<PAGE>
FORM 10-QSB/A2
(Amendment No. 2)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For Quarterly Period Ended: June 30, 1999
Commission File Number:1-15043
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: February 6, 2000: 6,135,491
Transitional Small Business Format: YES _____ NO __X__
<PAGE>
TABLE OF CONTENTS
PART I-FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ITEM 1. Financial Statements
UNAUDITED CONSOLIDATED BALANCE SHEETS 3
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS 5
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operation.
GENERAL INFORMATION 17
RESULTS OF OPERATIONS 19
LIQUIDITY AND CAPITAL RESOURCES 20
</TABLE>
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
--------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 311,602 $ 1,732,199
Accounts receivable - net of allowances
of $53,820 and $53,820 323,567 197,922
Prepaid expenses 318,979 198,349
Inventory (Note 2) 3,433,109 3,115,763
--------------- --------------
Total Current Assets 4,387,257 5,244,233
--------------- --------------
PROPERTY AND EQUIPMENT (Note 3) 989,677 622,717
--------------- --------------
OTHER ASSETS
Note receivable 65,000 65,000
Product rights (Note 1) 3,570,261 2,534,532
Secured interest (Note 14) - 1,198,530
Refundable deposits 15,704 15,704
Investments 3,000 3,000
--------------- --------------
Total Other Assets 3,653,965 3,816,766
--------------- --------------
TOTAL ASSETS $ 9,030,899 $ 9,683,716
=============== ==============
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,052,975 $ 896,408
Accrued expenses 50,220 38,672
Income tax payable 500 500
Accrued interest - related party 79,943 79,943
Accrued interest payable 95,565 39,791
Current portion related party (Note 5) 140,000 140,000
Current portion long-term debt (Note 6) 167,864 227,610
Current portion capital lease (Note 7) - 13,602
------------- -------------
Total Current Liabilities 1,587,067 1,436,526
------------- -------------
LONG-TERM LIABILITIES
Long-term debt (Note 6) 3,690,000 3,190,000
------------- -------------
Total Long-Term Liabilities 3,690,000 3,190,000
------------- -------------
Total Liabilities 5,277,067 4,626,526
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value 500,000,000 shares
authorized, 22,815,882 and 22,358,646 shares
outstanding, respectively 2,282 2,236
Capital in excess of par 25,108,017 24,461,440
Accumulated deficit (21,356,467) (19,406,486)
------------- -------------
Total Stockholders' Equity 3,753,832 5,057,190
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,030,899 $ 9,683,716
============= =============
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the three Months Ended
June 30,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUES $ 767,009 $ 89,748
COST OF SALES 332,949 28,134
--------------- ---------------
GROSS PROFIT 434,060 61,614
--------------- ---------------
EXPENSES
Selling expenses 810,875 129,635
General and administrative 1,515,306 443,156
--------------- ---------------
Total Expenses 2,326,181 572,791
--------------- ---------------
OTHER INCOME (EXPENSE)
Interest income 7,481 -
Interest expense (90,486) (2,804)
--------------- ---------------
Net Other Expense (83,005) (2,804)
--------------- ---------------
NET (LOSS) BEFORE INCOME TAXES (1,975,126) (513,981)
INCOME TAX PROVISION - -
--------------- ---------------
NET (LOSS) $ (1,975,126) $ (513,981)
=============== ===============
(LOSS) PER SHARE $ (0.09) $ (0.03)
=============== ===============
AVERAGE NUMBER OF SHARES OUTSTANDING 22,656,646 16,050,274
=============== ===============
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
-------------------------------
1999 1998
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (1,975,126) $ (513,981)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 113,783 28,070
(Increase) decrease in accounts receivable (12,645) (13,592)
(Increase) decrease in inventory (166,624) 28,429
(Increase) decrease in prepaid expense (120,630) (154)
Increase (decrease) in accounts payable 156,567 (53,131)
Increase (decrease) short-term debt - (21,756)
Increase (decrease) in accrued expenses 11,548 (1,523)
Increase (decrease) in accrued interest 55,774 -
------------- ------------
Net Cash (Used) by Operating Activities (2,351,797) (547,638)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of movie rights (262,876) (23,602)
------------- ------------
Net Cash (Used) by Investing Activities (262,876) (23,602)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock 465,980 375,044
Proceeds from debt 500,000 -
Payments of capital leases (13,602) (654)
Payments of long-term debt (59,746) (3,928)
------------- ------------
Net Cash Provided by Financing Activities $ 892,632 $ 370,462
------------- ------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
-----------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
NET (DECREASE) IN CASH $ (1,420,597) $ (200,778)
CASH AT BEGINNING PERIOD 1,732,199 220,840
---------------- --------------
CASH AT END OF PERIOD $ 311,602 $ 20,062
================ ==============
</TABLE>
The accompanying notes are an integral part of this financial statement.
7
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
(dba C3-D Digital)
Notes to Consolidated Financial Statements
June 30, 1999 and March 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies reflect practices of the software
sales, 3-D electronic devices and services industries and conform to
generally accepted accounting principles. Certain prior year amounts
have been reclassified to be consistent with the March 31, 1999
presentation. The following policies are considered to be significant:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries, Chequemate Electronic, Inc., Families
in Focus, Inc., Strata, Inc., AC&T Direct, AC&T and Chequemate
Tele-Services, Inc. All significant intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION
Revenue is recognized on an accrual basis upon deliver of the software
or product. Revenue consists of software sales, product sales, license
fees, and monthly service fees.
PRODUCT RIGHTS
Cost to acquire rights have been capitalized and amortized over four
to fifteen years using a straight line method. The total amortization
of product costs for the three months ended June 30, 1999 and the
year ended March 31, 1999, amounted to $61,600 and $314,873,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost with depreciation and
amortization computed on the straight line method. Property and
equipment are depreciated over the following estimated useful
lives:
<TABLE>
<CAPTION>
Years
---------
<S> <C>
Office equipment 5
Office furniture 5-7
Machinery and equipment 5
Leasehold improvements 3-5
Capital leases 3-5
</TABLE>
PRODUCT RIGHTS
<TABLE>
<CAPTION>
Net Book Value
-----------------------
June 30, March 31,
Term Cost Amortization 1999 1999
---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Product rights 4-15 years $3,927,310 $ 718,474 $3,208,836 $2,423,399
Contract/movie
rights 2 years 391,896 30,471 361,425 111,133
---------- ---------- ------------ ---------- ----------
$4,319,206 $ 748,945 $3,570,261 $2,534,532
========== ============ ========== ==========
</TABLE>
8
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
June 30, 1999 and March 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
9
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
June 30, 1999 and March 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CHANGE IN ACCOUNTING PRINCIPLES
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share" during the year ended March 31, 1999. In
accordance with SFAS No. 128, diluted earnings per share must be
calculated when an entity has convertible securities, warrants,
options, and other securities that represent potential common shares.
The purpose of calculating diluted earnings (loss) per share is to
show (on a pro forma basis) per share earnings or losses assuming the
exercise or conversion of all securities that are exercisable or
convertible into common stock and that would either dilute or not
affect basis of EPS. As permitted by SFAS No. 128, the Company has
retroactively applied the provisions of this new standard by showing
the fully diluted loss per common share for all years presented.
The Company adopted Statement of Financial Accounting Standards
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), which
requires the Company to determine compensation costs for the Company's
stock option plans and other stock awards in accordance with the fair
value based method prescribed in SFAS No. 123. The Company recognized
approximately $180,000 and $405,100 of a stock-based compensation
expense for the three months ended June 30, 1999 and the year ended
March 31, 1999, respectively.
The Company also adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income" during the year ended
March 31, 1999, SFAS No. 130 established standards for reporting and
display of comprehensive income (loss) and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. This statement requires that an enterprise classify items
of other comprehensive income by their nature in a financial statement
and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a balance sheet. The adaption of SFAS 130 had
no material effect on the Company's financial statements.
PRIOR PERIOD RECLASSIFICATION
Certain 1998 balances have been reclassified to conform to the
presentation of the 1999 consolidated financial statements.
NOTE 2 - INVENTORY
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
-------------- -------------
<S> <C> <C>
Finished goods $ 1,412,771 $ 1,035,682
WIP 849,872 1,076,880
Raw goods 1,140,466 1,003,201
Prepaid inventory 30,000 -
-------------- -------------
$ 3,433,109 $ 3,115,763
============== =============
</TABLE>
10
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
June 30, 1999 and March 31, 1999
NOTE 2 - INVENTORY (Continued)
The Company inventories are stated at the lower of cost or market,
using the first-in, first-out (FIFO) method. Inventories consist
mainly of components related to the 3-D electronic devices product
and pay-per-view operations.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1999 and March 31, 1999 are
detailed in the following summary:
<TABLE>
<CAPTION>
Net Book Value
-----------------------
Accumulated June 30, March 31,
Cost Depreciation 1999 1998
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Office furniture and fixtures $ 62,427 $ 39,840 $ 22,487 $ 24,320
Machinery and equipment 1,158,915 219,506 939,409 569,488
Capital leases 29,895 3,887 26,008 26,905
Leasehold improvements 4,581 2,808 1,773 2,004
---------- ------------ ---------- ----------
Total $1,255,818 $ 266,141 $ 989,677 $ 622,717
========== ============ ========== ==========
</TABLE>
Depreciation expense is computed principally on the straight line
method in amounts sufficient to write off the cost of depreciable
assets over their estimated useful lives. Depreciation expense for
the three months ended June 30, 1999 and the year ended March 31,
1999 amounted to $52,414 and $79,599, respectively.
NOTE 4 - STOCKHOLDERS' EQUITY
The Company is authorized to issue 500,000,000 shares of common
stock, par value $.0001. As of June 30, 1999 and March 31, 1999,
the Company has issued 22,815,882 and 22,358,646 shares of common
stock.
The Company continued the placement of Regulation 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.
11
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
June 30, 1999 and March 31, 1999
NOTE 5 - RELATED PARTIES
Notes payable to related parties as of June 30, 1999 and March 31,
1999 are detailed in the following summary:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1998
----------- -----------
<S> <C> <C>
Note payable to CEO; due on demand, with an
interest rate of 10.4%; unsecured; accrued
interest of $79,943 is due on demand $ 140,000 $ 140,000
----------- -----------
Total related party notes payable 140,000 140,000
Less: current portion (140,000) (140,000)
----------- -----------
Long-term portion $ -- $ --
=========== ===========
Maturities of the related party notes payable are as follows:
Period ending June 30, 2000 $ 140,000
2001 --
-----------
Total $ 140,000
===========
</TABLE>
NOTE 6 - LONG-TERM DEBT
Notes payable as of June 30, 1999 and March 31,1999 are detailed in
the following summary:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1998
------------- -------------
<S> <C> <C>
Note payable to a company; due in monthly
installments of $3,244 which includes
interest at 8%; due July, 1999, unsecured $ 50,990 $ 53,907
Convertible debentures to a company; due
December 22, 2001, with interest at 8% 750,000 750,000
Convertible debentures to a company; due
February 22, 2002, with interest at 8% 2,000,000 2,000,000
Convertible debenture to a company, due
April, 2002, with interest at 8% 500,000 --
------------- -------------
Balance Forward $ 3,300,990 $ 2,803,907
------------- -------------
</TABLE>
12
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
June 30, 1999 and March 31, 1999
NOTE 6 - LONG-TERM DEBT (Continued)
<TABLE>
<S> <C> <C>
Balance Forward $ 3,300,990 $ 2,803,907
Note payable to a company; due June 8, 2000,
interest at 10% due monthly, secured by
equipment and inventory 440,000 440,000
Note payable to a company; unsecured, due in
monthly installments of $19,654, which includes
interest at 6%; due October 1999 116,874 173,703
------------ -----------
Total long-term debt 3,857,864 3,417,610
Less: current portion (167,864) (227,610)
------------ -----------
Long-term portion $ 3,690,000 $ 3,190,000
============ ===========
Maturities of long-term debt are summarized below:
Period ending June 30, 2000 $ 167,864
2001 440,000
2002 2,750,000
2003 500,000
2004 --
-----------
Total $ 3,857,864
===========
</TABLE>
NOTE 7 - LEASES
All noncancelable leases with an initial term greater than one
year have been categorized as capital or operating leases in
conformity with the definitions in Financial Accounting Standards
Board Statement No. 13, "Accounting for Leases".
The following analysis represents property under capital lease at
June 30, 1999 and March 31, 1999:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------ -----------
<S> <C> <C>
Equipment $ 29,895 $ 29,895
Less: accumulated depreciation (3,887) (2,990)
------------ -----------
Net property under capital lease $ 26,008 $ 26,905
============ ===========
</TABLE>
13
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
June 30, 1999 and March 31, 1999
NOTE 7 - LEASES (Continued)
At June 30, 1999, the Company is liable under the terms of
non-cancelable leases for the following minimum lease commitments:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------------- -----------------
<S> <C> <C>
Period ended June 30,
2000 $ - $ 147,099
2001 - 113,987
2002 - 76,687
2003 - -
later years - -
----------------- -----------------
Total minimum lease payments - $ 337,773
=================
Less: interest -
-----------------
Present value of net minimum lease payment -
Less: current portion -
-----------------
Capital lease obligations payable long-term $ -
=================
</TABLE>
Rental expense for the three months ended June 30, 1999 and the year
ended March 31, 1999, amounted to $77,809 and $135,580, respectively.
NOTE 8 - CASH FLOW AND NON CASH INVESTING AND FINANCING ACTIVITIES
CASH FLOW INFORMATION
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------ -----------
<S> <C> <C>
Interest paid $ 35,486 $ 34,535
Income taxes paid $ - $ 500
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
For the three months ended June 30, 1999 and the year ending March
31, 1999, the Company incurred the following non-cash investing
and financing activities.
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------ -----------
<S> <C> <C>
Capital lease obligations incurred $ - $ 29,895
Issuance of stock and options for services rendered $ 180,000 $ 448,547
Issuance of stock for assets $ - $ 1,533,000
Increase in debt for assets $ - $ 440,000
Exchange of secured interest for assets $ 1,198,530 $ -
Exchange of note receivable for assets $ 205,788 $ -
</TABLE>
14
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
June 30, 1999 and March 31, 1999
NOTE 9 - FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade
receivables. The Company provides credit to its customers in the
normal course of business. However, the Company performs ongoing
credit evaluations of its customers and maintains allowances for
potential credit losses. The Company places its temporary cash with
high quality financial institutions. At times such cash accounts may
be in excess of the FDIC insurance limit.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement to maintain a satellite
transponder and uplink for broadcasting its three dimensional cable
channel. The agreement requires the Company to make monthly payments
of $100,000 to retain these services.
The Company is the defendant in a pending lawsuit. The ultimate
outcome of this litigation is unknown at the present time.
Accordingly, no provision for any liability that might result has
been made in the accompanying financial statements. In the opinion
of management, the existing litigation is not considered to be
material in relation to the Company's financial position.
NOTE 11 - ACQUISITIONS
In December 1998, the Company purchased assets to supplement the
hotel movie pay-per-view operations. The assets included existing
contracts with several hotels to provide pay-per-view movies. The
Company issued 250,000 shares of common stock, a convertible note
and cash for the assets.
NOTE 12 - GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities
in the normal course of business. The Company has incurred losses
from its inception through June 30, 1999. The Company does not have
an established source of revenues sufficient to cover its operating
costs. It is the intent of the Company to seek additional financing
through private placements of its common stock.
Management has formulated a plan to raise additional funding through
stock issuances and increase in debt. In addition, the Company's
projected increase in revenue from the establishment of its three
dimensional cable channel will provide sufficient capital for
operations.
15
<PAGE>
CHEQUEMATE INTERNATIONAL, INC. AND SUBSIDIARIES
(dba C3-D Digital)
Notes to Consolidated Financial Statements
June 30, 1999 and March 31, 1999
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.
NOTE 14 - ACQUISITION OF SECURED INTEREST
In December 1998, the Company purchased from a financing
institution the secured interest on a line of credit against
Strata, Inc. (Strata). The Company continued to advance credit to
Strata and as of March 31, 1999 had recorded a note receivable of
$465,530. Also, on March 31, 1999, the Company obtained the
secured interests of several other promissory notes held by
several investors against Strata by exchanging stock for the
notes. The Company exchanged 333,333 shares, at $2.20 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. In June 1999, the Company foreclosed upon Strata
and acquired all the assets that had been pledged as collateral
for the loans. As noted above, the Company had issued stock for
notes prior to the March 1999 year end, in the amount of $733,000
and loaned an additional $465,530 prior to year end which was
classified on the financial statements as secured interest. In
addition, during the quarter, the Company loaned an additional
$205,788 also secured by the assets noted above. Upon
foreclosure, the Company exchanged the notes for the assets. The
Company valued the fixed assets acquired at their market value of
$570,096 and the intangible asset was valued at the difference
between the purchase or loan balances less the fixed asset cost
of $834,222. The assets acquired were not the total assets of the
company foreclosed upon, but only those assets listed as
collateral for the loans.
In the foreclosure, the Company acquired equipment, furniture and
fixtures and the licensed rights to several Windows and Windows
NT. These products consist of VideoShop, Media Paint and Vision
3d along with other extensions related to or for use with these
products. The rights are being amortized over a fifteen year
period.
16
<PAGE>
Item 2: Management's Discussion and Analysis of Financial condition and
Results of Operation
General
For more detailed information regarding the financial position of
the Company, please refer to the Unaudited Financial Statements for the three
month periods ending June 30, 1999 and June 30, 1998. A copy of these
Financial Statements are included in Item 1 of this report.
During the quarter ended June 30, 1999 the Company continued to
aggressively pursue its position in 3D entertainment on television and the
internet. The Company's cable channel continues to operate 24 hours a day
with new content being added on an almost continuous basis. The securing of
the assets and intellectual property owned by Strata, Inc. has not only added
significantly to the Company's revenues, but has also put in place the
groundwork for its 3D entertainment website portal.
The Company has been operating its own cable channel since January
l, 1999. The channel is currently accessible by owners of C-8and 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 CBand satellite dish owner can tune in and receive the
Company's channel. However, the picture they see has two different images and
appears shadowed and out of focus when viewed without the proprietary 3D
equipment available from the Company. This equipment consists of a pair of
high speed shutter glasses and either the Company's original Realeyes product
or the new Channel Player. The difference between the two products is that
the original Realeyes product will not only allow the viewer to see the 3D
cable channel clearly, but will also convert existing 2D content from
whatever video source, be it other television channels, videos or video
games, to a 3D image. The Channel Player can be used to view the Company's
channel but cannot convert normal 2D images to 3D like the more expensive
Realeyes unit.
The Company is actively marketing its channel to cable operators
across the United States and recently returned from the National Cable
Television Association (NCTA) show in Chicago. At the show, the Company was
able to introduce the channel to numerous cable operators, hardware
manufactures and others involved in the cable industry. VisionComm, a cable
operator in Dallas, Texas, has successfully pulled the channel into its
system and will be marketing it to their subscribers beginning July l5th. 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.
17
<PAGE>
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
the" equipment was in place. The Company is interested in the hotel market as
another revenue source from its 3D technology. Currently the hotel
properties, consisting of more than 5,800 rooms, continue to operate as a
traditional pay-per-view system' but steps have been taken which will make it
possible for hotel guests to enjoy a 3D experience right in their own room.
The properties are located in Arizona, California, Idaho, New Mexico, Texas,
Utah and Washington.
The Company completed on June 16, 1999 the process of acquiring the
assets and technology previously owned by Strata, Inc. The Company secured
control of $5.3 million dollars of first position debt on certain Strata
assets pledged as collateral on the debts. The Company foreclosed on the
debt, resulting in a sheriff's sale of the pledged Strata assets. At the
sale, C-3D used $4.8 million of the secured first position debt to acquire
these pledged assets. The value of the above described transaction in stock
and cash was $1,404,318 and booked as outlined below.
<TABLE>
<S> <C>
Inventory $ 280,096
Furniture & Fixtures 110,000
Machinery & Equipment 180,000
License rights 834,222
-----------
Total 1,404,318
</TABLE>
The Company has hired former Strata, Inc. employees to support and
sell the Strata products for the Company. Strata, Inc. was one of the early
pioneers in 3D software. The Strata tool line has been used for such
well-known projects as the game "MYST"-C-; television shows like the "'98 MTV
Movie Awards"-C-,"Hercules"-C- and "Xena"-C-; the NBC dancing peacocks; the
Warner Bro.'s and Blockbuster web sites; the films "Contact"-C-, "5TH
Element"-C-, "Batman Forever"-C-, and many others. These tools will provide
the Company with some of the most advanced 3D technology available and should
enhance the Company's position in 3D media and technology.
The Company also recently announced the formation of a new wholly
owned subsidiary company named 3D.COM. Created from the Company's recent
Strata acquisition and its own internal web division, 3D.COM will be
launching the world's first Virtual Reality Portal. The portal, planned for a
fall 1999 debut, is designed to allow visitors to "go in" rather than just
"go to" the web. The plan is patterned after Real Networks-TM- which is both
a technology company and a media portal. Similarly, 3D.COM will be providing
a web portal and technology products, but with the focus being on 3D and
virtual reality. Revenue will be generated for the subsidiary by ad placement
on the website or by a fee being charged to explore the different virtual
reality worlds.
18
<PAGE>
Results of Operations
Comparison of Quarters Ended June 30, 1999 and 1998
Gross Revenue
The Company generated revenues of $767,009 for the quarter ended
June 30, 1999, as compared to $89,748 for the quarter ended June 30, 1998.
The dramatic increase in revenue during the quarter can be attributed mainly
to two new revenue sources which have been added. These are the hotel
pay-per-view division and the Strata product line. These two new revenue
sources, which have been added according to the business plan and direction
of the Company, accounted for over 80% of the revenue in the first quarter.
Gross Profit
The Company experienced a gross profit for the quarter ended June
30, 1999 of $434,060 compared to gross profit of $61,614 for the quarter
ended June 30, 1998. The significant increase in gross profit is due first of
all to the large growth in revenue, and secondly to favorable gross margins
in both the hotel pay-per-view business and the computer software business.
Gross margins in the coming months may not be quite so high (as a
percentage), if equipment sales increase, which do not carry as great a
profit margin.
Operating Expenses
The Company's operating expenses were substantially higher for the
quarter ended June 30, 1999 when compared to the quarter ended June 30, 1998.
The Company expended considerable amounts during the first quarter to launch
its new business plan and to make the public aware of the existence of its
products. The beginning benefits of this can be seen in the increased
revenue. The Company plans to experience significant expenses as its
continues to implement its business plan with the belief that revenues will
continue to grow. One of the large expenditures made during the quarter was
to have a booth at the National Cable Television Association show in Chicago.
The Company was able to make quality contacts and promote its 3D cable
channel to hundreds of people including cable operators from across the
country.
Selling expenses for the quarter ended June 30, 1999 were $810,875
compared to $129,635 for the quarter ended June 30, 1998. General and
Administrative expenses were $1,515,306 and $443,156 over the same time
periods respectively.
Net Loss
The Company's net loss for the quarter ending June 30, 1999 was
$1,975,126 compared to a loss of $513,981 for the quarter ended June 30,
1998. The increased loss is due to the rise in expenses, not to a downturn in
revenue and gross profit. As explained earlier, both revenue and gross profit
showed a marked improvement when compared to the same time last year.
19
<PAGE>
Liquidity and Capital
The Company's working capital needs have been satisfied primarily
through the Company's private offering and through increase in debt (proceeds
from debt associated with March 31, 1999 that was used for operations in the
first quarter was approximately $1,700,000.) The Company's working capital at
June 30, 1999 was $2,800,190 as compared to working capital of $3,807,707 at
June 30, 1998, a decrease of $1,007,517. The reduction of working capital is
primarily related to the implementation of its new marketing plan.
For the quarter ending June 30, 1999, cash used by operating
activities was $2,201,075. Increases in accounts receivable, inventory and
prepaids constitute the difference between this amount and the net loss of
$1,975,126. Proceeds from financing activities, mainly private placement of
common stock and debt, provided cash of $892,632.
Comparison of Quarter Ended June 30, 1999 to March 31, 1999 Assets
<TABLE>
<CAPTION>
June 30,1999 March 31, 1999 Difference
<S> <C> <C> <C>
Current Assets
Cash $ 311,602 $ 1,732,199 $ (1,420,597)
Accounts Receivable $ 323,567 $ 197,922 $ 125,645
Prepaid Expenses $ 318,979 $ 198,349 $ 120,630
Inventory $ 3,433,109 $ 3,115,763 $ 317,346
Total Current Assets $ 4,387,257 $ 5,244,233 $ (856,976)
</TABLE>
The most significant decrease in current assets was due to the 1.4 million
dollar change in the cash position of the company. The increase in accounts
receivable was the result of sales made by the Strata division during the
period. The material prepaid expense increase was attributable to payments
made for product shows to be held later in the year. Inventory increase was
as the result of the acquisition of the pledged Strata assets.
<TABLE>
<CAPTION>
June 30,1999 March 31, 1999 Difference
<S> <C> <C> <C>
Property and Equipment $ 989,677 $ 622,717 $ 366,960
</TABLE>
Property and Equipment purchased from Strata amounted to $290,000 of the
$366,960 difference between the two periods.
<TABLE>
<CAPTION>
June 30,1999 March 31, 1999 Difference
<S> <C> <C> <C>
Other Assets
Note receivable $ 65,000 $ 65,000 $ 0
Product rights $ 3,570,261 $ 2,534,532 $ 1,035,729
Secured Interest $ 0 $ 1,198,530 $ (1,198,530)
Refundable deposits $ 15,704 $ 15,704 $ 0
Investments $ 3,000 $ 3,000 $ 0
20
<PAGE>
Total Other Assets $ 3,653,965 $ 3,816,766 $ (162,801)
</TABLE>
The acquisition of the Strata technology rights amounted to $834,222 of the
$1,035,729 increase in the product rights accounts. The decrease in secured
interests was the result of a reallocation of the foreclosure on the pledged
Strata assets.
The $150,541 increase in the current liabilities is due primarily to the
increase of accounts payable. The accounts payable increase is due to the
Strata purchase and the additional increase in business activities related to
such acquisition.
The $500,000 increase in long-term debt is solely attributable to the
financing resulting from the issuance of additional convertible debentures by
the company.
21
<PAGE>
<TABLE>
<CAPTION>
June 30,1999 March 31, 1999 Difference
<S> <C> <C> <C>
Capital
Common stock $ 2,282 $ 2,236 $ 46
Capital in excess of par $ 25,108,017 $ 24,461,440 $ 646,577
Accumulated deficit $ (21,356,487) $ (19,406,486) $ (1,950,001)
Total Capital $ 3,753,812 $ 5,057,190 $ (1,303,378)
</TABLE>
The decrease in total capital is the result of the current loss of over 1.9
million dollars. The increase in capital in excess of par is the result of
$465,980 of subscribed but unissued shares.
Resources
The Company continues to be dependent on investment capital to fund
operations. The company completed a third convertible debenture agreement on
June 4, 1999 in the amount of $500,000. This third agreement was with the
same investment group that had previously completed two similar transactions,
one in December of 1998 and the other in February of 1999. Additionally, the
Company received $465,980 from private placements of its equity during the
quarter.
Subsequent to the quarter end the Company has continued to pursue
additional investment capital. The Company has obtained a verbal commitment
to raise an additional $500,000 a month for six months.
Forward Looking Statements
This filing includes "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 199S (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.
22
<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: MARCH 2, 2000
- ------------------------------- -----------------------
J. MICHAEL HEIL
CHIEF EXECUTIVE OFFICER
/s/ GUY DEHART DATE:3/2/2000
- ------------------------------- -----------------------
GUY DEHART
PRINCIPAL FINANCIAL OFFICER
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-1-2000
<PERIOD-END> JUN-30-1999
<CASH> 311,602
<SECURITIES> 0
<RECEIVABLES> 377,387
<ALLOWANCES> (53,820)
<INVENTORY> 3,433,109
<CURRENT-ASSETS> 4,387,257
<PP&E> 989,677
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,030,899
<CURRENT-LIABILITIES> 1,587,067
<BONDS> 0
0
0
<COMMON> 2,282
<OTHER-SE> 3,753,832
<TOTAL-LIABILITY-AND-EQUITY> 9,030,899
<SALES> 767,009
<TOTAL-REVENUES> 767,009
<CGS> 332,949
<TOTAL-COSTS> 2,326,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90,486
<INCOME-PRETAX> (1,975,126)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,975,126)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,975,126)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
