UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended: March 31, 1999
Commission File Number:33-38511-FW
CHEQUEMATE INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Utah 76-0279816
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(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
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(Address of principal executive offices)
(801) 322-1111
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(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
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State issuer's revenues for its most recent fiscal year: $682,760
Check if there is no delinquent filers pursuant to Item 405 of
Regulation S-B contained in this report and no disclosure will be contained to
the best of registrant's knowledge in definitive proxy or information statments
incorporated by reference in Part 111 of this Form 10-KSB or any amendment to
this Form 10-KSB:
As of June 30, 1999 the aggregate market value of the voting stock held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity as of a
specified date within the past 60 days (June 30,1999): $49,762,972
State the number of shares outstanding of each of the issuer's common
equity, as of the latest practicable date: 22,358,646 as of June 30, 1999
Transitional Small Business Format: YES NO X
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TABLE OF CONTENTS
PART I
<S> <C>
Item 1. Description of Business...................................................................................3
Item 2. Description of Property...................................................................................8
Item 3. Legal Proceedings.........................................................................................8
Item 4. Submission of Matters to a Vote of Security Holders.......................................................8
PART II
Item 5. Market for Common Equity..................................................................................8
Item 6. Management's Discussion and Analysis.....................................................................10
Item 7. Financial Statements.....................................................................................16
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.....................34
PART III
Item 9. Directors and Executive Officers.........................................................................34
Item 10. Executive Compensation..................................................................................37
Item 11. Security Ownership of Certain Beneficial Owners and Management..........................................38
Item 12. Certain Relationships and Related Transactions..........................................................38
Item 13. Exhibits and Reports....................................................................................40
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2
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Part I
ITEM 1. Description of Business
Forward Looking Statements
This annual filing includes Aforward 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.
History of the Company
The Company was incorporated under the laws of the State of Texas on
April 21, 1989 under the name Ainsley Corporation. The Company issued its
initial shares of common stock on April 25, 1989 (inception) and was organized
primarily for the purpose of raising capital to take advantage of potential
business opportunities. The name of the Company was later changed to Automated
Compliance & Training, Inc. (AC&T), when the Texas corporation was merged with a
Utah corporation to make the change to Utah as state of incorporation. On
September 3, 1996, AC&T merged with its wholly owned subsidiary Chequemate
International, Inc. (the "Company" or "CMI") and assumed the name of the
subsidiary.
On April 17, 1997 CMI formed a new wholly owned subsidiary named
Chequemate Third Dimension, Inc. The name has since been changed to Chequemate
Electronics, Inc. (CE). CE was formed to manufacture and market breakthrough 3D
imaging technology which was acquired from Advanced Technology Group, LLC (ATG).
On June 23, 1997 an agreement was finalized by which CE obtained the exclusive
worldwide license to the 3D technology developed by ATG.
On November 12, 1998 the Company sold the assets associated with the
financial service segments of the business to TFL, LLC with its two principals
being former Chequemate International employees. Both TFL, LLC and the Company
continue to use the name Chequemate International, although the Company has
filed for, and is operating under, the assumed name of C-3D Digital, Inc. At the
time of the 1999 shareholders' meeting, the name of the Company will be
officially changed to C-3D Digital, Inc. and the rights associated with the
Chequemate International name will be fully transferred to TFL, LLC.
On December 8, 1998 the Company purchased from Alpha Broadcasting
Corporation inventory, equipment and contracts to provide pay-per-view
television services to 19 hotel properties amounting to roughly 3,000 hotel
rooms. The value of the purchase was placed at $1,000,000 and was accomplished
through a combination of restricted stock, cash, and a note for $440,000. On
July 2, 1999 the Company purchased additional equipment and contracts to provide
pay-per-view television services to an additional 21 properties. The purchase of
these assets was accomplished for the sum of $150,000 cash and 125,000 shares of
stock of the Company. Both of these transactions were completed through the
Company's wholly owned subsidiary, Chequemate Technologies, Inc.
On December 10, 1998 and March 31, 1999, the Company acquired the debt
position of several secured investors in Strata, Inc., a 3D software provider.
On June 16, 1999 these debt positions were used to foreclose on the assets and
technology previously owned by Strata, Inc. The Company continues to market the
developed products and find new ways that the technology can help in other
businesses in which the Company is involved.
3
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Principal Products and Services
Realeyes Product and Technology
On June 23, 1997 the Company's wholly owned subsidiary executed a
license agreement and was granted an exclusive, worldwide and perpetual license
to certain proprietary three dimensional video technology which has been
developed under the name of Realeyes 3D Video.
The revolutionary Realeyes product consists of a small VCR-size unit
which digitizes a TV signal and converts it to a third dimensional picture. It
can be used with any television in combination with signals from satellite
receivers, cable feed, VCRs, laser disc players or video games. The Chequemate
3-D system can convert any TV signal to 3-D in either the NTSC format used in
the United States, or the PAL format used abroad.
Cable Channel
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 to 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.
Hotel Pay-Per-View
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 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, Nevada, New Mexico, Texas, Utah and Washington.
Strata Software Division
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 (c) Awards" (c),"Hercules" (c) and "Xena" (c); the
NBC dancing peacocks; the Warner Bros 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.
4
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The core Strata products, that will now be offered by the Company, are the
following:
StudioPro (TM). StudioPro is the premier Strata 3D product and is available for
Apple Macintosh, Windows 98 and NT. StudioPro has a retail price of $1,495 and
is available in the United States at the Astreet price@ of approximately $950.
StudioPro is used for creating 3D images and animations for the web, video,
movies, print, games and multimedia. StudioPro is well known for being used to
create the graphics for the world's best selling CD-Rom game, Myst (c).Recently
StudioPro has been used on projects such as the Blockbuster Video Web site, the
NBC dancing peacocks and the movie Contact. An upcoming release will add special
stereographic 3D features. StudioPro has an installed base of approximately
60,000 customers.
Vision 3D (TM). Vision 3D is an entry level 3D product and is based directly on
StudioPro. Vision 3D is presently available only on Apple Macintosh computers.
Vision 3D is priced at $395 retail with a $295 street price. Vision 3D is used
by professionals and non-professionals alike. Vision 3D is used for print, Web,
video and multimedia - as well as recreational purposes. This product has an
installed base of approximately 40,000 customers.
VideoShop. VideoShop is a professional quality non-linear video editor and
presently runs only on Apple Macintosh computers. VideoShop is priced at $495
retail with a $395 street price. VideoShop is used primarily for multimedia, web
and desktop video tasks. It has been bundled on select Macintosh computers for
over five years and has developed an installed base of well over one million
customers through this process.
MediaPaint (TM). MediaPaint is a video painting and effects application.
MediaPaint is available for Apple Macintosh, Windows 98 and NT. MediaPaint is
priced at $695 retail with a $395 street price. MediaPaint is used for
professional projects on the Web, multimedia and broadcast video. MediaPaint has
an installed base of approximately 6,000 users.
3D.COM
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 and through sales
at the 3D.COM online store.
5
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Research and Development
The Company is continuing its efforts to develop and integrate its
various 3D technologies. During fiscal year 1998 and 1999, the Company has
expended approximately $215,000 and $320,000 respectively on research and
development.
Patents, Trademarks and Copyrights
On June 23, 1997, the Company acquired an exclusive, worldwide and
perpetual license to the Realeyes proprietary three dimensional video technology
and subsequently filed U.S. provisional patent application number 60/034,149
with regard to aspects of such technology. The Company has now proceeded to file
additional patent applications, including a U.S. utility application, Serial No.
08/997,068, with regard to the system and method of synthesizing
three-dimensional video from a two-dimensional video source. Patent Cooperation
Treaty (PCT) national phase patent applications based upon this technology have
been filed in Australia, Brazil, Canada, China, Japan, Europe and Mexico.
Another U.S. provisional patent application has been filed with regard to a
system and method for recording and broadcasting three-dimensional video
synthesized from a two-dimensional source.
On June 16, 1999, the Company acquired certain copyrights and
trademarks relative to the technology and products of its Strata Division.
<TABLE>
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The Company currently owns or licenses the following U.S. and foreign patents:
- -----------------------------------------------------------------------------------------------------------------
Patent/Product Application or Country Granted or Filed Year of expiration or
Registration No. Renewal
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<S> <C> <C> <C> <C>
Chequemate 2D to 3D 08/997,068 U.S.A. December 23, 1997 Pending
- -----------------------------------------------------------------------------------------------------------------
Chequemate 2D to 3D 57206/98 Australia December 24, 1997 Pending
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Chequemate 2D to 3D Brazil December 24, 1997 Pending
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Chequemate 2D to 3D Canada December 24, 1997 Pending
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Chequemate 2D to 3D China December 24, 1997 Pending
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Chequemate 2D to 3D Japan December 24, 1997 Pending
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Chequemate 2D to 3D 97953466.6 Europe December 24, 1997 Pending
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Chequemate 2D to 3D Mexico December 24, 1997 Pending
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Chequemate Recording and 60/114,264 U.S.A. December 30, 1998 Conversion due
Broadcasting 3D from 2D Provisional December 30, 1999
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The Company currently owns or licenses the following U.S. copyrights:
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Copyright/Product Registration No. Country Granted
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StrataVISION 3D TX 2,688,747 U.S.A. October 2, 1989
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AIM - 3D TXu 507, 718 U.S.A. February 13, 1992
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</TABLE>
6
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<CAPTION>
The Company currently owns or licenses the following U.S. and foreign trademarks:
- ---------------------------------------------------------------------------------------------------------------
Trademark/Product Registration No. Country Granted or Filed Year of expiration or
or Serial No. Renewal
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<S> <C> <C> <C> <C>
C-3D Digital class 38 75/605,796 U.S.A. December 15, 1998 Pending
- ----------------------------------------------------------------------------------------------------------------
C-3D Digital class 9 75/605,795 U.S.A. December 15, 1998 Pending
- ----------------------------------------------------------------------------------------------------------------
C-3D class 9 75/605,794 U.S.A. December 15, 1998 Pending
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C-3D class 38 75/605,904 U.S.A. December 15, 1998 Pending
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3D.COM class 42 75/729,813 U.S.A. June 16, 1999 Pending
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3D TRAVEL class 38 75/279,982 U.S.A. June 16, 1999 Pending
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3D SPORTS class 9 75/729,984 U.S.A. June 16, 1999 Pending
- ----------------------------------------------------------------------------------------------------------------
3D SPORTS class 38 75/729,985 U.S.A. June 16, 1999 Pending
- ----------------------------------------------------------------------------------------------------------------
3D TRAVEL class 42 75/729,812 U.S.A. June 16, 1999 Pending
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3D SPORTS class 25 75/729,811 U.S.A. June 16, 1999 Pending
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3D SPORTS class 42 75/729,031 U.S.A. June 16, 1999 Pending
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STRATAVISION 3D 1,606,234 U.S.A. July 17, 1990 July 17, 2000
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STUDIOPRO 1,892,027 U.S.A. May 2, 1995 May 2, 2001 (1)
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MEDIAPAINT 2,042,281 U.S.A. March 4, 1997 March 4, 2003 (1)
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POWERING THE CREATIVE 2,098,858 U.S.A. September 23, 1997 September 23, 2003 (1)
ENVIRONMENT
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STRATAVISION TMA404,400 Canada November 6, 1992 November 6, 2007
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STRATAVISION 1,723,500 France November 14, 1998 November 13, 1999
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STRATAVISION 1,162,225 Germany August 8, 1990 October 5, 1999
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TELECHARGE 2,241,551 U.S.A. April 27, 1999 April 27, 20051
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TELECHARGE SIMPLE ACCESS 2,241,550 U.S.A. April 27, 1999 April 27, 20051
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</TABLE>
The Company has also licensed other technology regarding its Strata product line
that enables the Company to offer certain of its Strata products on the
Microsoft Windows 95 (or higher), operating system.
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(1) Affidavits of Continued Use are due by this date. If filed the
trademark will be valid for ten years from the date of grant. If not filed the
trademark will expire on this date.
7
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Employees
As of June 30, 1999, the Company and its subsidiaries had 33 full time
employees.
ITEM 2. Description of Property
The Company occupies leased office space at 57 West 200 South, Suite
350, Salt Lake City, Utah; at 21601 Devonshire Street Ste. 320, Chatsworth, CA
9131; at 1545 N. McQueen Suite 4, Gilbert, AZ 85233; and at 567 South Valley
View Dr. Suite 202, St. George, Utah. The Company offices are comprised of
15,659 square feet and are leased at a monthly base rental of $18,958. The
Company also occupies space for its fulfillment division at 545 West 500 South,
Suite 140 Bountiful, Utah. The office space is 2,125 square feet, and is leased
at a monthly base rental of $1,223.
ITEM 3. Legal Proceedings
On March 11, 1997 a citation and petition for suit on damages was filed
against Chequemate Tele-Services Inc., in the District Court of Dallas County
Texas. The plaintiff is Peak Credit Card Processing, L.C. d/b/a Peak Financial
Services. Relief is being sought by plaintiff for damages in an unspecified
amount, to be determined at some later date. A response to the citation was
filed in a timely basis in the court of jurisdiction denying any and all
allegations made in the citation. A court hearing was set for May 4, 1998; the
plaintiff did not show up. A motion was made to dismiss the action, but the
court wanted to give the plaintiff time to file a motion for continuance. No
motion for continuance has been filed, and it is the belief of the Company that
the plaintiff does not have the means or the will to continue this action. No
action has been evident since the original citation was filed.
On December 18, 1997 a citation and petition for suit was filed against
Chequemate Tele-Services, Inc., Blaine Harris, and Fred Boedeker, in the
District Courts of Dallas County Texas. The plaintiff is Central Meadow Park,
L.P. Plaintiff seeks damages, both direct and consequential, for breach of
contract on leased premises as detailed in the citation.
On June 22, 1998 a suit was filed against Chequemate International,
Inc. in the District Court for the Northern District of Illinois Eastern
Division. The plaintiff, BH Productions, Inc. d/b/a Ignite Advertising is
seeking payment remaining under a contract for advertising services entered into
in October 1997. The case was settled and the Company is making monthly payments
of $40,000. There are three payments remaining under the settlement. The
liability is reflected in the financial statements.
The Company has been named as a defendant in litigation entitled Marshall
Industries v. Chequemate International, Inc., Civil No. 990901773. The plaintiff
claims payment of $18,360.83 for parts acquired either by the Company or ATG,
the licensee of the 3D technology. The Company is negotiating to settle this
matter.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1999.
PART II
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ITEM 5. Market for Common Equity and Related Stockholder Matters.
The stock of the Company is traded on the American Stock Exchange under
the symbol of DDD. The listing on the American Stock Exchange took place on June
9, 1999. Prior to this date, the Company's stock had been traded on the OTC
Bulletin Board under the symbol CQMT of the NASD Stock Market, Inc. As of June
29, 1999, there are approximately 829 shareholders of record of the Company. As
8
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of June 29, 1999, the Company had issued and outstanding shares of 22,358,646.
Of this amount, 2,991,904 shares represent paid subscriptions for which
certificates have not been issued. The stock of the Company, as of June 30,
1999, was quoted at $2.75 bid and $2.875 ask.
The NASD Stock Market, Inc. provided the fiscal year 1999 quotations
for the Company's stock. The referenced quotations reflect inter-dealer prices
without dealer mark-up, markdown or commissions and may not represent actual
transactions.
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Fiscal Year High Bid Price Low Bid Price
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1998 B 1st Quarter (4/97-6/97) 6.6875 3.50
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1998 B 2nd Quarter (7/97-9/97) 6.0625 3.625
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1998 B 3rd Quarter (10/97-12/97) 3.6875 2.25
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1998- 4th Quarter (1/98-3/98) 2.625 1.20
1999- 1st Quarter (4/98-6/98) 2.5625 1.19
1999- 2nd Quarter (7/98-9/98) 1.24 .78
1999- 3rd Quarter (10/98-12/98) 3.76 .66
1999- 4th Quarter (1/99-3/99) 3.34375 1.46875
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</TABLE>
The Company has paid no dividends on common stock during its two most
recent fiscal years, and has no present intention to pay dividends in fiscal
year 2000.
Recent Sales of Unregistered Securities
On June 4, 1999, the Company issued to a private U.S. investor 8%
Convertible Debentures in the face amount of $500,000 and a warrant for 16,950
shares of common stock. Both of these convertible securities may be exercised by
the holder prior to June 4, 2002 to obtain shares of common stock of the
Company. The convertible debentures provide for conversion based on a formula of
eighty percent of the bid price of the stock of the Company for the five trading
days prior to the exercise of the conversion right, with a maximum conversion
price of $3.54 per share. The warrants have an exercise price of $3.54 per
share.
On July 8, 1999, the Company executed an agreement to acquire certain
hotel pay-per-view contracts and equipment. As part of this transaction, the
Company has issued 125,000 shares of restricted common stock to the seller of
the purchased assets.
In both of the transactions described above, the recipients of the
securities of the Company were U.S. entities making written representations of
their "accredited investor" status, and the issuance of the shares is exempt
from registration under the provisions of Regulation D promulgated by the
Securities and Exchange Commission.
All other securities sold by the Company within the past three years,
which were not registered under the Securities Act of 1933, have been reported
in the previously filed reports of the Company.
9
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ITEM 6. Management's Discussion and Analysis
General
The audited financial statements for the fiscal years ended March 31,
1999 and March 31, 1998 are enclosed with this Form 10-KSB. Reference is made to
the Consolidated Financial Statements filed with this report for greater detail
regarding the financial position of the Company.
The selected financial data set forth below should be read in
connection with the more complete information provided in the Consolidated
Financial Statements, and their accompanying notes, which are included as Item 7
in this report.
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<CAPTION>
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March 31, 1999 March 31, 1998 March 31, 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Assets $9,683,716 $5,809,466 $1,286,760
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities $4,626,526 $2,017,711 $ 849,309
- -----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $5,057,190 $3,791,755 $ 437,451
- -----------------------------------------------------------------------------------------------------------------
Revenue $ 682,760 $1,091,794 $ 776,963
- -----------------------------------------------------------------------------------------------------------------
Net Income (Loss) ($4,213,079) ($8,024,045) ($1,503,573)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Over the past year, the Company expended considerable amounts of money
to further develop and prepare its 3D technology based products to be marketed
to the mass consumer. The Company also incurred significant expenses in
maintaining operations of the Company for the year. These operations not only
included the 3D based segments of the business, but also the financial services
segment of the business for the first two quarters of the year, until it was
sold in November of 1998.
Some of the larger expenditures during the year came in the last
quarter when the Company launched what it believes to be the only television
network to exclusively offer 3D programming. Monthly expenses to rent satellite
space, and the services necessary to broadcast the channel, are near $100,000.
Other significant expenditures have been made to provide content/programming for
the 3D network. These expenditures include licensing movie rights and producing
new shows for the 3D channel. The Company believes these expenditures are
critical to create the monthly revenue that will come from the subscriber base
which it is now beginning to be established.
The acquisitions of Strata technology and Alpha Broadcasting
pay-per-view television assets have also created two new revenue streams which
replace, and have actually outdistanced, revenue which was lost when the
financial services segment of the business was sold. In just the final four
10
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months of the fiscal year, and acting only as a reseller, the Strata products
accounted for nearly $400,000 of revenue for the Company. The following table
shows the revenue by quarter for the varying business segments of the Company:
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<CAPTION>
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1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Services $ 62,4052 $ 33,2352 $ 0 $ 0
- ----------------------------------------------------------------------------------------------------------------
Realeyes Units $ 24,843 $ 41,798 $139,232 $ 42,028
- ----------------------------------------------------------------------------------------------------------------
Strata Software $ 0 $ 0 $122,854 $259,462
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Hotel Pay-Per-View $ 0 $ 0 $ 13,851 $ 38,692
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</TABLE>
As indicated in the chart above, the Company has more than replaced the
revenue lost from the financial services business through its new business
segments.
Management of the Company is very optimistic due to the increase in
revenue during the last two quarters of the year and believes these new product
lines can do even better. The Company believes it has only scratched the surface
of the potential revenue due to its patented technology used in the Realeyes
units. All revenue generated in the past fiscal year from this technology was
due to hardware sales of the Realeyes units. In the coming year this revenue
will be augmented by monthly subscriber revenue, as people subscribe to the
newly launched channel through their local cable provider. Furthermore, actual
hardware sales are expected to increase as people who subscribe to the channel
will need to buy the Realeyes unit or the newly developed Channel Player. Two
recent contracts, one from the United Kingdom and one from Japan, should also
significantly increase sales of the technology in hardware form.
There are roughly 70,000,000 cable television subscribers in the United
States alone, whether through the traditional cable company or the new digital
satellite systems. Even the smallest of penetrations into this market would
create monthly subscriber revenue in significant amounts, plus the
aforementioned increase to hardware sales.
The Strata software products generated in excess of $10,000,000 in
annual revenue in 1995 and 1996. Although the Company is not projecting that
this will be duplicated in the coming year, the Company expects to regain a
portion of this revenue amount. A new licensing agreement with Software Too,
Inc. in Japan is being negotiated, and other sales averaged nearly $100,000 per
month for the last four months of the year just ended. These two sources of
revenue, if annualized, could create in excess of $2 million in revenue from the
Strata products alone.
The hotel pay-per-view segment generates roughly $20,000 a month in
revenue. Although this is not a large amount, the real significance of this
business is its ability to serve as an internal beta test for providing 3D
entertainment to hotel guests. The Company has adapted its 3D technology to work
through the hotel pay-per-view system and will be testing it in one of its
properties in July 1999. If it is successful and can increase buy rates from
hotel guests, the possibilities are tremendous. There are an estimated 3,800,000
hotel rooms receiving pay-per-view services with some of the more recognized
providers being On-Command Video and Lodgenet. Once the Company proves the value
of adding 3D to the pay-per-view menu through our own properties, there is great
potential with these large providers.
- ----------------------
(2) This revenue is not included in revenue section of the Company's income
statement, because this business segment represents discontinued operations.
11
<PAGE>
Liquidity and Capital Resources
The Company used $4.57 million of cash in operating activities in
fiscal year 1999, compared with $5.08 million in fiscal year 1998. The Company
was able to decrease its current liabilities during the year by over $550,000.
The Company also showed a considerable increase in current assets with the most
notable change being an increase of over $1.5 million in cash at year end. The
net effect of the changes during the year was an increase in working capital
from $937,835 at year end 1998, to $3,807,707 at year end 1999. The change in
working capital results in a ratio of current assets to current liabilities of
3.65 at March 31, 1999.
There was a measurable increase in the long-term liabilities of the
Company when comparing the year end statements. The increase is due to the $2.75
million the Company issued as convertible debentures during the year and the
$440,000 note payable to Alpha Broadcasting from the hotel pay-per-view
purchase. The Company fully expects the debentures to be converted to equity
during the coming year and will no longer show this investment as a long-term
debt.
In addition to cash from sales, the Company also received cash through
issuance of notes payable (the previously mentioned convertible debentures being
the major part) and the issuance of common stock and subscribed stock. The notes
payable issuance accounts for just over $3 million and the stock, both issued
and subscribed, accounts for slightly over $3.5 million.
At March 31, 1999, the stockholders' equity was $5,057,190 versus
$3,791,755 at March 31, 1998. The improvement is due mainly to the acquisitions
from Alpha Broadcasting, Inc. and Strata, Inc. The Alpha asset purchase
transaction was completed in December and is fully integrated into the financial
statements. The Strata acquisition was completed subsequent to year end and will
be fully integrated into the financial statements for the coming quarter, but is
reflected in the year end statement as part of the note receivable. The Company
had issued stock to certain parties involved in these transactions and forwarded
funds to Strata which are reflected as a line item on the balance sheet entitled
"Secured Interest." The $1.2 million secured interest, and additional funds
forwarded subsequent to year end are being converted to furniture and fixtures,
equipment and machinery, inventory, and intellectual property in their
proportional amounts, now that the foreclosure action on the interests has been
completed on June 16, 1999.
The Company has received subsequent to year end additional capital from the
issuance of notes payable and subscribed stock, and plans to do so in the future
to help fund its business plan and growth.
Results of Operations
The Company's revenues for fiscal year 1999 were down from the previous
year. The decrease of $409,034 can in part be attributed to the fact that the
financial service segment is accounted for as discontinued operations, and the
two revenue sources replacing the discontinued segment did not begin functioning
until December. However, as explained in the table above, revenue for the last
two quarters was over three and a half times higher when compared to the first
two quarters of the year.
Gross Profit for the year was down $190,247 when compared to last year.
This decrease can in part be attributed to the overall decrease in revenue for
the Company. The Company is also making a calculated effort to get the 3D
technology based hardware into customers= hands so that awareness of the product
and its capabilities is enhanced. The other benefit of increasing market
awareness of the Realeyes hardware is that, as the Company markets its cable
channel to cable providers, more of their customers will already be aware of the
product and will be more apt to subscribe to the channel.
Management is also aware of the business model being used by many of
the digital satellite providers who make small margins on the original equipment
12
<PAGE>
subscriber revenue. Management believes that in the future this model may become
applicable to its products and services and, in the long-term, lead to
higher gross margins.
The loss for the year showed a marked improvement from $8 million in
1998 to $4.2 million in 1999. This comparison is somewhat skewed however due to
the impairment of product rights expense the Company had to recognize in fiscal
year 1998. Regardless of this factor, the Company would have still shown an
improvement in its overall loss in the current fiscal year. The improvement is
due to decreases in all three of the operating expenses; Bad Debts, Selling
Expenses, and General and Administrative. The decrease in these three expenses
totaled $1.228 million.
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 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
issue. Many of these third parties have responded to the letter of the Company
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 on overcoming the Year 2000 issue, it could have
a material adverse impact on the operations of the Company.
13
<PAGE>
ITEM 7. Financial Statements
CHEQUEMATE INTERNATIONAL, INC.
AND SUBSIDIARIES
(dba C3-D Digital)
Consolidated Financial Statements
March 31, 1999 and 1998
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report.....................................................................................15
Consolidated Balance Sheets......................................................................................16
Consolidated Statement of Operations.............................................................................18
Consolidated Statement of Stockholders' Equity...................................................................19
Consolidated Statements of Cash Flows............................................................................20
Notes to Consolidated Financial Statements.......................................................................22
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
Chequemate International, Inc. and Subsidiaries
(dba C3-D Digital)
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheets of Chequemate
International, Inc. and Subsidiaries (dba C3-D Digital) as of March 31, 1999 and
1998 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended March 31, 1999, 1998 and 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Chequemate International, Inc. and Subsidiaries (dba C3-D Digital) as of March
31, 1999 and 1998 and the consolidated results of their operations and their
cash flows for the years ended March 31, 1999, 1998 and 1997 in conformity with
generally accepted accounting principles.
Jones, Jensen & Company
Salt Lake City, Utah
June 30, 1999
15
<PAGE>
<TABLE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Consolidated Balance Sheets
<CAPTION>
ASSETS
------
March 31,
-------------------------
1999 1998
------ ------
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,732,199 $ 220,840
Accounts receivable - net of allowances of $53,820
and $115,000 in 1999 and 1998, respectively 197,922 24,305
Inventory (Note 2) 3,115,763 2,684,378
Prepaid expenses 198,349 11,259
---------------- ----------------
Total Current Assets 5,244,233 2,940,782
---------------- ----------------
PROPERTY AND EQUIPMENT (Note 3) 622,717 200,335
---------------- ----------------
OTHER ASSETS
Notes receivable 65,000 -
Organization costs and product rights (Note 1) 2,534,532 2,657,296
Secured interest (Note 15) 1,198,530 -
Refundable deposits 15,704 8,053
Investments 3,000 3,000
---------------- ----------------
Total Other Assets 3,816,766 2,668,349
---------------- ----------------
TOTAL ASSETS $ 9,683,716 $ 5,809,466
================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
16
<PAGE>
<TABLE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
March 31,
--------------------------------------
1999 1998
------------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 871,116 $ 1,584,576
Related party accounts payable (Note 16) 25,292 42,034
Customer deposits - 54,724
Accrued expenses 38,672 43,339
Income tax payable (Note 18) 500 500
Accrued interest - related party (Note 5) 79,943 65,903
Accrued interest payable 39,791 -
Current portion related party (Note 5) 140,000 156,802
Current portion long-term debt (Note 6) 227,610 50,080
Current portion capital lease (Note 7) 13,602 4,989
---------------- ----------------
Total Current Liabilities 1,436,526 2,002,947
---------------- ----------------
LONG-TERM LIABILITIES
Long-term debt (Note 6) 3,190,000 11,976
Capital lease obligations (Note 7) - 2,788
---------------- ----------------
Total Long-Term Liabilities 3,190,000 14,764
---------------- ----------------
Total Liabilities 4,626,526 2,017,711
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value, 500,000,000 shares
authorized, 22,358,646 and 14,088,650 shares
outstanding at 1999 and 1998, respectively 2,236 1,409
Capital in excess of par 24,461,440 18,983,753
Accumulated deficit (19,406,486) (15,193,407)
---------------- ----------------
Total Stockholders' Equity 5,057,190 3,791,755
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,683,716 $ 5,809,466
================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Consolidated Statements of Operations
For the Years Ended March 31,
---------------------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES
Sales - products $ 682,760 $ 1,091,794 $ 776,963
---------------- ---------------- ----------------
COST OF SALES
Product, supplies and materials 631,132 849,919 291,072
---------------- ---------------- ----------------
GROSS MARGIN 51,628 241,875 485,891
---------------- ---------------- ----------------
EXPENSES
Impairment of product rights (Note 14) - 3,133,333 -
Bad debt expense 53,820 138,259 6,465
Selling expenses 851,339 1,639,806 630,207
General and administrative 3,074,839 3,430,005 1,338,066
---------------- ---------------- ----------------
Total Expenses 3,979,998 8,341,403 1,974,738
---------------- ---------------- ----------------
OPERATING LOSS (3,928,370) (8,099,528) (1,488,847)
---------------- ---------------- ----------------
OTHER INCOME (EXPENSE)
Loss from discontinued operations (40,859) - -
Interest income 11,265 24,152 7,018
Interest expense (93,779) (18,478) (20,344)
Gain (loss) on sale of equipment (160,836) 70,309 -
---------------- ---------------- ----------------
Total Other Income (Expense) (284,209) 75,983 (13,326)
---------------- ---------------- ----------------
LOSS BEFORE INCOME TAXES (4,212,579) (8,023,545) (1,502,173)
INCOME TAX PROVISION (Note 18) 500 500 400
---------------- ---------------- ----------------
NET LOSS $ (4,213,079) $ (8,024,045) $ (1,502,573)
================ ================ ================
BASIC LOSS PER SHARE $ (0.23) $ (0.59) $ (0.12)
================ ================ ================
FULLY DILUTED LOSS PER SHARE $ (0.23) $ (0.59) $ (0.12)
================ ================ ================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 17,984,186 13,568,845 12,891,947
================ ================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Consolidated Statements of Stockholders' Equity
For the Years Ended March 31, 1999, 1998 and 1997
Total
Shares Capital Total
Stockholders' Common in Excess Accumulated
Issued Stock of Par Deficit Equity
-------------- ------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, March 31,1996 12,666,053 $ 1,267 $ 5,785,695 $ (5,666,789) $ 120,173
Shares issued through
stock offering 450,788 44 1,816,307 - 1,546,351
Shares issued for services 1,000 1 3,499 - 3,500
Subscribed stock - - - - 270,000
Net loss - - - (1,502,573) (1,502,573)
-------------- -------------- -------------- ---------------- ---------------
Balance, March 31, 1997 13,117,841 1,312 7,605,501 (7,169,362) 437,451
Shares issued through
stock offering 379,000 38 4,756,682 - 4,756,720
Shares issued for cash 315,142 31 67,355 - 67,386
Shares issued in exchange
for services 256,667 26 387,474 - 387,500
Shares issued for debt 20,000 2 85,494 - 85,496
Option issued for
compensation - - 81,247 - 81,247
Options issued for rights - - 6,000,000 - 6,000,000
Net loss - - - (8,024,045) (8,024,045)
-------------- -------------- -------------- ---------------- ---------------
Balance, March 31, 1998 14,088,650 1,409 18,983,753 (15,193,407 ) 3,791,755
Shares issued through
stock offering 6,085,430 609 3,770,925 - 3,771,534
Shares issued for assets 583,333 58 1,532,942 - 1,533,000
Shares issued for cash 371,800 37 3,681 - 3,718
Correction of an error 50,000 5 - - 5
Shares issued in exchange
for services 1,094,810 109 43,338 - 43,447
Shares issued for debt 84,623 9 126,801 - 126,810
Net loss - - - (4,213,079) (4,213,079)
-------------- -------------- -------------- ----------------- ---------------
Balance, March 31, 1999 22,358,646 $ 2,236 $ 24,461,440 $ (19,406,486) $ 5,057,190
============== ============== ============== ================ ===============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
19
<PAGE>
<TABLE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Consolidated Statements of Cash Flows
<CAPTION>
For the Years Ended March 31,
----------------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,213,079) $ (8,024,045) $ (1,502,573)
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization 314,873 427,575 62,183
Depreciation 79,599 70,209 41,549
Loss on sale of assets 160,836 - -
Allowance for bad debts 53,820 107,480 4,602
Reduction in product rights valuation - 3,133,333 -
Common stock and options issued for services rendered 448,547 651,517 -
(Increase) decrease in:
Accounts receivable (227,437) (92,933) 9,546
Prepaid expenses (187,090) (2,756) (1,859)
Inventory 275,246 (2,498,860) (101,637)
Note receivable (530,530) - -
Deposits (7,651) 7,514 2,862
Increase (decrease) in:
Accounts payable (730,202) 1,448,879 94,038
Accrued interest payable 53,831 - (7,000)
Customer deposits (54,724) 54,724 -
Short-term note payable - (300,000) -
Accrued expenses (4,667) (60,213) 81,056
Income taxes payable - 100 400
---------------- ----------------- -----------------
NET CASH USED BY OPERATING ACTIVITIES (4,568,628) (5,077,476) (1,316,833)
---------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets - 375,000 -
Purchase or development of intangibles (128,021) - (222,706)
Equipment purchases (198,736) (194,392) (101,121)
Collection on notes receivable - - 1,380
---------------- ----------------- -----------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (326,757) 180,608 (322,447)
---------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 3,502,167 4,824,204 1,719,951
Minority interest - - 100,000
Issuance of notes payable 3,043,409 135,000 -
Payments made on notes payable (138,832) (7,032) (45,415)
---------------- ----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 6,406,744 $ 4,952,172 $ 1,774,436
---------------- ----------------- -----------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
20
<PAGE>
<TABLE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Consolidated Statements of Cash Flows (Continued)
<CAPTION>
For the Years Ended March 31,
---------------------------------------------------------
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH $ 1,511,359 $ 55,304 $ 135,156
CASH AT BEGINNING OF YEAR 220,840 165,536 30,380
---------------- ----------------- -----------------
CASH AT END OF YEAR $ 1,732,199 $ 220,840 $ 165,536
================ ================= =================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
21
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
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., 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.
Organization Costs and Product Rights
-------------------------------------
Organization and production costs have been capitalized and
amortized over five years using a straight line method. The total
amortization of organization and production costs for the years
ended March 31, 1999, 1998 and 1997 amounted to $314,873, $427,575
and $62,183, 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:
Years
---------
Office equipment 5
Office furniture 5-7
Machinery and equipment 5
Leasehold improvements 3-5
Capital leases 3-5
Organization Costs and Product Rights
-------------------------------------
<TABLE>
<CAPTION>
---------------
Term Cost Amortization 1999 1998
------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Product rights 4-5 years $ 3,093,087 $ 669,688 $ 2,423,399 $ 2,580,574
Contract/movie
rights 2 years 129,022 17,889 111,133 76,722
Organization cost 5 years 17,261 17,261 - -
- ------------- ------------- -------------- -------------- --------------
$ 3,134,610 $ 695,436 $ 2,534,532 $ 2,657,296
============= ============== ============== ==============
</TABLE>
22
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
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.
23
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Change in Accounting Principles
-------------------------------
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, AEarnings 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
AAccounting for Stock-Based Compensation@ (ASFAS 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 $405,100 and $-0- of a
stock-based compensation expense for the years ended March 31,
1999 and 1998, respectively.
The Company also adopted Statement of Financial Accounting
Standards (SFAS) No. 130, AReporting 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
March 31,
------------------------------------
1999 1998
------- -------
Finished goods $ 1,035,682 $ 1,238,258
WIP 1,076,880 124,243
Raw goods 1,003,201 1,321,877
----------------- ---------------
$ 3,115,763 $ 2,684,378
================= ===============
24
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
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 March 31, 1999 and 1998 are detailed
in the following summary:
<TABLE>
<CAPTION>
Net Book Value
Accumulated ----------------------------------
Cost Depreciation 1999 1998
------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Office furniture and fixtures $ 62,427 $ 38,107 $ 24,320 $ 33,237
Machinery and equipment 739,541 170,053 569,488 161,464
Capital leases 29,895 2,990 26,905 2,707
Leasehold improvements 4,581 2,577 2,004 2,927
------------- ---------------- --------------- ----------------
Total $ 836,444 $ 213,727 $ 622,717 $ 200,335
============= ================ =============== ================
</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 years ended March 31, 1999, 1998 and 1997 amounted to $79,599,
$70,209 and $41,549, respectively.
NOTE 4 - STOCKHOLDERS' EQUITY
The Company is authorized to issue 500,000,000 shares of common
stock, par value $.0001. As of March 31, 1999, the Company has
issued 22,358,646 shares of common stock.
The Company continued the placement of Regulation S stock in the
year ended March 31, 1999 and issued 2,729,526 shares to non U.S.
persons. The Company's plans are to continue placing common stock
through private placements to fund the growth requirements of the
Company.
25
<PAGE>
<TABLE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
<CAPTION>
NOTE 5 - RELATED PARTIES
Notes payable to related parties as of March 31, 1999 and 1998 are
detailed in the following summary:
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 $ 135,000
Note payable to CEO; unsecured, due in monthly
interest installments of $930 with an interest rate
of 12%; due December 31, 1998. - 21,802
----------------- -----------------
Total related party notes payable 140,000 156,802
Less: current portion (140,000) (156,802)
----------------- -----------------
Long-term portion$ - $ -
================= =================
Maturities of the related party notes payable are as follows:
Period ending March 31, 2000 $ 140,000
2001 -
-----------------
Total $ 140,000
=================
NOTE 6 - LONG-TERM DEBT
Notes payable as of March 31, 1999 and 1998 are detailed in the
following summary:
1999 1998
----------------- ----------------
Note payable to a company; due in monthly
installments of $3,244 which includes
interest at 8%; due July, 1999, unsecured. $ 53,907 $ 62,056
Convertible debentures to a company; due
December 22, 2001, which includes interest
at 8%. 750,000 -
Convertible debentures to a company; due
February 22, 2002, which includes interest at 8%. 2,000,000 -
----------------- -----------------
Balance Forward $ 2,803,907 $ 62,056
----------------- -----------------
</TABLE>
26
<PAGE>
<TABLE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
<CAPTION>
<S> <C> <C>
NOTE 6 - LONG-TERM DEBT (Continued)
Balance Forward $ 2,803,907 $ 62,056
Note payable to a company; due June 8, 2000,
interest at 10% due monthly, secured by
equipment and inventory. 440,000 -
Note payable to a company; unsecured, due in
monthly installments of $19,654, which includes
interest at 6%; due October 1999. 173,703 -
----------------- -----------------
Total long-term debt 3,417,610 62,056
Less: current portion (227,610) (50,080)
----------------- -----------------
Long-term portion$ 3,190,000 $ 11,976
================= =================
Maturities of long-term debt are summarized below:
Period ending March 31, 2000 $ 227,610
2001 440,000
2002 2,750,000
2003 -
2004 -
-----------------
Total $ 3,417,610
=================
</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
March 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Equipment $ 29,895 $ 26,877
Less: accumulated depreciation (2,990) (24,170)
----------------- -----------------
Net property under capital lease $ 26,905 $ 2,707
================= =================
</TABLE>
27
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
NOTE 7 - LEASES (Continued)
At March 31, 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 March 31,
2000 $ 22,744 $ 147,099
2001 - 113,987
2002 - 76,687
2003 - -
later years - -
----------------- -----------------
Total minimum lease payments 22,744 $ 337,773
=================
Less: interest 9,142
-----------------
Present value of net minimum lease payment 13,602
Less: current portion 13,602
-----------------
Capital lease obligations payable long-term $ -
=================
</TABLE>
Rental expense for the years ended March 31, 1999, 1998 and 1997
amounted to $135,580, $187,961 and $86,094, respectively.
<TABLE>
<CAPTION>
NOTE 8 - CASH FLOW AND NON CASH INVESTING AND FINANCING ACTIVITIES
Cash flow information
March 31,
----------------------------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C> <C>
Interest paid $ 34,535 $ 18,478 $ 24,230
Income taxes paid $ 500 $ 400 $ 300
Non-cash investing and financing activities
For the years ending March 31, 1999 and 1998, the Company incurred
the following non-cash investing and financing activities.
March 31,
----------------------------------------------
1999 1998 1997
--------------- -------------- -------------
Capital lease obligations incurred $ 29,895 $ - $ -
Issuance of stock and options for services
rendered $ 448,547 $ 651,517 $ -
Issuance of stock for assets $ 1,533,000 $ - $ -
Increase in debt for assets $ 440,000 $ - $ -
</TABLE>
28
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
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
On February 27, 1997, the Company established Chequemate
Tele-Services, Inc. (CTS) along with another individual and
received fifty-one percent (51%) of the company. CTS then entered
into an asset purchase agreement to acquire all of the assets of
Quality Products Distribution, Inc. The assets consisted mainly of
credit card processing software and certain intangibles. In
November of 1997, the Company sold the processing software and
related intangibles.
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 March 31, 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.
29
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
NOTE 12 - GOING CONCERN (Continued)
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. Subsequent to year end, the Company had
raised approximately $966,000 through common stock and debt
issuances.
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 convertible
debentures of $750,000 are in $250,000 incremental units and carry
warrants equal to 24,753 shares per unit. The convertible
debentures of $2,000,000 are in $250,000 increments and carry
warrants equal to 8,475 shares per unit.
Activity regarding stock options is summarized as follows:
<TABLE>
<CAPTION>
Number of Shares
-----------------------------------------------------------------
1999 Price 1998 Price
--------------- --------------- ------------- ------------------
<S> <C> <C> <C> <C>
Options Granted:
Beginning of year 2,354,800 $ .01 - 7.00 354,800 $ 3.50 - 7.00
Additional granted 64,000 .01 2,000,000 .01
Canceled (252,800) 3.50-7.00 - -
-------------- -------------
End of year 2,166,000 2,354,800
============== =============
Options Exercised:
Beginning of year 283,242 $ .01 - 7.00 100 3.50
Additional exercised 1,074,810 .01 283,142 .01
Expired - - - -
--------------- -------------
End of year 1,358,052 283,242
============== =============
Options Outstanding at End
of Year 807,948 2,071,558
============== =============
</TABLE>
Option prices range from $0.01 to $7.00 per share. The Company
granted several stock options to various individuals for service
performed or for future services. The option price for the
services performed was stated at $5.00 per share on 4,000 shares.
30
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
NOTE 14 - ACQUISITION OF TECHNOLOGY
In May of 1997, the Company formed the wholly-owned subsidiary,
Chequemate Electronic, Inc. (formerly Chequemate Third Dimension,
Inc,) (CEI). CEI then entered into an agreement to acquire
technology relating to certain intellectual property from Advanced
Technology Group, LLC (LLC). Pursuant to the agreement, the
Company contributed to CEI three million dollars within sixty (60)
days of signing. In addition, the Company established a
non-qualified stock option for certain members of the LLC.
In May 1997, the Company granted 2,000,000 common stock options to
certain individuals in exchange for the exclusive rights to
specified intellectual property. Under APB 17, the transactions
were recorded using the fair market value of the stock upon the
date of the grant, which was determined to be $3.00 per share
based upon the current trading value of the stock and the time
delay before the shares could be exercised. At March 31, 1998, the
Company's projected cash flows indicated that the recoverability
of the asset may be impaired. Revaluation of the projected cash
flow associated with this technology was determined to be
approximately $2,500,000. Under FASB 121 an adjustment of
$3,133,333 for impairment of the asset was recognized.
NOTE 15 - 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 have recorded a note receivable of
$465,530. Also, on March 31, 1999, the Company obtained the secure
interests of several other promissory notes held by several
investors against Strata by exchanging stock for the notes. The
Company exchanged 333,333 shares, at $3.00 per share, 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. Subsequent to year
end, the Company foreclosed upon Strata and acquired all of the
assets of Strata.
NOTE 16 - RELATED PARTY TRANSACTIONS
The Company owes certain officers and directors royalties from the
revenue of book sales. In addition, the Company owes a major
shareholder royalties on active users of the Chequemate product.
The total amount owing to these individuals as of March 31, 1999
and 1998 was $25,292 and $42,034, respectively.
NOTE 17 - MARKETING DEVELOPMENT AGREEMENT
In December 1996, the Company entered into a venture with an
individual to enhance and improve its marketing capacity as well
as to strengthen its in-house administrative capacity. The Company
has incurred monthly expenses of approximately $10,000 on this
venture. The alliance between the parties indicates that the
individual will earn 50% of all net profits directly generated
from revenues created specifically and exclusively by this
agreement. Upon termination of this alliance, the specific
revenues will revert back to the individual.
31
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
NOTE 18 - PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended March 31, 1999
and 1998 consists of the following:
<TABLE>
<CAPTION>
Current Deferred Total
------------------ ----------------- -----------------
<S> <C> <C> <C>
Year ended March 31, 1999
U.S. Federal $ - $ - $ -
State and local 500 - 500
------------------ ----------------- -----------------
$ 500 $ - $ 500
================== ================= =================
Year ended March 31, 1998
U.S. Federal $ - $ - $ -
State and local 500 - 500
------------------ ----------------- -----------------
$ 500 $ - $ 500
================== ================ =================
</TABLE>
Income tax expense was $500 and $500 for each of the years ended
March 31, 1999 and 1998, respectively, and differed from the
amounts computed by applying the U.S. Federal income tax rate of
34 percent to loss from operations before provision for income
taxes and extraordinary item as a result of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Computed Aexpected@ benefit $ (1,552,274) $ (2,728,005)
Increase (reduction) in income taxes resulting from:
Change in valuation allowance for deferred
tax assets 1,542,774 2,722,639
Non-deductible expenses 9,000 4,866
----------------- -----------------
Income tax provision $ 500 $ 500
================= =================
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets at March 31, 1999
are presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards
Total deferred tax assets $ 5,656,774 $ 4,114,000
Less valuation allowance (5,656,774) (4,114,000)
----------------- -----------------
Net deferred tax assets $ - $ -
================= =================
</TABLE>
32
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
NOTE 19 - SUBSEQUENT EVENTS
Subsequent to year end, the Company acquired assets to enhance its
hotel pay-per-view operations by issuing 125,000 shares of common stock
and $150,000 of cash. The Company increased its debt position by
borrowing an additional $500,000 in convertible debentures.
33
<PAGE>
ITEM 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
The Company does not have any disagreements with its accountants
regarding the accounting and financial disclosures contained in this Form 10-KSB
report.
PART III
--------
ITEM 9. Directors and Executive Officers
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Name and Principle Occupation or Age First Shares of Common Percentage of
Employment Became a Stock Common Stock
Director Beneficially Outstanding
Owned
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Blaine Harris 60 1994 2,192,948 (3) 10.2%
Chairman and former CEO and President
of the Company. Elected as an officer
of the Company in 1994
- -----------------------------------------------------------------------------------------------
Harold P. Glick 57 1995 528,962 2.4%
Partner in the real estate company of
Moore Warfield & Glick
- -----------------------------------------------------------------------------------------------
Robert E. Warfield 59 1995 1,000,000 4.6%
Partner in the real estate company of
Moore Warfield & Glick
- -----------------------------------------------------------------------------------------------
Andre Peterson 46 1998 32,990 (4) less than 1%
VP of Marketing and Chief Marketing
Officer of Cogito Incorporated
- -----------------------------------------------------------------------------------------------
John Bartholomew 40 1998 202,133 (5) 1%
General Manager of The Kaizen Group
- -----------------------------------------------------------------------------------------------
J. Michael Heil 44 n/a 0 0%
CEO
- -----------------------------------------------------------------------------------------------
Terrell A. Lassetter 68 n/a 14,285 less than 1%
President
- -----------------------------------------------------------------------------------------------
Steven B. Anderson 30 n/a 9,000 (6) less than 1%
CFO
- ----------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
(3) This amount includes 49,000 shares available under unexercised options and
2,074,500 shares held by a limited liability company, of which Mr. Harris is
general partner.
(4) This amount includes 9,900 shares owned by a partnership, of which Mr.
Peterson is a partner.
(5) This amount includes 3,990 shares owned by a partnership, of which Mr.
Bartholomew is a partner, and includes 17,143 shares subject to an unexercised
option.
(6) This amount consists of shares available under unexercised options.
34
<PAGE>
Business Experience
Blaine Harris. Chairman, Director. Mr. Harris is an alumnus of Idaho State
University, where he majored in Business and Marketing. Mr. Harris has extensive
experience in real estate with his primary focus being commercial and
residential project development. From 1986 to 1991, he served as Chief Executive
Officer and Chairman of the Board of Directors of Help-U-Sell, Inc. and was
involved with Help-U-Sell as a partner of Conquest Management, a Utah
partnership, which managed and owned a 49% interest in Help-U-Sell. During his
administration, Help-U-Sell grew from 118 franchises to 650 plus franchises and
was listed as the fastest growing real estate franchising organization in the
country. In 1991, the Help-U-Sell parent company, Mutual Benefit Life, was taken
over by the New Jersey State Insurance Regulators and its subsidiaries were
liquidated, including Help-U-Sell, Inc. In 1991, Mr. Harris formulated and began
development of Chequemate International, Inc.
Harold P. Glick. Director. Mr. Glick received his BS degree in Accounting from
the University of Maryland in 1965 and became a Certified Public Accountant the
following year. Mr. Glick successfully built and managed a family-owned retail
business prior to joining Mr. Robert Warfield as a partner in the real estate
Company of Moore, Warfield and Glick. Additionally, since 1988, Mr. Glick has
been a regional owner of Help-U-Sell Real Estate in Virginia, Maryland,
Washington D.C. and Delaware. Mr. Glick served as President of the Greater Ocean
City, Maryland, Board of Realtors in 1988, is a member of the Advisory Board of
Nations Bank and serves on the Maryland Governor's Economic Development
Committee.
Robert E. Warfield. Director. Mr. Warfield has a BS Degree in Economics from
Western Maryland College. He has an extensive background in real estate and
regional sales management with the Weyerhaeuser Corporation. Mr. Warfield first
became licensed in real estate in 1962, and in 1975 started Warfield Real
Estate. He has been in the real estate and development business in Ocean City,
Maryland since 1971. For the past 18 years Mr. Warfield has been President of
Moore, Warfield and Glick, Inc., with real estate sales over $100 million and
rentals of $12 million. Additionally, since 1988, Mr. Warfield has been a
regional owner of help-U-Sell Real Estate in Virginia, Maryland, Washington D.C.
and Delaware. Mr. Warfield currently serves on the Board of Directors of
Atlantic General Hospital and Ocean City Golf and Yacht Club. He has also served
as a director of Second National Service Corp., and Salisbury School.
Andre Peterson. Director. Mr Peterson is an alumnus of Brigham Young University,
where he majored in Business Management. He is currently the Vice President of
Marketing and Chief Marketing Officer for Cogito Incorporated, a software
technology development company. He was the VP of Marketing and a Partner of The
Kaizen Group, a marketing and development group for start-up software from 1996
to 1998. He served as the President of Enhanced Simulation Marketing from 1994
through 1996, marketing a newly patented motion simulator for the entertainment
industry. He was the VP of Marketing for WordPerfect Corporation and Novell
Corporation from 1983 to 1994. Mr. Peterson was responsible for all aspects of
sales and marketing for WordPerfect, taking sales from one million in 1983, to
over seven hundred million in 1994. Prior to working for WordPerfect, Mr.
Peterson was a member of the White House Staff for four years.
John V. Bartholomew. Director. Mr. Bartholomew has a BS degree in Computer
Science from Brigham Young University. He has extensive experience in the
application of technology in computers and complex systems. He has been involved
in the management of technology sales and marketing for more than a decade with
such companies as WordPerfect and Novell. He is the General Manager of The
Kaizen Group, a consulting organization for technology companies with such
customers as Microsoft, NetVision, PowerQuest, LogicalNet and Cogito, a
knowledge based software solutions provider.
Committees of the Board of Directors
Robert E. Warfield serves as the sole voting member of the Compensation
Committee of the board of directors. Harold P. Glick serves as the sole voting
member of the Audit Committee. The Compensation Committee has been charged with
35
<PAGE>
the responsibility of evaluating and establishing compensation for the
management of the Company and the grant of corporate stock options. The Audit
Committee has been charged with the responsibility of communicating with the
auditors of the Company, and evaluating the accounting controls, functions and
systems of the Company.
Executive Officers
The following table outlines the executive officers of the Company.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Name Age Position Held Current Term of Office or
Directorship and period of Service
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
J. Michael Heil 44 September 1998 to present
---------------------------------------------------------------------------------------------------------
Terrell A. Lassetter 68 President September 1998 to present
---------------------------------------------------------------------------------------------------------
Steven B. Anderson 30 CFO/Secretary/ Service since July 1995
Treasurer
---------------------------------------------------------------------------------------------------------
</TABLE>
Business Experience
J. Michael Heil. CEO. Mr Heil has over 17 years experience in the satellite and
television business. Mr Heil was formerly president of Skylink America, Inc. and
Satellite Cinema, successfully launching five digital video pay-per-view
networks. During his tenure in these businesses, he developed the business to
$20 million in annual revenue and over 150,000 subscribers. He was the Director
of Operations for Comsat Video Enterprises, and Chairman and CEO of Television
Entertainment Network, Inc., a Canadian hotel pay-per-view company.
Terrell Lassetter. Mr. Lassetter spent over 34 years with IBM working as Senior
Engineer, product manager and vice president of data processing (DP)
manufacturing IBM World Trade Corp. He successfully managed all of IBM's DP
plants and technology plants outside the U.S. He later became a private
consultant for such companies as Toyota MFG., Mutual Benefit Life and
Help-U-Sell, Inc.
Steven B. Anderson. CFO/Secretary/Treasurer. Mr. Anderson has a Masters of
Business Administration degree from the University of Utah. Mr. Anderson also
received his BA Degree in Accounting from the University of Utah. Mr. Anderson
has been with the Company since 1995 when he joined Chequemate as the Assistant
Controller. Mr. Anderson first distinguished himself through his ability to
provide projections and models that help with business decisions. Since then,
his role with the Company has continually increased. Mr. Anderson currently
works on SEC reporting, financial statements, shareholder and investor
relations, among other corporate responsibilities.
36
<PAGE>
ITEM 10. Executive Compensation
The table set forth below contains information about the remuneration
received and accrued during fiscal years 1997, 1998, and 1999 from the Company
and its subsidiaries by the Chief Executive Officer and each of the most highly
compensated executive officers of the Company.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Name and Principal Fiscal Year Salary ($) Bonus ($) All Other Annual
Position Compensation
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Blaine Harris, Former 1999 $111,667 $1,218 $ 0
CEO and current Chairman 1998 $100,000 $1,457 $10,000
1997 $100,000 $1,015 $ 2,443
- ---------------------------------------------------------------------------------------------------------
J. Michael Heil 1999 $100,000 $6,299 $ 0
CEO 1998 $ 0 $ 0 $ 0
1997 $ 0 $ 0 $ 0
- ---------------------------------------------------------------------------------------------------------
Terrell Lassetter 1999 $70,000 $1,299 $ 0
President 1998 $ 0 $ 0 $ 0
1997 $ 0 $ 0 $ 0
- ---------------------------------------------------------------------------------------------------------
Steven B. Anderson 1999 $54,833 $ 812 $ 0
CFO/Secretary/ 1998 $41,208 $ 950 $ 0
Treasurer 1997 $32,977 $ 390 $ 0
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The following chart shows the stock options that were granted to
executive officers of the Company during the last completed fiscal year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Name and Principal Total Percentage of total Total Exercise Expiration
Position Options granted to employees Options Price Date
Granted in fiscal year Vested ($/share)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Blaine Harris, CEO 7,000 70 % 49,000 $6.32 Dec. 16, 2005
-----------------------------------------------------------------------------------------------------
Steven B. Anderson 3,000 30 % 9,000 $5.75 Dec. 16, 2005
CFO
-----------------------------------------------------------------------------------------------------
</TABLE>
The following table reflects the number of unexercised options which
are exercisable and unexercisable at the end of fiscal year 1999. None of the
executive officers exercised any options in the fiscal year ending March 31,
1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Number of unexercised options Value of unexercised in-the-money
at FY-end (#) options at FY-end ($)
Name of Officer exercisable/unexercisable exercisable/unexercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Blaine Harris 49,000/21,000 $0/$0
- ------------------------------------------------------------------------------------------------------------------
Steven B. Anderson 9,000/30,000 $0/$0
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The table below sets forth certain information as of July 7, 1998 with
respect to each person who owns of record, or is known to the Company to
beneficially own, more than 5% of the outstanding shares of Voting Common Stock,
and the beneficial ownership of such securities by each officer and director who
owns any stock, and by all officers and directors as a group. The original
directors and officers of the Company, whose aggregate share holdings are now
less than three percent of the total shares outstanding, may be deemed to have
been promoters of the Company.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Amount and Nature of Ownership of Percent of currently issued and
Voting Stock Subscribed Common Stock
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Blaine Harris 118,448 Direct Ownership
57 West 200 South Suite 350 2,074,500 Indirect Ownership 10.2%
Salt Lake City, Utah 84101
-----------------------------------------------------------------------------------------------------------
Robert Warfield 1,000,000
10481 Golf Course Road Direct Ownership 4.6%
Ocean City, MD 21842
-----------------------------------------------------------------------------------------------------------
Harold P. Glick 528,962
10706 Piney Island Drive Direct Ownership 2.4%
Bishopville, MD 21842
-----------------------------------------------------------------------------------------------------------
Andre Peterson 32,990 less than 1%
-----------------------------------------------------------------------------------------------------------
John Bartholomew 202,133 1%
-----------------------------------------------------------------------------------------------------------
</TABLE>
The Company knows of no arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent
date result in a change in control of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Subsequent to the end of its fiscal year, on June 9, 1999, the
registrant became a reporting company pursuant to Section 12(b) of the
Securities Exchange Act of 1934. All reports required under Section 16(a) are
believed to have been timely filed by the officers, directors and 10%
shareholders of the stock of the Company.
ITEM 12. Certain Relationships and Related Transactions.
At the August 21, 1998 meeting of the board of directors of the
Company, a resolution was adopted to issue 300,000 restricted shares of common
stock to the Chairman of the board for financing activities and services
rendered on behalf of the Company. A resolution was also adopted to compensate
the members of the board of directors through the issuance of 10,000 shares of
the restricted stock of the Company for each year of service on the board of
directors. None of the described shares have been issued, and such matters have
been referred to the Compensation Committee of the board of directors for
further action. If the grants of stock to the directors are completed, an
aggregate of 230,000 shares would be issued to the directors of the Company for
service through the end of this calendar year. Because the Compensation
Committee has not taken final action on these matters, and the shares have not
been issued, such shares have not been included in the compensation or share
ownership tables in Items 10 and 11 of this report.
Independent members of the Board of Directors acted on November 6, 1998
to approve the sale of the financial services business of the Company to TFL,
L.L.C., a Utah limited liability company. A definitive sales agreement was
executed on November 12, 1998. The sale was made in order to pursue the newly
developed business plan of the Company. This strategic business plan is premised
upon focusing on the three dimensional imaging technology of the Company. The
notion of spinning off the business segments of the Company which were not
related to the Company's communications and entertainment business had long been
a matter under consideration by management.
In conjunction with this sale, the Company has transferred to the
purchaser the Chequemate trademark which has been identified with the financial
services business formerly conducted by the Company. As part of the
consideration for the transaction, the purchaser agreed to assume all
operational expenses of the financial services business from September 1, 1998.
The balance of the purchase consists of a percentage of the net profits of the
38
<PAGE>
business segment from the closing of the transaction until September 30, 2001,
with a Fifty Thousand Dollar minimum payment obligation. The physical assets
sold in the transaction are limited. The remaining assets are intangibles;
including trademarks, proprietary information and other intellectual property.
The purchase price and all material terms of the agreement were
established in arm's length negotiations with an independent third party. After
the Company achieved the best possible terms for the transaction, the proposed
purchaser declined to proceed with the closing of the transaction. With the
transaction stalemated in this manner, Ken and Marci Redding (two former
employees of the Company), agreed to step into the shoes of the independent
third party and consummate the transaction on the same terms in all material
respects. This purchase was completed by the Reddings through a limited
liability company which they control. Because the Reddings were former employees
of the Company (and are the son-in-law and daughter respectively of the Chairman
of the board of directors of the Company), the substitution of the Reddings as
purchasers in the transaction was disclosed to the board of directors and the
terms of the transaction were approved a second time. Upon this latter vote, the
Chairman abstained from voting. The final sales transaction was approved by the
unanimous action of the independent board members.
39
<PAGE>
<TABLE>
<CAPTION>
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<S> <C> <C>
NO. DESCRIPTION PAGE
--- ----------- ----
3.1 Restated Articles of Incorporation. Incorporated by reference from Form 8-A (Film No. 99636119)
filed by the Company with the Commission on May 27, 1999.
3.2 By-Laws. Incorporated by reference from Form 8-A (Film No. 99636119) filed by the Company with
the Commission on May 27, 1999.
4 Specimen Common Stock Certificate. Incorporated by reference from Form 8-A (Film No. 99636119)
filed by the Company with the Commission on May 27, 1999.
10.1 License Agreement between the Company's wholly owned
subsidiary and Advanced Technology Group, L.L.C. dated as of
June 23, 1997. Incorporated by reference from Form 10-KSB
(Film No. 97641185) filed by the Company with the Commission
on July 16, 1997.
10.2 Subscription Agreement between the Company and Augustine Fund,
LP dated as of December 21, 1998. Incorporated by reference
from Form 8-K (Film No. 98774706) filed by the Company with
the Commission on December 23, 1998.
10.3 Subscription Agreement between the Company and Augustine Fund,
LP dated as of February 9, 1999. Incorporated by reference
from Form 10-QSB (Film No. 99541584) filed by the Company with
the Commission on February 16, 1999.
10.4 Subscription Agreement between the Company and Augustine Fund,
LP dated as of June 4, 1999. Incorporated by reference from
Form S-3/A (Film No. 99659015) filed by the Company with the
Commission on July 2, 1999.
11 Computation of per-share earnings................................................................
21 Subsidiaries of the registrant (see section entitled Principals of Consolidation)..............22
23 Consent of Jones, Jensen & Company.............................................................42
24 Power of Attorney..............................................................................43
27 Financial Data Schedule (for SEC use only).....................................................44
(b) Reports Filed on Form 8-K
Dec. 23, 1998 Form 8-K report regarding the acquisition of certain assets of Alpha Communications.
April 14, 1999 Form 8-K regarding the acquisition of secured interests in the assets of Strata. Inc.
</TABLE>
40
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CHEQUEMATE INTERNATIONAL, INC.
By: /s/J. Michael Heil Date July 14, 1999
------------------------- --------------
J. Michael Heil B CEO
By /s/Steven B. Anderson Date July 13, 1999
--------------------- --------------
Steven B. Anderson B CFO
In accordance with the Exchange Act, 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/Blaine Harris
- ---------------------------------------
Blaine Harris, Chairman Date July 14, 1999
-------------
/s/Terrell A. Lassetter for
- ---------------------------------------
for Harold P. Glick, Director Date July 13, 1999
-------------
/s/Terrell A. Lassetter for
- ---------------------------------------
for Robert E. Warfield, Director Date July 13, 1990
-------------
/s/Terrell A. Lassetter
- ---------------------------------------
for Andre Peterson, Director Date July 13, 1999
-------------
/s/Terrell A. Lassetter
- ---------------------------------------
for John Bartholomew, Director Date July 13, 1999
--------------
41
EXHIBIT 23
Consent of Jones, Jensen & Company
We hereby consent to the use of our audit report dated June 30, 1999 in this
Form 10KSB of Chequemate International, Inc. for the year ended March 31, 1999,
which is part of this Form 10KSB and all references to our firm included in this
Form 10KSB
/s/ Jones, Jensen & Company
Jones, Jensen & Company
Salt Lake City, Utah
July 13, 1999
42
EXHIBIT 24
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Terrell A. Lassetter Sr. and J. Michael Heil as attorneys-in-fact with
full power of substitution, to execute in the name and on the behalf of each
person, individually and in each capacity stated below, and to file the Form
10-KSB for fiscal year ending March 31, 1999, and any amendment thereto.
Signature Title
--------------------- ----------------------
- ---------------------- Chief Executive Officer Dated July , 1999
J. Michael Heil
- ---------------------- Chairman Dated July , 1999
Blaine Harris
/s/ John Bartholomew Director Dated July 6, 1999
- ----------------------
John Bartholomew
/s/ Hal Glick Director Dated July 12, 1999
- ---------------------
Hal Glick
/s/ Andre Peterson Director Dated July 6, 1999
- --------------------
Andre Peterson
/s/ Robert E. Warfield Director Dated July 12, 1999
- -------------------
Robert E. Warfield
/s/ Steven Anderson Chief Financial Officer Dated July 2, 1999
- ------------------ and Principal Accounting Officer
Steven Anderson
43
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1732199
<SECURITIES> 0
<RECEIVABLES> 251742
<ALLOWANCES> (53820)
<INVENTORY> 3115763
<CURRENT-ASSETS> 5244233
<PP&E> 622717
<DEPRECIATION> 0
<TOTAL-ASSETS> 9683716
<CURRENT-LIABILITIES> 1436526
<BONDS> 0
0
0
<COMMON> 2236
<OTHER-SE> 5057190
<TOTAL-LIABILITY-AND-EQUITY> 9683716
<SALES> 682760
<TOTAL-REVENUES> 682760
<CGS> 631132
<TOTAL-COSTS> 3979998
<OTHER-EXPENSES> 284209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93779
<INCOME-PRETAX> (4212579)
<INCOME-TAX> 500
<INCOME-CONTINUING> (4171720)
<DISCONTINUED> (40859)
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