company generated revenues of $767,009 for the quarter ended
June 30, 1999, as compared to $89,748 for the quarter ended June 30, 1998.
The dramatic increase in revenue during the quarter can be attributed mainly
to two new revenue sources which have been added. These are the hotel
pay-per-view division and the Strata product line. These two new revenue
sources, which have been added according to the business plan and direction
of the Company, accounted for over 80% of the revenue in the first quarter.
Gross Profit
The Company experienced a gross profit for the quarter ended June
30, 1999 of $434,060 compared to gross profit of $61,614 for the quarter
ended June 30, 1998. The significant increase in gross profit is due first of
all to the large growth in revenue, and secondly to favorable gross margins
in both the hotel pay-per-view business and the computer software business.
Gross margins in the coming months may not be quite so high (as a percentage)
if equipment sales increase, which do not carry as great a profit margin.
Page 18 of 22
<PAGE>
Operating Expenses
The Company's operating expenses were substantially higher for the
quarter ended June 30, 1999 when compared to the quarter ended June 30, 1998.
The Company expended considerable amounts during the first quarter to launch
its new business plan and to make the public aware of the existence of its
products. The beginning benefits of this can be seen in the increased
revenue. The Company plans to experience significant expenses as its
continues to implement its business plan with the belief that revenues will
continue to grow. One of the large expenditures made during the quarter was
to have a booth at the National Cable Television Association show in Chicago.
The Company was able to make quality contacts and promote its 3D cable
channel to hundreds of people including cable operators from across the
country.
Selling expenses for the quarter ended June 30, 1999 were $810,875
compared to $129,635 for the quarter ended June 30, 1998. General and
Administrative expenses were $1,515,306 and $443,156 over the same time
periods respectively.
Net Loss
The Company's net loss for the quarter ending June 30, 1999 was
$1,975,126 compared to a loss of $513,981 for the quarter ended June 30,
1998. The increased loss is due to the rise in expenses, not to a downturn in
revenue and gross profit. As explained earlier, both revenue and gross profit
showed a marked improvement when compared to the same time last year.
Liquidity and Capital Resources
The Company continues to be dependent on investment capital to fund
operations. The company completed a third convertible debenture agreement on
June 4, 1999 in the amount of $500,000. This third agreement was with the
same investment group that had previously completed two similar transactions,
one in December of 1998 and the other in February of 1999. Additionally, the
Company received $465,980 from private placements of its equity during the
quarter.
Subsequent to the quarter end the Company has continued to pursue
additional investment capital. The Company has obtained a verbal commitment
to raise an additional $500,000 a month for six months.
YEAR 2000 COMPLIANCE
The Year 2000 issue is a result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system/job failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar business transactions.
The Company utilizes and is dependent upon computer systems and
software to conduct its business. The Company began a review of its computer
systems and software applications during the first quarter of 1998. The
Company has purchased upgrades to existing software programs which claim Year
2000 compliance and has also hired computer consultants which have
Page 19 of 22
<PAGE>
evaluated the Company's system for preparedness. These computer specialists
will continue to work closely with the Company during the coming months to
help ensure preparedness. The Company does not use any specialized software
programmed internally in its operations, so there will be no need for
expensive re-programming of this kind of system.
The Company has initiated formal communications with many of its
significant suppliers and larger customers to determine the extent to which
the Company is vulnerable to third party failure to remediate their own Year
2000 issues. Many of these third parties have responded to the letter or sent
their Company's official statement on Year 2000 compliance. However, there
can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
The Company presently believes that, with the steps it has taken in
purchasing new software and hiring external computer consultants to evaluate
and prepare the system, the affects of the Year 2000 will be mitigated.
However, if such efforts are not successful in overcoming the Year 2000 issue
it could have a material adverse impact on the operations of the Company.
FORWARD LOOKING STATEMENTS
This filing includes "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). The
PSLRA provides a "safe harbor" for such statements to encourage companies to
provide prospective information about themselves so long as such information
is identified as forward-looking and is accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the information. All statements
other than statements of historical fact made in this report or incorporated
by reference are forward-looking. In particular, the statements herein
regarding the availability of adequate funding and progress in the
development of its various business segments are forward-looking statements.
Forward-looking statements represent management's current expectations and
are inherently uncertain. Investors are warned that the Company's actual
results may differ significantly from management's expectations and,
therefore, from the results discussed in such forward-looking statements.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On July 29, 1999, a subsidiary of the Company was served with a
complaint filed in the Third Judicial District Court of the State of Utah
under Civil No. 990907583 by Multi-Dimensional Studios, L.L.C. ("MDS"),
Jonathan Neville and Loran Swensen. Neville and Swensen seek to recover
$8,131 each for alleged breaches of purported consulting agreements between
each of them and the Company dated June 23, 1997. MDS seeks to recover
direct, compensatory and consequential damages alleged to exceed $3,075,000
for alleged breaches of the Restated Video Purchase Agreement (the
"Agreement") between it and the subsidiary dated May 16, 1997.
The subsidiary of the Company has denied that it has any delinquent
obligations under the consulting agreements between it and Neville or
Swensen, and that it owes them any sums. The
Page 20 of 22
<PAGE>
Company also denies that it has breached the Agreement with MDS and has
asserted a counterclaim against MDS to recover a $50,000 deposit it placed
with MDS for demonstration tapes that were never produced pursuant to the
Agreement. The Company believes that the claims asserted by the plaintiffs
are without merit and intends to vigorously defend the action.
ITEM 2 - CHANGES IN SECURITIES
Set forth in the table below is a summary of all securities sold by
the Company through the month of July in calendar year 1999 (without
registering the securities under the Securities Act of 1933), and which have
not been previously reported in the SEC filings of the Company.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Date Title and amount of Consideration Class of persons to
Securities sold whom sold
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A 4/1/99 and unexercised options for Consulting services with a five year U.S. investors
5/30/99 375,000 shares vesting provision
- --------------------------------------------------------------------------------------------------------------------
B 5/31/99 to 212,950 shares common $465,980 U.S. investor
6/28/99 stock
- --------------------------------------------------------------------------------------------------------------------
C 6/4/99 8% convertible $500,000 U.S. investor
debentures
- --------------------------------------------------------------------------------------------------------------------
D 6/4/99 warrant for 16,950 Unexercised with a $ 3.54 strike U.S. investor
shares price
- --------------------------------------------------------------------------------------------------------------------
E 7/8/99 125,000 shares common Movie Express asset acquisition U.S. investor
stock
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
These transactions constitute private placements under Regulation D.
The private placement transactions were variously made for the asset
acquisition transaction described below, for services rendered to the
Company, for the cancellation of debt of the Company, or for cash.
Prior to the date of this report, the Company issued its 8%
Convertible Debentures due December 21, 2001 in the face amount of $750,000,
and its 8% Convertible Debentures due February 9, 2002 in the face amount of
$2,000,000. These debentures were issued in private placements on December
21, 1998 and February 9, 1999 respectively. Both private placements were made
to a single accredited investor. On June 4, 1999, the same investor purchased
additional 8% Convertible Debentures due June 4, 2002 in the face amount of
$500,000 (transaction C). A finders fee of $30,000 was paid for the June
transaction.
On July 8, 1999 (transaction E), the Company entered into an Asset
Purchase Agreement to purchase certain assets of King Farms, Inc., an
Illinois corporation doing business as Hotel Movie Express, Inc. Pursuant to
the Asset Purchase Agreement, the Company has issued 125,000 shares of its
restricted common stock to the selling entity, which is an accredited
investor. Further details of the described transaction, including a
discussion of the balance of the consideration to be paid for the assets, are
included in the Form 8-K report of the Company dated July 22, 1999 and filed
with the SEC.
All U.S. investors are believed to be accredited investors, as defined
in Rule 501(a) of Regulation D.
Page 21 of 22
<PAGE>
ITEM 5 - OTHER INFORMATION
CHANGE IN THE CHAIRMAN OF THE BOARD
On August 17, 1999, the Company announced the retirement of its
Chairman, Blaine Harris. Mr. Harris, age 60, is retiring from his position as
Chairman of the Board of Directors after eight years with Chequemate
International, which he helped establish in 1991.
Mr. Harris has been the principal individual involved in capital
formation for the Company during his tenure as Chairman, and in his former
capacity as CEO, a position he relinquished in 1998. Over the past twelve
months, Mr. Harris' leadership has been instrumental in assembling a team of
seasoned managers who can advance the Company's vision in the digital media
realm, particularly in the television and internet industries.
Succeeding Mr. Harris as Chairman is Mr. J. Michael Heil, who has been
the Company's CEO since September, 1998. Mr. Heil was elected to serve as
Chairman by the board of directors at its meeting on August 16, 1999, and
will retain his position as Chief Executive Officer. J. Michael Heil has over
17 years of experience in the satellite and broadcast television industry.
Prior to joining C-3D Digital, he was President of Skylink America, Inc. and
Satellite Cinema, and has launched five digital broadcast networks.
ITEM 6 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
a. Exhibits: None
b. Reports on Form 8-K.
July 22, 1999 Form 8-K report on the acquisition of Hotel Movie
Express pay-per-view contracts and assets.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on the 19th day of August, 1999.
CHEQUEMATE INTERNATIONAL, INC.
By /s/ J. Michael Heil
-----------------------------------
J. Michael Heil
CEO
By /s/ Steve Anderson
-----------------------------------
Steve Anderson
CFO and Secretary
Page 22 of 22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-1-1999
<PERIOD-END> JUN-30-1999
<CASH> 311,602
<SECURITIES> 0
<RECEIVABLES> 323,567
<ALLOWANCES> (53,820)
<INVENTORY> 3,433,109
<CURRENT-ASSETS> 4,387,257
<PP&E> 989,677
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,030,899
<CURRENT-LIABILITIES> 1,587,067
<BONDS> 0
0
0
<COMMON> 2,282
<OTHER-SE> 3,753,832
<TOTAL-LIABILITY-AND-EQUITY> 9,030,899
<SALES> 767,009
<TOTAL-REVENUES> 767,009
<CGS> 332,949
<TOTAL-COSTS> 2,326,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90,486
<INCOME-PRETAX> (1,975,126)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,975,126)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,975,126)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
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