SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 000-29611
THE CHILDREN'S INTERNET, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 20-1290331
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5000 Hopyard Rd., Suite 320, Pleasanton, California 94588
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(Address of principal executive offices)
(925) 737-0144
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
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 requirements for the past 90 days. Yes [X] No [ ]
As of August 1, 2004, the number of shares of Common Stock issued and
outstanding was 2,287,755.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
THE CHILDREN'S INTERNET, INC
INDEX
Page
Number
PART I - FINANCIAL INFORMATION 1
Item 1. Financial Statements (Unaudited) 1
Unaudited Condensed Balance Sheet -June 30, 2004 1
Unaudited Condensed Statements of Operations - For the six
months ended June 30, 2004 and 2003, and the period from
inception to June 30, 2004 2
Unaudited Condensed Statements of Stockholders' Deficit -
For the six months ended June 30, 2004 and the period
from inception to June 30, 2004 3
Unaudited Condensed Statements of Cash Flow - For the
six months ended June 30, 2004 and 2003, and the period
from inception to June 30, 2004 4
Notes to Unaudited Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Conditions and Plan of Operation 7
Item 3. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
UNAUDITED BALANCE SHEET
June 30,
2004
ASSETS
Current Assets Prepaid Rent $ 4,000
-----------
Total Current Assets 4,000
-----------
Deposit and Prepaid Rent net of Current Portion 7,000
-----------
TOTAL ASSETS $ 11,000
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts Payable and Accrued Expenses $ 71,000
Due to Parent Company 307,000
-----------
Total Current Liabilities 378,000
-----------
378,000
-----------
STOCKHOLDERS' DEFICIT
Preferred Stock, $0.001 par value; 10,000,000 shares -
authorized; zero shares issued and outstanding.
Common stock, $0.001 par value; 75,000,000 shares 2,000
authorized; 2,287,755 shares issued and outstanding
Additional paid-in capital 663,000
Deficit accumulated during the development stage (1,032,000)
-----------
TOTAL STOCKHOLDERS' DEFICIT (367,000)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 11,000
===========
The accompanying notes are an integral part of the financial statements.
1
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
UNAUDITED STATEMENTS OF OPERATIONS
For the Period
--------------
September 25,
-------------
1996 (inception)
----------------
For The Three Months Ended June 30, For The Six Months Ended June 30, to June 30,
----------------------------------------------------------------------- -----------
2004 2003 2004 2003 2004
----------- ----------- ----------- ----------- -----------
REVENUE $ -- $ -- $ -- $ -- $ --
General Selling and Administrative Expenses 84,000 113,000 189,000 236,000 (1,068,000)
----------- ----------- ----------- ----------- -----------
Operating Loss before provision for income (84,000) (113,000) (189,000) (236,000) (1,068,000)
Other Income--Gain from forgiveness of rent -- -- 36,000 -- 36,000
Provision for Income taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
NET LOSS $ (84,000) $ (113,000) $ (153,000) $ (236,000) $(1,032,000)
=========== =========== =========== =========== ===========
Net Loss per Common Share
- basic and diluted $ (0.04) $ (0.05) $ (0.07) $ (0.10) $ (0.72)
=========== =========== =========== =========== ===========
Weighted Average Number of Common
Shares Outstanding
- basic and diluted 2,287,755 2,287,755 2,287,755 2,287,755 1,426,885
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
2
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
UNAUDITED STATEMENTS OF STOCKHOLDERS' DEFICIT
Deficit
Accumulated
Common Stock Additional During the
-------------------------- Paid-In Development Stockholders'
Shares Amount Capital Stage Deficit
----------- ----------- ----------- ----------- -------------
Balance, September 25, 1996 -- $ -- $ -- $ -- $ --
Issuance of common stock
for cash on September 24, 1996
at $0.005 per share 1,121,000 1,000 4,000 -- 6,000
Net Loss (6,000) (6,000)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 1,121,000 1,000 4,000 (6,000) --
Net Loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 1,121,000 1,000 4,000 (6,000) --
Net Loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 1,121,000 1,000 4,000 (6,000) --
Net Loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 1,121,000 1,000 4,000 (6,000) --
Net Loss -- -- -- (3,000) (3,000)
Expenses paid by former office on behalf of company 3,000 3,000
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 1,121,000 1,000 7,000 (9,000) --
Net Loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 1,121,000 1,000 7,000 (9,000) --
Issuance of common stock
for cash on July 3, 2002
at $0.1286 per share 1,166,755 1,000 149,000 150,000
Expenses paid by former officer on behalf of company 2,000 2,000
Services performed as capital contribution 125,000 125,000
Net Loss -- -- -- (392,000) (392,000)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 2,287,755 2,000 283,000 (401,000) (116,000)
Services performed as capital contribution 290,000 290,000
Net Loss -- -- -- (478,000) (478,000)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 2,287,755 2,000 573,000 (879,000) (304,000)
Services performed as capital contribution 90,000 90,000
Net Loss (153,000) (153,000)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2004 2,287,755 $ 2,000 $ 663,000 $(1,032,000) $ (367,000)
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements
3
THE CHILDREN'S INTERNET, INC.
(Formerly D.W.C. Installations)
(A Development Stage Company)
UNAUDITED STATEMENTS OF CASH FLOWS
For the Period
September 25,
For The Six Months Ended 1996 (inception)
June 30, to March 31,
--------------------------- ----------------
2004 2003 2004
---- ---- ----
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $ (153,000) $ (236,000) $(1,032,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Services performed as capital contribution 90,000 150,000 504,000
Expenses paid by former officer on behalf of company 5,000
Increase in Assets
Current and non-current prepaid rent (11,000) (11,000)
Increase in liabilities
Accounts payable and accrued expenses (28,000) 10,000 71,000
Due to Parent Company 102,000 76,000 307,000
----------- ----------- -----------
Net cash used in operating activities -- -- (156,000)
----------- ----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Issuance of common stock 156,000
----------- ----------- -----------
Net cash provided by financing activities -- -- 156,000
----------- ----------- -----------
Net change in cash and cash equivalents -- -- --
Cash and cash equivalents - beginning of period -- -- --
----------- ----------- -----------
Cash and cash equivalents - end of period $ -- $ -- $ --
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
4
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Children's Internet, Inc. (formerly D.W.C. Installations ("Company") is
currently a development stage company under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 7. The Company was incorporated
under the laws of the State of Nevada on September 25, 1996.
On July 3, 2002, Shadrack Films, Inc. purchased 1,166,755 newly issued shares of
our common stock for $150,000, thereby obtaining a majority ownership interest
and becoming our parent company. Total issued and outstanding shares were
increased to 2,287,755 as a result of this sale.
Interim Financial Information
The accompanying unaudited interim financial statements have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States of America pursuant to Regulation S-B of the Securities and
Exchanges Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. Accordingly, these interim financial statements should be
read in conjunction with the Company's audited financial statements and related
notes as contained in the Company's Form 10-KSB for the year ended December 31,
2003. In the opinion of management, the interim financial statements reflect all
adjustments, including normal recurring adjustments, necessary for fair
presentation of the interim periods presented. The results of operations for the
six months ended June 30, 2004 are not necessarily indicative of results of
operations to be expected for the full year.
5
Basis of Presentation
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States, which contemplate
continuation of the Company as a going concern. At present, although the Company
has signed contracts establishing revenue sources, the Company has not generated
any revenues from these established sources of revenue. This factor raises
substantial doubt about the Company's ability to continue as a going concern.
Without realization of additional capital or established revenue sources, it
would be unlikely for the Company to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amount, or amounts and classification of
liabilities that might be necessary should the Company be unable to continue in
existence. It is management's objective to seek additional capital through the
an SB-2 Registration Statement (See Footnote 3.)
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company's principal office is leased by the Parent Company, Shadrack Films,
Inc. The Parent Company pays for and provides the office space utilized by the
Company as well as pays for the Company's telecommunications and utility costs.
The Company has agreed to reimburse the Parent Company for these costs and any
other direct costs paid on its behalf. As of June 30, 2004, the Company had
accrued a payable due to the Parent Company of approximately $307,000 for such
costs.
In April 2004, the Company moved to a new office location and the monthly rent
approximates $3,600. The Company has Shadrack Film's verbal permission to use
this office space, but this permission is revocable at any time without prior
notice. These offices are 2,059 square feet and are leased by Shadrack Films
from the landlord, Principal Life Insurance Company, an Iowa corporation. From
March 22, 2004 until April 30, 2004, Shadrack Films received the office space on
a rent-free basis. From month two (May 1, 2004) through thirteen the basic rent
per month is $3,603; for months fourteen through twenty five, the basic rent per
month will be $3,706; and for months twenty-six through thirty-seven, the basic
rent per month will be $3,809 under a lease agreement that expires on May 1,
2007. Shadrack Films is responsible for making all rent payments to the
landlord, but the cost of these rent payments are being added to the balance of
the accrued account payable due to Parent Company for the expenses that the
Parent Company, Shadrack Films, has been paying on the Company's behalf.
The Company, Shadrack and TDN are related parties, in that, the Company's
President, Chief Executive Officer, Chief Financial Officer, and Director,
Sholeh Hamedani, is the sole shareholder of Shadrack which owns 51% of the
Company's common stock. Ms. Hamedani was President of TDN until August 1, 2002.
In addition, the current President, Chairman and Founder of TDN, Nasser
Hamedani, is the father of the Company's President, Chief Executive Officer,
Chief Financial Officer, and Director, Sholeh Hamedani.
6
The Company's President, Chief Executive Officer, Chief Financial Officer, and
Director, Sholeh Hamedani provided services to the Company at a fair market
value of $90,000 during the six months ended June 30, 2004 and will not seek
payment for the services provided.
On June 28, 2002, the Company entered into a Consulting Agreement with Alan
Schram. This agreement provides for Alan Schram to provide consulting services
to the Company. In return for his services, the agreement entitles Alan Schram
to receive 25,000 shares of the Company's common stock at the completion of the
agreement's four month term. The consulting services have been accrued in other
expenses. The Company is currently in negotiations with Mr. Schram to settle its
obligations under the terms of this agreement. As of the date hereof, these
shares have not been issued. Alan Schram is the Company's former President,
Secretary, Chief Financial Officer and Director.
NOTE 3 - SB-2 REGISTRATION STATEMENT
On February 10, 2003, the Company filed a Form SB-2 Registration Statement
offering for sale of up to a maximum of 4,000,000 shares of the Company's common
stock directly to the public. There is no underwriter involved in this offering.
The shares are being offered without any underwriting discounts or commissions.
The purchase price is $2.00 per share. If all of the shares offered by the
Company are sold, the proceeds will be $8,000,000. The Company received
notification from the SEC that their SB-2 Registration Statement No. 333-103072
was declared effective on May 5, 2004.
NOTE 4 - GAIN FROM FORGIVENESS OF RENT
On February 13, 2004 the Company received notice that their landlord, Hill
Physicians Medical Group, Inc. had filed an unlawful detainer action against the
Company on February 6, 2004 in the Contra Costa County Superior Court as case
number WS04-0238. On February 19, 2004 the Company signed a Mutual Settlement
Agreement and Release. The effect of the release has been reflected in the
operating statements as a gain from forgiveness of rent for the six months ended
June 30, 2004 in the approximate amount of $36,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
The following discussion and analysis should be read in conjunction with our
financial statements, including the notes thereto, appearing elsewhere in this
Report.
Forward-Looking Statements
7
This quarterly report on Form 10-QSB contains statements relating to future
results of the Company (including certain projections and business trends) that
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties, including but not limited to
changes in political and economic conditions; demand for and market acceptance
of new and existing products, as well as other risks and uncertainties detailed
from time to time in the filings of the Company with the Securities and Exchange
Commission.
Critical Accounting Policies and Estimates
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The preparation of
these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the 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.
Selected Financial Data
The following selected statement of operations and balance sheet data for the
period from September 25, 1996, the date of our inception, through June 30, 2004
and for the six months ended June 30, 2004 as compared to the six months ended
June 30, 2003 were derived from our financial statements and notes thereto
included in this report which are unaudited. The difference between the periods
was primarily due to the forgiveness of rent. Historical results are not
necessarily indicative of results that may be expected for any future period.
The following data should be read in conjunction with "Plan of Operation" and
our unaudited financial statements, including the related footnotes.
8
- ---------------------------------------------- ---------------------- ----------------------- -----------------------
For the period from
September 25, 1996
For the six months For the six months (inception) through
ended June 30, 2004 ended June 30, 2003 June 30, 2004
- ---------------------------------------------- ---------------------- ----------------------- -----------------------
Statement of Operations Data (Unaudited)
- ---------------------------------------------- ---------------------- ----------------------- -----------------------
Net sales - -
- ---------------------------------------------- ---------------------- ----------------------- -----------------------
Operating expenses: 189,000 236,000 1,068,000
- ---------------------------------------------- ---------------------- ----------------------- -----------------------
Operating loss (189,000) (236,000) (1,068,000)
- ---------------------------------------------- ---------------------- ----------------------- -----------------------
Net Loss (153,000) (236,000) (1,032,000)
- ---------------------------------------------- ---------------------- ----------------------- -----------------------
- ------------------------------------------------------- --------------------------------------------------------
As of June 30, 2004
- ------------------------------------------------------- --------------------------------------------------------
Balance Sheet Data: (Unaudited)
- ------------------------------------------------------- --------------------------------------------------------
Total assets 11,000
- ------------------------------------------------------- --------------------------------------------------------
Current liabilities 378,000
- ------------------------------------------------------- --------------------------------------------------------
Total stockholders' deficit (367,000)
- ------------------------------------------------------- --------------------------------------------------------
Plan of Operation
The plan of operation should be read in conjunction with the Company's financial
statements, including the notes thereto, appearing elsewhere in this Report.
The following information contains certain forward-looking statements of
management of the Company. Forward-looking statements are statements that
estimate the happening of future events and are not based on historical fact.
Forward-looking statements may be identified by the use of forward-looking
terminology, such as "may," "could," "expect," "estimate," "anticipate," "plan,"
"predict," "probable," "possible," "should," "continue," or similar terms,
variations of those terms or the negative of those terms. The forward-looking
statements specified in the following information have been compiled by our
management on the basis of assumptions made by management and considered by
management to be reasonable. Our future operating results, however, are
impossible to predict and no representation, guaranty, or warranty is to be
inferred from those forward-looking statements.
Through a wholesale sales & marketing agreement with Two Dog Net, Inc. ("Two Dog
Net"), we are the exclusive marketers of Two Dog Net's proprietary and patent
pending secured Internet service for pre-school to junior high school aged
children called The Children's Internet(R). We plan to introduce this Internet
service designed specifically for children that allows them to have completely
safe, unrestricted live access to the Internet. The cornerstone of our consumer
marketing plan is a national television advertising campaign which includes a
30-minute infomercial that was produced over a two-year period of time by Two
Dog Net and is ready to air. We intend to utilize the infomercial to introduce
The Children's Internet(R) service to the public, as well as build brand
recognition and generate customer subscriptions. We plan to first conduct a
media test in the fourth quarter of 2004. We believe the results from the media
test will give us the platform to launch the advertising campaign on a national
basis thereafter.
9
In a Stock Purchase Agreement dated October 11, 2002, our original shareholders
sold 1,118,500 of their shares of our common stock to various purchasers, two of
whom are related parties to our management, Nasser Hamedani, Sholeh Hamedani's
father, and Soraiya Hamedani, Sholeh Hamedani's sister. Some of these purchasers
were introduced to the original shareholders by Sholeh Hamedani, our President,
Chief Financial Officer, and a Director. Some of these purchasers resold their
shares to unrelated third parties. A portion of the proceeds received from the
stock sales by the purchasers was in turn loaned to Shadrack Films, Inc., our
parent company, to finance our initial operations thus far. These amounts are
reflected on the financial statements as "Due to Parent Company." Our President,
Chief Executive Officer, and one of our Directors, Sholeh Hamedani, is the sole
shareholder of our parent company, Shadrack Films, Inc.
As of June 30, 2004, we had an accumulated total net loss of approximately
$1,032,000. Of this amount, approximately $505,000 represents the estimated fair
market value for the cost of wages, if paid, for the services rendered by our
President, Chief Executive Officer and an outside consultant (we have recorded
these amounts for the cost of wages as contributed capital, since these
individuals did not charge the Company), $370,000 represents professional fees
such as legal and accounting expenses, and the balance of $157,000 consists
primarily of occupancy and telecommunications costs including internet costs. To
date, our parent company, Shadrack Films, has funded all of our expended costs.
Currently, we do not have any cash on hand and are dependent on funding from
Shadrack Films for our current operations and for providing office space and
utilities that, for the six months ended June 30, 2004, averaged $6,000 per
month in operating costs exclusive of professional fees and time donated by
employees. The accrued account payable due to Shadrack Films is an open account
payable. Currently, the accrued balance of this account is approximately
$307,000. Our parent company is under no obligation to continue to fund our
operations and could stop at any time without notice. We estimate that we need a
minimum of $180,000 in cash to continue our operations for the next twelve
months.
Our registration statement filed with the Securities and Exchange Commission
("SEC") was declared effective on May 5, 2004. This registration statement
registers 4,000,000 shares of our common stock to be sold by us at a price of
$2.00 per share in a direct public offering. We have not raised any funds in
this offering yet and can offer no assurance that any shares will be sold. If we
raise the maximum offering of $8,000,000, our working capital needs, including
expansion of marketing and technical operations, will be met for approximately
24 months without regard to any subscription revenue. We do not currently have
any arrangements for alternative financing in the event that we raise less then
the maximum offering. Where practicable, we plan to contract with third party
companies to market The Children's Internet(R) Service as well as to provide
administrative support services such as billing and level one technical support.
We have already entered into two agreements with Infolink Communications, Ltd.,
a third party company, for the marketing of our service. However, there is no
assurance that we will be able to enter into additional arrangements for
marketing and administrative support services.
10
We plan to scale our expenditures depending upon the amount of funds raised in
our direct public offering, with initial funds being used primarily to market
the services in an effort to develop a revenue base sufficient to support our
operations. Following is a discussion of how we to plan to proceed at different
levels of funding.
Funding at the 10% Level:
If we receive net proceeds of $755,000 from the direct public offering, which is
the approximate net proceeds we will receive if we raise 10% of the funds we are
hoping to raise in this offering, we anticipate using the funding to cover
occupancy, telecommunications and other office costs for a twelve month period.
We plan to spend the majority of the funds raised on marketing and sales
initiatives in an effort to achieve sufficient revenues to help support the
company on an ongoing basis. The infomercial television campaign would be the
primary marketing vehicle to generate sales.
At this level of funding, we anticipate that our employees will continue to
donate the necessary time as they have in the past for approximately six months.
However, they are under no obligation to continue to do so and they could stop
at any time without notice.
At this level of funding, we plan to expend approximately $90,000 in marketing
funds in the initial 90 days as follows:
o Approximately $10,000 for creating, printing and duplicating
collateral marketing materials including sales brochures and The
Children's Internet(R) installation CDs with packaging.
o Approximately $10,000 to re-edit and update the infomercial with new
testimonials and to create additional versions of the infomercial
with different price points and special free trial offers based on
consumer feedback from the media test.
o Approximately $70,000 to conduct a television media test to assess
consumer response, test various price points and to fine-tune the
media plan prior to "rolling-out" or launching the media schedule.
We expect the $70,000 media test conducted in the first 90 days to secure
approximately 140 thirty-minute infomercial time slots, in approximately 40
markets, airing on both family oriented national television networks, such as
Pax TV (Paxson Communications Corporation) and on various local affiliate
broadcast stations. This approach should allow us to test a broad range of time
periods, various markets, and multiple national and local stations.
In the fourth through twelfth months upon completion of the initial three-month
media test phase, we will enter the roll-out phase. During this roll-out phase,
we plan to re-book all airings that achieved or exceeded the pre-determined
target goal as well as expand the media mix to include additional time periods
on proven stations and include other stations in proven markets. In the roll-out
phase. it is estimated that an average of approximately $44,000 would be spent
each month on media time.
11
Technical operations' costs at the 10% level of funding include our data center
co-location facility and contingent technical reserve costs of approximately
$41,000. plus license fees paid to Two Dog Net and for technical support based
upon subscribers. Working capital and general corporate purposes at this level
of funding are for occupancy costs, telecommunications costs and other office
costs, which approximate $5,000 per month. Although we owe our parent company,
Shadrack Films, approximately $307,000 in accrued costs for expenses incurred in
the past, we do not plan to repay this amount in the first twelve months at the
10% level of funding.
Funding at the 25% Level
If we receive net proceeds of $1,955,000 from the direct public offering, which
is the approximate net proceeds we will receive if we raise 25% of the funds we
are hoping to raise in this offering, we anticipate using the funding to cover
occupancy, telecommunications and other office costs for a twelve-month period.
We plan to spend the majority of the funds raised on marketing and sales
initiatives in an effort to achieve sufficient revenues to help support the
company on an ongoing basis. The infomercial television campaign will be our
primary marketing vehicle to generate sales.
At this level of funding, we anticipate that our employees will continue to
donate the necessary time as they have in the past for approximately six months.
However, they are under no obligation to continue to do so and they could stop
at any time without notice.
At this level of funding, we plan to expend approximately $90,000 in marketing
funds in the initial 90 days as follows:
o Approximately $10,000 for creating, printing and duplicating
collateral marketing materials including sales brochures and The
Children's Internet(R) installation CDs with packaging.
o Approximately $10,000 to re-edit and update the infomercial with new
testimonials and create additional versions of the infomercial with
different price points and special free trial offers based on
consumer feedback from the media test.
o Approximately $70,000 to conduct a media test to assess consumer
response, test various price points and to fine tune the media plan
prior to "rolling-out" or launching the media schedule.
We expect the $70,000 media test conducted in the first 90 days will secure
approximately 140 thirty-minute infomercial time slots, in approximately 40
markets, airing on both family oriented national television networks, such as
Pax TV (Paxson Communications Corporation) and on various local affiliate
broadcast stations. This approach should allow us to test a broad range of time
periods, various markets, and multiple national and local stations.
12
In the fourth through twelfth months upon completion of the initial three-month
media test phase, we will enter the roll-out phase. During this roll-out phase,
we plan to re-book all airings that achieved or exceeded the pre-determined
target goal as well as expand the media mix to include additional time periods
on proven stations and include other stations in proven markets. In the roll-out
phase, it is estimated that an average of approximately $125,000 would be spent
each month on media time.
In addition to infomercial marketing, we would spend approximately $240,000 in
the same time period on other support advertising and promotional activities
including, public relations, direct mail campaigns, newspaper and magazine ads,
and online marketing all focused on publications, events and regions that reach
our target market of parents.
Technical operations' costs at the 25% level of funding include our data center
co-location facility and contingent technical reserve costs of approximately
$83,000 plus license fees paid to Two Dog Net and for technical support based
upon subscribers. We further anticipate spending at this level an additional
$160,000 for the development of new web pages of The Children's Internet(R)
daily features like the Fun Facts of the Day, Surveys, Grab Bag and new home
room environments to give the child more choices and keep them engaged. Working
capital and general corporate purposes at this level of funding are for
occupancy costs, telecommunications costs and other office costs, which
approximate $5,000 per month. In addition, we would incur personnel costs of
approximately $7,000 per month and other contingent costs of $900 per month.
Although we owe our parent company, Shadrack Films, approximately $307,000 in
accrued costs for expenses incurred in the past, we do not plan to repay this
amount in the first twelve months at the 25% level of funding.
Funding at the 50% Level
If we receive net proceeds of $3,955,000 in the direct public offering, which is
the approximate net proceeds we will receive if we raise 50% of the funds we are
hoping to raise in this offering, we anticipate using the funding to cover
occupancy, telecommunications and other office costs for a twelve-month period.
We plan to spend the majority of the funds raised on marketing and sales
initiatives in an effort to achieve sufficient revenues to help support the
company on an ongoing basis. The infomercial television campaign will be our
primary marketing vehicle to generate sales.
At this level of funding, we anticipate that our employees will continue to
donate the necessary time as they have in the past for approximately three
months. However, they are under no obligation to continue to do so and they
could stop at any time without notice.
At this level of funding we plan to expend approximately $90,000 in marketing
funds in the initial 90 days as follows:
o Approximately $10,000 for creating, printing and duplicating
collateral marketing materials including sales brochures and The
Children's Internet(R) installation CDs with packaging.
13
o Approximately $10,000 to re-edit and update the infomercial with new
testimonials and create additional versions of the infomercial with
different price points and special free trial offers based on
consumer feedback from the media test.
o Approximately $70,000 to conduct a media test to assess consumer
response, test various price points and to fine tune the media plan
prior to "rolling-out" or launching the media schedule.
We expect the $70,000 media test conducted in the first 90 days will secure
approximately 140 thirty-minute infomercial time slots, in approximately 40
markets, airing on both family oriented national television networks, such as
Pax TV (Paxson Communications Corporation) and on various local affiliate
broadcast stations. This approach should allow us to test a broad range of time
periods, various markets and multiple national and local stations.
In the fourth through twelfth months upon completion of the initial three-month
media test phase, we will enter the roll-out phase. During this roll-out phase,
we plan to re-book all airings that achieved or exceeded the pre-determined
target goal as well as expand the media mix to include additional time periods
on proven stations and include other stations in proven markets. In the roll-out
phase, it is estimated that an average of approximately $258,000 would be spent
each month on media time.
An additional $20,000 would be spent in producing 30, 60 and 90 second
commercial spots to support the infomercial, as well as to broadcast the
commercial spots in new markets as a stand alone advertising campaign. In
addition, we would spend approximately $240,000 in the same time period on other
support advertising and promotional activities including, public relations,
direct mail campaigns, newspaper and magazine ads, and online marketing all
focused on publications, events and regions that reach our target market of
parents.
Technical operations' costs at the 50% level of funding include our data center
co-location facility and contingent technical reserve costs of approximately
$103,000 plus license fees paid to Two Dog Net and for technical support based
upon subscribers. We further anticipate spending at this level an additional
$510,000 for the development of new web pages of The Children's Internet(R)
daily features like the Fun Facts of the Day, Surveys, Grab Bag and new home
room environments to give the child more choices and keep them engaged. Working
capital and general corporate purposes at this level of funding are for
occupancy costs, telecommunications costs and other office costs, which
approximate $5,000 per month. In addition, we would incur personnel costs of
approximately $26,000 per month and other contingent costs of $3,000 per month.
We owe our parent company, Shadrack Films, approximately $307,000 in accrued
costs for expenses incurred in the past. At the 50% level of funding, we plan to
repay this amount in the first twelve months.
At this level of funding, we believe would have sufficient operating capital to
currently pay management employees, at close to market rates, and all other
employees at market rates for their time.
Funding at the 75% Level
14
If we receive net proceeds of $5,955,000 in the direct public offering, which is
the approximate net proceeds we will receive if we raise 75% of the funds we are
hoping to raise in this offering, we anticipate using the funding to cover
occupancy, telecommunications and other office costs for a twelve month period.
We plan to spend the majority of the funds raised on marketing and sales
initiatives in an effort to achieve sufficient revenues to help support the
company on an ongoing basis. The infomercial television campaign will be our
primary marketing vehicle to generate sales.
At this level of funding, we anticipate that our employees will continue to
donate the necessary time as they have in the past for approximately three
months. However, they are under no obligation to continue to do so and they
could stop at any time without notice.
At this level of funding we plan to expend approximately $90,000 in marketing
funds in the initial 90 days as follows:
o Approximately $10,000 for creating, printing and duplicating
collateral marketing materials including sales brochures and The
Children's Internet(R) installation CDs with packaging.
o Approximately $10,000 to update and re-edit the infomercial with new
testimonials and create additional versions of the infomercial with
different price points and special free trial offers based on
consumer feedback from the media test.
o Approximately $70,000 to conduct a media test to assess consumer
response, test various price points and to fine tune the media plan
prior to "rolling-out" or launching the media schedule.
We expect the $70,000 media test conducted in the first 90 days will secure
approximately 140 thirty-minute infomercial time slots, in approximately 40
markets, airing on both family oriented national television networks, such as
Pax TV (Paxson Communications Corporation) and on various local affiliate
broadcast stations. This approach should allow us to test a broad range of time
periods, various markets and multiple national and local stations.
In the fourth through twelfth months upon completion of the initial three-month
media test phase, we will enter the roll-out phase. During this roll-out phase,
we plan to re-book all airings that achieved or exceeded the pre-determined
target goal as well as expand the media mix to include additional time periods
on proven stations and include other stations in proven markets. In the roll-out
phase, it is estimated that an average of approximately $258,000 would be spent
each month on media time.
An additional $20,000 would be spent in producing 30, 60 and 90 second
commercial spots to support the infomercial as well as broadcast the commercial
spots in new markets as a stand alone advertising campaign. In addition, we
would spend approximately $440,000 in the same time period on other support
advertising and promotional activities including, public relations, direct mail
campaigns, newspaper and magazine ads, and online marketing all focused on
publications, events and regions that reach our target market of parents.
15
Technical operations' costs at the 75% level of funding include our data center
co-location facility and contingent technical reserve costs of approximately
$118,000 plus license fees paid to Two Dog Net for technical support based upon
subscribers. We further anticipate spending at this level an additional $800,000
for the development of new web pages of The Children's Internet(R) daily
features like the Fun Facts of the Day, Surveys, Grab Bag and new home room
environments to give the child more choices and keep them engaged. Working
capital and general corporate purposes at this level of funding are for
occupancy costs, telecommunications costs and other office costs, which
approximate $5,000 per month. In addition, we would incur personnel costs of
approximately $42,000 per month and other contingent costs of $3,000 per month.
We owe our parent, Shadrack Films, company approximately $307,000 in accrued
costs for expenses incurred in the past. At the 75% level of funding, we plan to
repay this amount.
At this level of funding, we believe we would have sufficient operating capital
to pay management employees, who previously donated a portion of their time, at
close to market rates, and all other employees at market rates for their time.
Funding at the 100% Level
If we receive net proceeds of $7,955,000 in the direct public offering, which is
the approximate net proceeds we will receive if we raise 100% of the funds we
are hoping to raise in this offering, we anticipate using the funding to cover
occupancy, telecommunications and other office costs for a twelve month period.
We plan to spend the majority of the funds raised on marketing and sales
initiatives in an effort to achieve sufficient revenues to help support the
company on an ongoing basis. The infomercial television campaign will be our
primary marketing vehicle to generate sales.
At this level of funding, we believe we would have sufficient operating capital
to pay all of our employees at market rates for their time.
At this level of funding we plan to expend approximately $90,000 in marketing
funds in the initial 90 days as follows:
o Approximately $10,000 for creating, printing and duplicating
collateral marketing materials including sales brochures and The
Children's Internet(R) installation CDs with packaging.
o Approximately $10,000 to update and re-edit the infomercial with new
testimonials and create additional versions of the infomercial with
different price points and special free trial offers based on
consumer feedback from the media test.
o Approximately $70,000 to conduct a media test to assess consumer
response, test various price points, and to fine tune the media plan
prior to "rolling-out" or launching the media schedule.
16
We expect the $70,000 media test conducted in the first 90 days will secure
approximately 140 thirty-minute infomercial time slots, in approximately 40
markets, airing on both family oriented national television networks, such as
Pax TV (Paxson Communications Corporation) and on various local affiliate
broadcast stations. This approach should allow us to test a broad range of time
periods, various markets, and multiple national and local stations.
In the fourth through twelfth months upon completion of the initial three-month
media test phase, we will enter the roll-out phase. During this roll-out phase,
we plan to re-book all airings that achieved or exceeded the pre-determined
target goal as well as expand the media mix to include additional time periods
on proven stations and include other stations in proven markets. In the roll-out
phase it is estimated that on average approximately $515,000 would be spent each
month on media time.
An additional $20,000 would be spent in producing 30, 60 and 90 second
commercial spots to support the infomercial as well as broadcast the commercial
spots in new markets as a stand alone advertising campaign. In addition, we
would spend approximately $580,000 in the same time period on other support
advertising and promotional activities including, public relations, direct mail
campaigns, newspaper and magazine ads, and online marketing all focused on
publications, events and regions that reach our target market of parents.
Technical operations' costs at the 100% level of funding include our data center
co-location facility and contingent technical reserve costs of approximately
$146,000 plus license fees paid to Two Dog Net for technical support based upon
subscribers. We further anticipate spending at this level an additional
$1,200,000 for the development of new web pages of The Children's Internet(R)
daily features like the Fun Facts of the Day, Surveys, Grab Bag and new home
room environments to give the child more choices and keep them engaged. Working
capital and general corporate purposes at this level of funding are for
occupancy costs, telecommunications costs and other office costs, which
approximate $5,000 per month. In addition, we would incur personnel costs of
approximately $48,000 per month and other contingent costs of $14,000 per month.
We owe our parent company, Shadrack Films, approximately $307,000 in accrued
costs for expenses incurred in the past. At the 100% level of funding, we plan
to repay this amount in the first twelve months.
At this level of funding, we believe would have sufficient operating capital to
pay all employees at market rates for their time.
Possible Need for Additional Funds
We may be wrong in our estimates of revenue generated from marketing costs and
additional funds may also be required in order to proceed with our marketing
plan and our business plan. Additionally, we will likely need additional funds
in the event Shadrack Films discontinues funding our operations. Should we need
additional funds, we would attempt to raise these funds through additional
private placements or by borrowing money. We do not have any arrangements with
potential investors or lenders to provide such funds and there is no assurance
that such additional financing will be available when required in order to
proceed with the business plan or that our ability to respond to competition or
changes in the marketplace or to exploit opportunities will not be limited by
lack of available capital financing. If we are unsuccessful in securing the
additional capital needed to continue operations within the time required, we
will not be in a position to continue operations.
17
Although this Plan of Operation describes our planned use of the net proceeds of
our offering at different funding levels, we can offer no assurance that we will
raise any funds in the offering.
If we are unsuccessful in securing the capital needed to continue operations or
if initial sales of subscriptions do not fund continued operations, we will
continue to look to our parent company to fund operations and to employees to
donate their time. If our parent company, Shadrack Films, a company controlled
by Sholeh Hamedani, discontinues the funding of our operations and/or if our key
employees discontinue donating their time, we will not be in a position to
continue operations. In this event, we would attempt to sell the company or file
for bankruptcy.
Off-Balance Sheet Arrangements
None.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (the "Certifying
Officers") are responsible for establishing and maintaining disclosure controls
and procedures and internal controls and procedures for financial reporting for
the Company. The Certifying Officers have designed such disclosure controls and
procedures and internal controls and procedures for financial reporting to
ensure that material information is made known to them, particularly during the
period in which this report was prepared. The Certifying Officers have evaluated
the effectiveness of the Company's disclosure controls and procedures and
internal controls and procedures for financial reporting as of the end of the
period covered by this report and believe that the Company's disclosure controls
and procedures and internal controls and procedures for financial reporting are
effective based on the required evaluation. During the period covered by this
report, there were no changes in internal controls and procedures that
materially affected, or are reasonably likely to materially affect, the
Company's internal control and procedures over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
To the best knowledge of management, there are no legal proceedings pending or
threatened against the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
1. The following Exhibits are filed herein:
No. Title
31.1 Certification of Chief Executive Officer Pursuant to the
Securities Exchange Act of 1934, Rules 13a-14 and
15d-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to the
Securities Exchange Act of 1934, Rules 13a-14 and
15d-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
2. Reports on Form 8-K filed:
On July 30, 2004, the Company filed a Current Report on Form 8-K
disclosing that it had changed independent auditors. On August 13, 2004 it filed
an amendment to this report.
19
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, duly authorized.
DATED: August 16, 2004 The Children's Internet, Inc.
/S/ SHOLEH HAMEDANI
-----------------------------------
By: Sholeh Hamedani
Its: President, Chief Executive Officer,
and Chief Financial Officer
(Principal Executive Officer, Principal
Financial Officer and Principal
Accounting Officer)
20