<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended: September 30, 1999
Commission File Number:33-385-11-FW
CHEQUEMATE INTERNATIONAL, INC.
-------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UTAH 76-0279816
-----------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
330 WASHINGTON BOULEVARD, SUITE 507; MARINA DEL REY, CALIFORNIA 90292
---------------------------------------------------------------------
(Address of principal executive offices)
(305) 310-3659
--------------
(Issuer's Telephone Number)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirement for the past 90 days .
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's common
equity, as of the latest practicable date: October 25, 1999: 23,866,834
Transitional Small Business Format: YES NO X
----- -----
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I-FINANCIAL STATEMENTS
ITEM 1. Financial Statements PAGE
<S> <C>
UNAUDITED CONSOLIDATED BALANCE SHEETS 4
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS 6
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
GENERAL INFORMATION 15
RESULTS OF OPERATIONS 18
LIQUIDITY AND CAPITAL RESOURCES 21
YEAR 2000 COMPLIANCE 21
PART II-OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 22
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Financial Statements
September 30, 1999 and March 31, 1999
3
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 57,964 $ 1,732,199
Accounts receivable - net of allowances
of $53,820 and $53,820 643,361 197,922
Prepaid expenses 271,628 198,349
Inventory (Note 3) 3,268,893 3,115,763
------------ ------------
Total Current Assets 4,241,846 5,244,233
------------ ------------
PROPERTY AND EQUIPMENT (Note 4) 959,306 622,717
------------ ------------
OTHER ASSETS
Note receivable 73,588 65,000
Product rights (Note 2) 3,476,302 2,534,532
Secured interest - 1,198,530
Refundable deposits 14,384 15,704
Investments 153,000 3,000
------------ ------------
Total Other Assets 3,717,274 3,816,766
------------ ------------
TOTAL ASSETS $ 8,918,426 $ 9,683,716
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,321,456 $ 896,408
Accrued expenses 206,093 38,672
Income tax payable 500 500
Accrued interest - related party 79,943 79,943
Accrued interest payable - 39,791
Current portion related party 140,000 140,000
Current portion long-term debt (Note 5) 607,864 227,610
Current portion capital lease - 13,602
------------- -------------
Total Current Liabilities 2,355,856 1,436,526
------------- -------------
LONG-TERM LIABILITIES
Long-term debt (Note 5) 3,250,000 3,190,000
------------- -------------
Total Long-Term Liabilities 3,250,000 3,190,000
------------- -------------
Total Liabilities 5,605,856 4,626,526
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value 500,000,000 shares
authorized, 23,198,433 and 22,358,646 shares
outstanding, respectively 2,319 2,236
Capital in excess of par 26,528,328 24,461,440
Accumulated deficit (23,218,077) (19,406,486)
------------- -------------
Total Stockholders' Equity 3,312,570 5,057,190
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,918,426 $ 9,683,716
============= =============
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES $ 842,177 $ 77,628 $ 1,609,186 $ 167,376
COST OF SALES 249,105 78,111 582,054 106,245
--------------- --------------- --------------- ---------------
GROSS PROFIT 593,072 (483) 1,027,132 61,131
--------------- --------------- --------------- ---------------
EXPENSES
Selling expenses 529,655 85,873 1,340,530 215,509
General and administrative 1,885,982 550,687 3,401,288 991,842
--------------- --------------- --------------- ---------------
Total Expenses 2,415,637 636,560 4,741,818 1,207,351
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE)
Loss on sale of assets - (165,167) - (165,167)
Interest income 1,105 - 8,586 -
Interest expense (15,005) (4,579) (105,491) (9,383)
--------------- --------------- --------------- ---------------
Net Other Expense (13,900) (169,746) (96,905) (174,550)
--------------- --------------- --------------- ---------------
NET (LOSS) BEFORE INCOME TAXES (1,836,465) (806,789) (3,811,591) (1,320,770)
INCOME TAX PROVISION - - - -
--------------- --------------- --------------- ---------------
NET (LOSS) $ (1,836,465) $ (806,789) $ (3,811,591) $ (1,320,770)
=============== =============== =============== ===============
BASIC (LOSS) PER SHARE $ (0.08) $ (0.05) $ (0.17) $ (0.08)
=============== =============== =============== ===============
AVERAGE NUMBER OF SHARES
OUTSTANDING 22,876,361 16,050,274 22,766,504 16,050,274
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) $ (1,836,465) $ (806,789) $ (3,811,591) $ (1,320,770)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 148,551 150,096 262,334 178,166
(Increase) decrease in accounts
receivable and other assets (108,522) (86,050) (180,078) (99,642)
(Increase) decrease in inventory 164,216 208,247 (153,130) 236,676
(Increase) decrease in prepaid expense 47,351 605 (73,279) 451
Increase (decrease) in accounts payable 268,468 198,103 425,035 144,972
Increase (decrease) short-term debt - (35,968) - (57,724)
Increase (decrease) in accrued expenses 152,873 43,744 110,332 42,221
Increase (decrease) in accrued interest (95,565) - (39,791) -
--------------- --------------- --------------- ---------------
Net Cash (Used) by Operating
Activities (1,259,093) (328,012) (3,460,168) (875,650)
--------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Equipment purchase (26,283) - (138,437) (23,602)
--------------- --------------- --------------- ---------------
Net Cash (Used) by Investing
Activities (26,283) - (138,437) (23,602)
--------------- --------------- --------------- ---------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from common stock 1,033,425 555,556 1,499,405 930,600
Proceeds from debt - - 500,000 -
Payments of capital leases (1,687) (796) (15,289) (1,450)
Payments of long-term debt - (165,850) (59,746) (169,778)
--------------- --------------- --------------- ---------------
Net Cash Provided by Financing
Activities $ 1,031,738 $ 388,910 $ 1,924,370 $ 759,372
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
7
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH $ (253,638) $ 60,898 $ (1,674,235) $ (139,880)
CASH AT BEGINNING PERIOD 311,602 20,062 1,732,199 220,840
--------------- --------------- --------------- ---------------
CASH AT END OF PERIOD $ 57,964 $ 80,960 $ 57,964 $ 80,960
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of this financial statement.
8
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Notes to Consolidated Financial Statements
September 30, 1999 and March 31, 1999
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been
prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows at September 30, 1999 and
1998 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's March 31,
1999 audited consolidated financial statements. The results of
operations for the periods ended September 30, 1999 and 1998 are
not necessarily indicative of the operating results for the full
years.
NOTE 2 - 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.
9
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Notes to Consolidated Financial Statements
September 30, 1999 and March 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost with depreciation and
amortization computed on the straight line method. Property and
equipment are depreciated over the following estimated useful
lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Office equipment 5
Office furniture 5-7
Machinery and equipment 5
Leasehold improvements 3-5
Capital leases 3-5
</TABLE>
ORGANIZATION COSTS AND PRODUCT RIGHTS
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 planning, 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.
10
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Notes to Consolidated Financial Statements
September 30, 1999 and March 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
NOTE 3 - INVENTORY
<TABLE>
<CAPTION>
September 30, March 31,
1999 1998
------------- -------------
<S> <C> <C>
Finished goods $ 173,856 $ 1,035,682
WIP 2,215,165 1,076,880
Raw goods 879,872 1,003,201
------------- -------------
$ 3,268,893 $ 3,115,763
============= =============
</TABLE>
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 4 - PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1999 and March 31, 1999
are detailed in the following summary:
<TABLE>
<CAPTION>
Net Book Value
Accumulated September 30, March 31,
Cost Depreciation 1999 1999
<S> <C> <C> <C> <C>
Office furniture and fixtures $ 172,426 $ 45,523 $ 126,903 $ 24,320
Machinery and equipment 898,217 238,357 659,860 569,488
Capital leases 206,877 35,876 171,001 26,905
Leasehold improvements 4,581 3,039 1,542 2,004
------------ ------------ ------------ ------------
Total $ 1,282,101 $ 322,795 $ 959,306 $ 622,717
============ ============ ============ ============
</TABLE>
11
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Notes to Consolidated Financial Statements
September 30, 1999 and March 31, 1999
NOTE 4 - PROPERTY AND EQUIPMENT (Continued)
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
six months ended September 30, 1999 and the year ended March 31,
1999 amounted to $108,608 and $79,599.
NOTE 5 - LONG-TERM DEBT
Notes payable as of September 30, 1999 and March 31, 1999 are
detailed in the following summary:
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------ -----------
<S> <C> <C>
Note payable to a company; due in monthly
installments of $3,244 which includes
interest at 8%; due July 1999, unsecured. $ 50,990 $ 53,907
Convertible debentures to a company; due
December 22, 2001, which includes interest
at 8%. 750,000 750,000
Convertible debentures to a company; due
February 22, 2002, which includes interest at
8%. 2,000,000 2,000,000
Convertible debenture to a company, due
April 2002, with interest at 8%. 500,000 -
Note payable to a company; due June 8, 2000,
interest at 10% due monthly, secured by
equipment and inventory. 440,000 440,000
Note payable to a company; unsecured, due in
monthly installments of $19,654, which includes
interest at 6%; due October 1999. 116,874 173,703
------------ -----------
Total long-term debt 3,857,864 3,417,610
Less: current portion (607,864) (227,610)
------------ -----------
Long-term portion $ 3,250,000 $ 3,190,000
============ ===========
</TABLE>
12
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Notes to Consolidated Financial Statements
September 30, 1999 and March 31, 1999
NOTE 5 - LONG-TERM DEBT (Continued)
Maturities of long-term debt are summarized below:
<TABLE>
<S> <C>
Period ending September 30, 2000 $ 607,864
2001 -
2002 3,250,000
2003 -
2004 -
------------
Total $ 3,857,864
============
</TABLE>
NOTE 6 - CASH FLOW AND NON-CASH INVESTING AND FINANCING ACTIVITIES
CASH FLOW INFORMATION
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- -----------
<S> <C> <C>
Interest paid $ 72,277 $ 34,535
Income taxes paid $ 500 $ 500
</TABLE>
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:
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- -------------
<S> <C> <C>
Capital lease obligations incurred $ - $ 29,895
Issuance of stock and options for services
rendered $ 1,006,349 $ 448,547
Issuance of stock for assets $ 150,000 $ 1,533,000
Increase in debt for assets $ - $ 440,000
</TABLE>
NOTE 7 - 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.
13
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Notes to Consolidated Financial Statements
September 30, 1999 and March 31, 1999
NOTE 8 - 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 $50,000 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.
14
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
For more detailed information regarding the financial position of the
Company, please refer to the Unaudited Financial Statements for the second
quarter (three months) of the year 2000 ended September 30, 1999 and the six
months of the year 2000 ended September 30, 1999.
On August 17, 1999, Chequemate International Inc. announced the retirement of
Blaine Harris, the chairman of the board, to pursue other personal lifetime
goals.
Succeeding Blaine Harris as chairman is J. Michael Heil, who has been the
Company's chief executive officer since September 1998. Michael was elected as
Chairman by the board of directors at the August 16, 1999, board meeting. Mr.
Heil will retain the position of chief executive officer. Mr. Heil has more
than 17 years of experience in the satellite and broadcast television
industry. Prior to joining C-3D Digital, he was president of Skylink America
Inc. and Satellite Cinema, and has launched five digital broadcast networks.
Mr. Heil thanked Blaine for securing the technology that established a solid
platform that enables the Company to move from the developmental stage on to
the production level of 3D content. With the industry starving for new
products, this is a truly exciting time to be launching a new and unique
television network and Internet portal.
The Company, doing business as C-3D Digital, Inc., announced that it has
relocated its corporate headquarters from Salt Lake City to the Los Angeles
metropolitan area in Marina del Rey.
The relocation from Salt Lake City to the Los Angeles metropolitan area
positions the Company to develop its relationships with broadcasting
executives in the entertainment capital of the world. Being in the heart of
the entertainment industry, C-3D Digital enhances the visibility of the
Company, further defines its mission, and allows the Company local access to
a highly specialized talent pool. In addition, the Company believes the
availability of existing media content, that is the driving force behind the
business of the Company, is greater here than anywhere else in the world.
Since the Company introduced its revolutionary 3D Network to satellite
television subscribers in January of this year, it has entered into numerous
agreements with cable TV operators and hotel pay-per-view providers
throughout the United States to deliver the 3D channel to viewers.
Currently, cable subscribers in California, Missouri, Michigan and Texas have
access to the Company's 3D channel, and more than 8,000 hotel rooms
throughout Arizona, Idaho, New Mexico, Texas, Utah, Washington, and
California are offering the Company's pay-per-view selections to guests.
Additionally, 3D Television Co. Ltd. of Japan has signed an agreement to
broadcast the Company's programming in Japan through the Sky Perfect TV
platform, which has 1.3 million subscribers and is the largest direct to home
(DTH) satellite company in Japan.
15
<PAGE>
On Wednesday, September 22, the Company's board of directors approved the
appointment of media marketing expert Daniel R. Thompson as a member of the
C-3D Digital Board. Thompson is the founder and head of the influential
Hollywood entertainment agency "A Creative Group" (ACG) which specializes in
product placement, promotional advertising, program sponsorships, and
distribution.
Under Thompson's direction, ACG and its related sister companies represent
major motion picture production companies and distributors such as Warner
Bros., Paramount, Disney, Castle Rock Entertainment, and New Line Cinema. ACG
companies also act as agents within the entertainment industry on behalf of
major high-tech corporations such as Intel, Raytheon, and the Internet giant,
Lycos.
The Company believes adding Mr. Thompson's professionalism and industry
insight will help the Company continue to build C-3D Digital into a
cutting-edge 3D media and technology company.
C-3D Digital also recently brought on board an aggressive new Vice President
of Affiliate Relations, Fernando Antonio Gomez. Mr. Gomez has successfully
managed affiliate sales and relations for such prestigious companies as
Liberty Media, Bravo, The Weather Channel, and Univision. Mr. Gomez brings to
C-3D more than 16 years of experience in affiliate relations in the cable,
broadcast, and satellite industries.
In a related development, C-3D Digital also announced the retirement of
Terrell (Ted) H. Lassetter, age 68, as the Company President. Lassetter was a
key part of the management team that helped C-3D Digital establish itself
during 1998 in Salt Lake City, as a new advanced media company.
On September 22, 1999, C-3D Digital Inc. announced that it has signed a
long-term agreement whereby I-O Display Systems will manufacture C-3D
Digital's viewing systems for the Company's exclusive 3D TV Network.
I-O Display Systems, a joint venture between Ilixco Inc. and
Telecommunications Inc. (now Liberty Media), is the industry leader in the
design and manufacture of three-dimensional video viewing systems for the PC
gaming market. Its products are currently used with computer games such as
Tomb Raider(TM), Quake(TM), and Star Wars Pod Racer(TM). I-O Display Systems
allows users of its products to view three-dimensional graphics in
photo-realistic, stereoscopic quality.
The Company expects this venture will enable C-3D Digital to concentrate on
expanding its 3D Television Network and on developing its 3D Virtual Reality
Portal(TM) on the Internet. The focus of C-3D will now shift to closing on
negotiations the Company has been engaged in with major cable TV operators
over the past several months.
On September 29, 1999, C-3D Digital announced a broad-based subscriber launch
with cable system partner Vision Comm.
16
<PAGE>
Vision Comm., which operates cable systems in Texas, Missouri and Michigan,
has committed to providing the C-3D Television Network and viewing equipment
to its subscribers. The equipment for displaying the 3D channel will be
provided by C-3D's manufacturing partner I-O Displays.
Vision Comm. is enthusiastic to the early response to the new C-3D Television
Network from their subscriber base. C-3D Digital predicts this is another step
toward the objective of C-3D, to achieve a 5% market penetration of the 75
million US cable homes.
Among the major milestones achieved by C-3D Digital are key advancements in
the Company's patented 2D to 3D-conversion technology. Using this technology,
the Company has converted over twenty two feature films for broadcast for the
Company's C-3D Television Network. The efficiency of this process now allows
the Company to complete the conversion of a feature film for broadcast in a
single day. In addition, these new technologies have proven to create even
greater depth, texture and color. The ability to create original programming
with the C-3D proprietary 3D cameras, combined with the Company's
revolutionary 2D to 3D conversion, allows C-3D to satisfy the need for a
continuous stream of new programming content for its network.
On August 30,1999, C-3D Digital announced it has signed a distribution
agreement with Software Too of Japan for sales of the Strata line of 3D and
digital video(DV) software tools. The Company expects revenues from the
contract to exceed $1 million in fiscal year 2000 and grow from there in the
coming years. Software Too is the largest distributor of graphics and
media-related software in Japan, and also carries product lines by Adobe,
Macromedia and Quark. The Strata family of software has always enjoyed
immense popularity among Japanese digital artists.
Strata technology is also a key component of our Internet strategy and
securing a place in Asia will be important as we move forward. The Company
expects to have a Japanese language version of its 3D.COM Web portal in the
future and this agreement helps to lay that groundwork.
On August 26, 1999, C-3D Digital, Inc. announced that the Company has signed
an agreement with Be Inc. (Nasdaq:BEOS) to implement C-3D's line of Strata 3D
and Digital Video ("DV") software to the BeOS operating system, which is
optimized for the Internet. C-3D Digital and Be engineers are currently
working together on a BeOS version of StudioPro, the renowned 3D modeling,
rendering, and animation package used worldwide by digital artists and other
creative professionals. The BeOS operating system is designed to be modular
and streamlined to run a variety of computing devices. It was also developed
from the start with TCP/IP -- the Internet's language -- as its networking
foundation. With its combination of native Internet services -- such as a
built-in Web server, Web browser, e-mail client, ftp client, and telnet
server -- BeOS is the ideal platform for Internet applications and appliances.
17
<PAGE>
RESULTS OF OPERATIONS
Comparison of Quarter Ended September 30, 1999
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30, 1999
1999 1998
<S> <C> <C>
REVENUES $ 842,177 $ 77,628
COST OF SALES 249,105 78,111
GROSS PROFIT 593,072 (483)
Revenues percentage increase over 1998 1,084.89%
Cost of sales percentage increase over 1998 318.91%
Gross profit as a percentage of sales over 1998 11,318.15%
</TABLE>
Revenues for the second quarter of 1999 once again show a dramatic
improvement over 1998. For the three months ended September 30, 1999 revenues
increased over 1000% over the same period in 1998. Gross Margin as a
percentage of sales for the three months ended September 30, 1999 increased
over 11000% over the same period in 1998.
This dramatic increase is due primarily to the purchase of the Strata assets
and the resulting revenue stream generated by the Strata product line. This
acquisition occurred in calendar year 1999, and prior quarters reflect no
sales of the Strata products.
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30, 1999
1999 1998
<S> <C> <C>
Selling Expenses $529,665 $85,873
General and Administrative 1,885,982 550,687
Total Expenses 2,415,637 636,560
Selling Expenses increase over 1998 616.79%
General and Administrative increase over 1998 342.48%
Total Expenses increase over 1998 379.48%
</TABLE>
18
<PAGE>
Selling and General Administrative expenses have increased over 370% in the
three months ended September 30, 1999 over the same period in 1998. These
increase are due largely to the merger of the old Strata employees into the
new 3D.com enterprise and building a team of professionals to maintain a
quality programming plan for the TV Channel.
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30, 1999
1999 1998
<S> <C> <C>
Net Loss $1,836,465 $806,789
Net Loss increase over 1998 227.63%
</TABLE>
Net Losses have increased over 220% in the three months ended September 30,
1999 over the same period in 1998.
Comparison of Six Months Ended September 30, 1999
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30, 1999
1999 1998
<S> <C> <C>
REVENUES $1,609,186 $167,376
COST OF SALES 582,054 106,245
GROSS PROFIT 1,027,032 61,131
Revenues percentage increase over 1998 961.42%
Cost of sales percentage increase over 1998 574.84%
Gross Profit as a percentage of sales over 1998 174.76%
</TABLE>
Revenues for the first six months of 1999 once again show a dramatic
improvement over 1998. For the six months ended September 30, 1999, revenues
increased over 900% over the same period in 1998.
Gross Margin as a percentage of sales for the six months ended September 30,
1999 increased over 170% over the same period in 1998.
Management expects that gross Margins for 3D.com will continue to be very
good. When C-3D Digital begins to gain momentum in the channel subscription
market, revenue will increase quickly while corresponding expenses will
remain relatively the same. C-3D Digital has the capability of
19
<PAGE>
taking billions of dollars of media titles that have brought comfort,
satisfaction and excitement to viewers world wide, and reintroducing them to
those same viewers and to new markets of viewers in the 3D format. For those
companies who own the rights to these titles that are now dormant in their
archives, a whole new royalty revenue is possible for them that has, in the
past, not been available. As these new titles become 3D compatible more
subscribers will be attracted to the 3D Channel to view their old favorites
in 3D. Management anticipates that the old emotions that these favorite
movies kindled will once again stir souls when viewed in 3D. Such emotions
will encourage the sale of videos and DVD's, once again increasing the
revenue stream to C-3D Digital and those who have licensed these titles to
C-3D Digital.
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30, 1999
1999 1998
<S> <C> <C>
Selling Expenses $1,340,530 $215,509
General and Administrative 3,401,288 991,842
Total Expenses 4,741,818 1,207,351
Selling Expenses increase over 1998 622.03%
General and Administrative increase over 1998 342.93%
Total Expenses increase over 1998 392.75%
</TABLE>
Selling and General Administrative expenses have increased over 390% in the
six months ended September 30, 1999 over the same period in 1998. These
increases are due largely to the merger of the old Strata employees into the
new 3D.com enterprise and building a team of professionals to maintain a
quality programming plan for the TV Channel.
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30, 1999
1999 1998
<S> <C> <C>
Net Loss $3,811,591 $1,320,770
Net Loss increase over 1998 288.59%
</TABLE>
Net losses have increased over 280% in the six months ended September 30,1999
over the same period in 1998. The accumulation of these losses over the
development period of the Company has given the Company over a 20 million
dollar tax carry forward loss until the year 2014. 3D Digital is in the
position of not having to pay taxes on the first 20 million dollars of income
that it
20
<PAGE>
generates, allowing the Company to use the moneys that would normally be
collected by the government to finance its growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to be dependent on investment capital to fund its
operations. The Company has made arrangements with some of its consultants to
receive stock in place of cash for the services they render to the Company.
These consultants are very important to the overall success of C-3D Digital
in the market place. The consultants have given us no assurance that they
will continue to take stock in place of cash.
Non-U.S. investors have committed verbally to provide an additional
$2,000,000 over the next four months of operations. The Company does not know
if this commitment will continue even though our investors have honored this
commitment in the past. Management continues to work with the financial
industry to arrange proper capitalization of C-3D Digital. In the past,
management has been successful at making these arrangements. The Company
cannot rely entirely on the past performance of management to succeed in the
future in securing necessary financing.
IMPACT OF YEAR 2000
The "Year 2000 Problem" (Y2K) exists because many existing computer programs
use only two digits to refer to a year. Therefore, these programs do not
properly recognize a year that begins with "20" instead of "19". If not
corrected, many computer applications could fail or create erroneous results.
The Company has completed an analysis of its internal systems and the
potential for issues associated with the Year 2000 problem. The Company
began in first quarter of 1998 to bring on-line new systems to support both
operations and financial reporting requirements as part of building the
infrastructure to support the Company's growth. As part of the conversion,
the Company received assurances from its software suppliers and experts hired
by the Company that all systems are Year 2000 compliant. The Company is
installing software modules that address inventory management, purchasing
components, receiving, order entry, shipping and invoicing, and accounting.
Relative to areas other than information systems, the Company has
investigated this area for potential problems. As the Company does not have a
high degree of computer controlled equipment in its production processes, the
risk in this area is low and the Company has not identified any areas of
non-compliance in its analysis.
With regard to third party Year 2000 issues, the Company has completed a
survey of all of its major supplier base, and continues to have discussions
with its supplier base to ascertain the potential for a negative impact on
the Company's operations and what steps are being taken to ensure continuity
of supply of parts and services. While the Company believes its plans and
actions are adequate to deal with the Year 2000 issues internally, and that
it will be compliant, there is no guarantee that all suppliers and other
parties that are essential to the Company's operations will similarly do so.
The failure of any supplier to adequately address this issue in a timely
manner will result in the Company looking to other suppliers to fill the
need. For many of its components, there are alternative suppliers for all
required parts and services. The potential for a material negative effect on
Company operations if a key supplier does not adequately address the issue in
a timely manner is very small, with the exception of transmission of the
channel's programming. The Company will be working with all key suppliers
throughout this time period to ensure continuity of parts and services. The
Company has completed reviews of all of its suppliers, with most reporting
full compliance already in place or to be completed by the end of the fourth
quarter 1999. The Company will continue to solicit information from
suppliers that have not responded and follow up on those that have not
completed their compliance activities.
The Company has also evaluated the risks associated with this problem and its
customers through discussions with key media distributors.
The Company's cost to become Year 2000 compliant has been minimal and not
material to this point, nor expected to be in the future. As the Company had
already planned its systems conversions to facilitate its growth, there were
no incremental costs associated with insuring those systems were Year 2000
compliant. As a result, costs of the effort are mainly focused on following
up with suppliers to determine their level of compliance. These costs are
imbedded in other activities and are not expected to be material.
The most reasonable likely worst case Year 2000 scenario would be for a key
distributor of programming to not become compliant. If no steps were taken
to address this issue, it could result in the Company's operations being shut
down until the problem was resolved. However, all key distributors have
responded to a Company survey as being fully compliant. As discussed above,
the Company is continuing to analyze each key distributor to ensure
compliance to assure continuity of parts and services.
After identifying such an event, the Company would take some or all of the
following steps: work with the vendors/distributors to put in place a manual
back-up system to assure continued parts and services until the vendor
becomes compliant or, bring on-line alternate vendors/distributors with the
capacity to meet 100% of the Company's parts and services requirements.
FORWARD-LOOKING STATEMENTS
This filing includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "PSLRA"). The PSLRA
provides a "safe harbor" for such statements to encourage companies to
provide prospective information about themselves so long as such information
is identified as forward-looking and is accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the information. All statements
other than statements of historical fact made in this filing or incorporated
by reference are forward-looking and are beliefs, estimates, intentions and
strategies about the future. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," "projects", "predicts"
or variations of such words and similar expressions are intended to identify
such forward-looking statements, but their absence does not mean the
statement is not forward-looking. In particular, the statements herein
regarding the availability of adequate funding and progress in the
development of the Company's various business segments are forward-looking
statements. Forward-looking statements represent management's current
expectations and are inherently uncertain. The failure of any forward-looking
event to occur can cause all forward-looking predictions to fail. 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.
21
<PAGE>
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sales of Equity Securities Pursuant to Regulation S
Set forth in the table below is a summary of all securities sold by the
Company from July 1, 1999 until October 25, 1999 (without registering the
securities under the Securities Act of 1933), and which have not been
previously reported in the SEC filings of the Company.
<TABLE>
<CAPTION>
Date Title and amount of Consideration Class of persons to whom sold
Securities sold
<S> <C> <C> <C> <C>
A 8/13/99 200,000 common shares 200,000 at $1.00 per share non U.S. investors
B 8/24/99 536,717 common shares cancellation of $742,787 of U.S. investor
debt
C 9/9/99 20,000 common shares purchase of secured U.S. investors
interest Strata assets
D 9/16,17/99 200,000 common shares 200,000 at $1.00 per share non U.S. investors
</TABLE>
The sales reflected in transactions A and D were made pursuant to Regulation
S promulgated by the Securities and Exchange Commission. The securities were
all restricted common stock, and shall remain as restricted securities for
the one-year distribution compliance period. The facts relied upon to satisfy
the exemption were as follows:
(a) The Regulation S stock purchasers (the "purchasers") were not
U.S. persons as that term is defined under Regulation S.
(b) At the time the buy orders were originated, the purchasers were
outside the U.S. and were outside the U.S. as of the date of the execution
and delivery of any subscription agreements.
(c) Purchasers purchased the shares for their own account and not on
behalf of any U.S. person; the sales had not been pre-arranged with a
purchaser in the U.S.; and all offers and resales of the securities are to be
made only made in compliance with the provisions of Regulation S.
(d) The purchasers were not entities organize under foreign law by a
U.S. person, as defined in Regulation S, Rule 902(k), for the purpose of
investing in unregistered securities, unless the Purchasers were organized
and owned by accredited investors, as defined in Regulation D, Rule 501(a),
who are not natural person, estates, or trusts.
22
<PAGE>
(e) The transactions were not purchases pursuant to a fiduciary
account where a U.S. person, as defined in Regulation S, Rule 902(o), had
discretion to make investment decisions for the account.
(f) To the knowledge of the Company, all of the offers or sales of
the Regulation S shares by purchasers prior to the expiration of a one-year
distribution compliance period have only been made in compliance with the
safe harbor contained in Regulation S, or pursuant to an exemption from
registration.
(g) All offering documents received by the purchasers included
statements to the effect that the shares had not been registered under the
1933 Act and may not be offered or sold in the United States or to U.S.
persons unless the shares are registered under the 1933 Act or an exemption
from the registration requirements was available.
(h) The purchasers acknowledged that the purchase of the shares
involved a high degree of risk and further acknowledged that they could bear
the economic risk of the purchase of the shares, including the total loss of
their investment.
(i) The purchasers understood that the shares were being offered and
sold to them in reliance on specific exemptions from the registration
requirements of United States Federal and State securities laws and that the
Company was relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgments and understandings of the purchasers.
As of August 24, 1999, the Company completed the satisfaction of $676,884 of
debt owing by the Company to a private lender through the issuance of 457,316
shares of the restricted common stock of the Company. The Company has also
agreed to satisfy $65,903 of interest on such debt for 79,401 shares of
restricted stock.
On September 9, 1999, the Company issued 20,000 shares of restricted common
stock to purchase the final secured position in the assets and technology of
Strata, Inc. The Company had previously acquired other secured positions in
the described collateral, but had continued negotiations with this single
intervening creditor. This final acquisition should resolve all material
claims of secured creditors with regard to the assets and technology that has
been acquired by the Company.
The two foregoing transactions are listed in the table above as transactions
B and C. The recipients of these shares are U.S. entities or individuals
making written representations of their "accredited investor" status, and the
issuance of these securities is exempt from registration under the provisions
of Regulation D promulgated by the Securities and Exchange Commission.
No underwriting discounts were incurred or commissions paid in any of the
transactions described in this section.
23
<PAGE>
ITEM 5. OTHER INFORMATION
Corporate Name Change
The Company has filed in the state of Utah an application to conduct business
under the assumed name of C-3D Digital, Inc. This name is more in keeping
with C-3D's focus on its entertainment and communications business related to
3D technology. At the time of the next meeting of shareholders of C-3D,
management contemplates submitting a proposal to amend the Articles of
Incorporation to reflect this new name.
Amex Listing
On June 9, 1999, the common stock of C-3D began trading on AMEX. The new
trading symbol for the stock of C-3D is DDD, reflective of C-3D's focus on 3D
products and services.
Relocation of Corporate Headquarters
Effective Monday, September 20, 1999, C-3D relocated its corporate
headquarters to the Los Angeles metropolitan area in Marina del Rey. In
conjunction with this action, C-3D has streamlined its operations by closing
its Salt Lake City, Utah and Chatsworth, California offices. C-3D is
retaining its Strata division office in St. George, Utah, and its Gilbert,
Arizona office. The Marina del Rey corporate office is located in Suite 507
at 330 Washington Boulevard.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K
On July 22, 1999 the Company filed a Form 8-K report regarding the purchase
of pay-per-view TV assets and contracts from King Farms, Inc. dba Hotel Movie
Express.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEQUEMATE INTERNATIONAL, INC.
/s/ J. MICHAEL HEIL DATE 11/15/99
- ----------------------------- -------------------------
J. MICHAEL HEIL
CHIEF EXECUTIVE AND FINANCIAL OFFICER
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 57,964
<SECURITIES> 0
<RECEIVABLES> 697,181
<ALLOWANCES> 53,820
<INVENTORY> 3,268,893
<CURRENT-ASSETS> 4,241,846
<PP&E> 959,306
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,918,426
<CURRENT-LIABILITIES> 2,355,856
<BONDS> 0
0
0
<COMMON> 2,316
<OTHER-SE> 3,310,251
<TOTAL-LIABILITY-AND-EQUITY> 8,918,426
<SALES> 1,609,186
<TOTAL-REVENUES> 1,609,186
<CGS> 582,054
<TOTAL-COSTS> 4,741,818
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,491
<INCOME-PRETAX> (3,811,591)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,811,591)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,811,591)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
