FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from _________ to ____________.
Commission file number 0-27418
KINETIKS.COM, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0478045
(State or other jurisdiction IRS Employer
of incorporation or organization) Identification Number
10055 Westmoor Drive, Westminster, CO 80021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 534-1408
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
$.001 Par Value Common Stock
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for 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 [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. [X]
As of April 14, 2000, the market value of the Registrant's
$0.001 par value common stock, excluding shares held by
affiliates, was $ 7,950,000 based on a closing bid price of
$ 1.56 per share on the OTC Bulletin Board. There were 17,500,00
shares of common stock and 250,000 shares of preferred stock
convertible into 12,500,000 shares of common stock outstanding
as of December 31, 1999.
Forward-Looking Statements
In addition to historical information, this Annual Report
contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, and is
thus prospective. The forward-looking statements contained
herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited
to, competitive pressures, changing economic conditions,
those discussed in the Section entitled "Management's
Discussion and Analysis of Financial Condition and Results
of Operations," and other factors, some of which will be
outside the control of the Company. Readers are cautioned
not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof.
Readers should refer to and carefully review the information
in future documents the Company files with the Securities
and Exchange Commission.
eLinear/Kinetiks.com 10KSB Filing for December 31, 1999
ITEM 1: DESCRIPTION OF BUSINESS
GENERAL
Kinetiks.com, Inc., is a development stage company that,
since December 1999 has operated an Internet consulting
business through its wholly owned subsidiary eLinear, Inc.,
a Colorado corporation, ("eLinear").
Kinetiks completed a Plan of Merger under which eLinear
acquired by merger substantially all of the assets of
Imagenuity, Inc., a Florida corporation. Kinetiks issued to
Jon V. Ludwig, the sole shareholder of Imagenuity,
10,000,000 shares of its $0.001 par value Common Stock and
250,000 shares of its Series A Preferred Convertible Stock,
each share of which has the voting, dividend and liquidation
rights of 50 shares of the Common Stock. Effective as of
the merger, Mr. Ludwig also was elected chairman of the
board and appointed president of Kinetiks.
Prior to acquiring the business of Imagenuity, Kinetiks did
not engage in any business activities except for negotiating
and compromising debt and searching for a merger candidate.
The Company's current headquarters are located at 10055
Westmoor Drive, Westminster, CO 80021 and the main telephone
number is (303) 543-1408. The Company's Internet address is
http://www.elinear.com. Its stock is traded on the OTC
Bulletin Board under the symbol "KNET."
INTERNET INDUSTRY
The Internet is changing the way consumers and organizations
communicate, share information and conduct business. Its
initial use consisted of advertising and promotional
websites that provided marketing material largely
replicating traditional paper-based marketing messages in a
static web page environment, sometimes referred to as
brochure-ware. Businesses often relied on in-house
personnel, Internet advertising firms, or web design
companies to develop and deploy their websites.
This next generation of Internet business models involved
the development and use of transactional websites presenting
product information combined with advertising and marketing
messages. Those sites provided basic features and
processing capabilities with little or no integration with
the business's technology systems. Moreover, a large number
of those sites simply replicated traditional business models
and functioned as additional distribution channels similar
to a direct mail catalogue program.
A growing number of businesses are realizing that the
Internet is transforming the way they compete, is forcing
businesses to reevaluate their Internet strategies and, most
importantly, review their entire operational models in order
to integrate their business objectives more closely with
their business processes and systems. The demand for an
integrated service offering has led to the emergence of a
new breed of third-party service providers that have the
necessary expertise to integrate strategy, marketing and
technology into a single, unified Internet solution.
International Data Corp. estimates that the market for
Internet professional services will grow from approximately
$7.8 billion in 1998 to $78.6 billion in 2003.
Kinetiks' Internet Business
Kinetiks, through eLinear, sells Internet professional
services to clients to align their personnel, processes and
systems in an electronic enterprise. An electronic
enterprise utilizes Internet-based technologies allowing
clients to transact business, communicate information and
share knowledge among employees, customers and suppliers.
eLinear delivers its services through a consulting model
that it refers to as ROII-Return on Internet Investment.
This entails analysis, design and support. During the
Analysis phase, eLinear develops strategic plans for using
the Internet and other technologies to address a client's
business needs. eLinear conducts interviews with a client's
managers and users to understand a client's business
strategy, processes and expectations. Also included is an
assessment of the client's web site. Current processes are
mapped and alternatives are identified for improvements
through Web-based applications. At the end of the analysis
phase, eLinear develops a plan outlining an Internet
strategy and assists the client in the identification,
evaluation and selection of hardware and software to
implement that strategy.
Design involves execution of plans developed in the Analysis
phase. If requested by a client, eLinear will manage the
implementation of all or portions of a plan. As part of its
ROII program, eLinear develops and monitors controls to
measure the impact of its plans on a client's operations.
The final phase, support, addresses an ongoing service
relationship and the level of support clients will require
going forward.
In addition to providing complete customer Internet
applications, eLinear also markets services that solve
specific business problems for clients. Those services are
based on the "develop once, sell many" template driven
approach. Typically, these services focus on the small to
medium business market segment, but they may be scaled to
meet the requirements of most businesses. These services
include use of eLinear's proprietary "WebCAS" Website
content management service, and "OnePlace," an information
portal service.
WebCAS is a proprietary, subscription based Web application
that allows non-technical personnel to develop and maintain
pages on one or more Websites through a Web browser.
Product and marketing managers and other non-technical
personnel may send requests for updates or new Web pages
through an email implemented, approval process. After the
document flows through the email driven approval process,
updates are electronically published immediately on one or
more corporate Websites. The WebCAS application also
permits third parties to author material and route it for
approval. This allows clients to engage third parties for
such tasks as localizing the application to support specific
languages or adding graphics and / or professional content
authoring.
WebCAS is a customizable template. Approximately 80% of the
application does not require customization; 20% is
programmed to meet specific client requirements, depending
on the clients budget and the requested applications.
eLinear also provides support services for WebCAS.
OnePlace is a proprietary, subscription based Web
application that centralizes features such as electronic
mail, timekeeping, expense reporting, client contact
management, lead-tracking and project management into a
single Web-based application interface. OnePlace integrates
these critical business processes so information can flow
more efficiently through the client organization. The
OnePlace applications are sold a la carte. Clients may
choose the number of applications they require, and pay a
monthly service fee to utilize those applications through
their Web browser. No desktop software installation or
maintenance will be required.
OnePlace is also a customizable template. Approximately 70%
of the application coding and development is complete for
most clients. The remaining 30% of the application is
customized to meet specific client requirements, depending
on the clients' budget and the required applications.
eLinear also provides support services for OnePlace.
Competition
The market for Internet professional services is intensely
competitive and subject to rapid technological change.
eLinear competes with:
1. other Internet professional service firms such as
Appnet, USWeb / CKS, Viant and Scient
2. information technology consulting and integration firms
(such as Anderson Consulting, IBM, Cambridge Technology
Partners and Sapient)
3. in-house technology and marketing departments of its
clients, such as IBM, and potential clients.
eLinear believes that the principal competitive factors in
the industry are:
1. integrated Internet strategy, marketing and technology
capabilities
2. reliability
3. offering superior client service
4. technology expertise and client industry knowledge
5. cost management / operational efficiency
6. referenceable customer base
There are relatively low barriers to entry into the Internet
professional services business. Kinetiks expects that it
will face additional competition from new entrants that
provide significant performance, price, creative or other
advantages over those offered by eLinear. Many of these
competitors have greater name recognition and resources than
Kinetiks.
Kinetiks will attempt to diminish competitive pressures on
eLinear by focusing on markets where Internet consulting and
design penetration is low, but technology usage is high.
Initially, those markets include Denver, Colorado,
Charlotte, North Carolina, and Ft. Lauderdale, Florida.
eLinear has established a client base in the Denver region,
based primarily on the business it acquired in its merger
with Imagenuity, Inc., and is pursuing plans to expand into
other second tier markets through a combination of internal
growth and acquisitions.
CUSTOMERS
eLinear derives a large percentage of its revenues from two
clients. In 1999, eLinear's (and its predecessor
Imagenuity) largest customer accounted for 58% of revenues,
and its 2 largest clients accounted for 89% of revenues. The
loss of any large client, in particular IBM, will, unless
such loss is replaced by another larger client, have an
adverse material impact on the Company's revenues and
financial condition.
PROPRIETARY RIGHTS
Kinetiks' success depends entirely on eLinear's proprietary
methodologies and software applications. Neither Kinetiks
nor eLinear has any patents, copyrights, or trademarks.
They rely, instead, on laws protecting trade secrets, as
well as non-disclosure and other contractual agreements to
protect proprietary rights. There can be no guarantee that
those laws, and the procedures initiated to protect its
business, will prevent misappropriation of its proprietary
software and web-site applications. In addition, those
protections do not preclude competitors from developing
products with similar features as those of eLinear.
Although Kinetiks believes eLinear's products and services
are unique and do not infringe upon the proprietary rights
of others, there can be no assurance that infringement
claims will not be brought against eLinear and Kinetiks in
the future. Any such claims could result in costly
litigation or have a material adverse effect on Kinetiks'
business, operating results and financial condition.
EMPLOYEES
As of December 31, 1999, Kinetiks and eLinear together had
12 full-time and 0 part-time employees. Of those employees,
10 full-time were in Consulting and Development, 2 full-time
were in Sales and Marketing, and 0 full-time and 0 part-time
were in Administration. None of eLinear's employees are
covered by any collective bargaining agreements. Management
believes that its relations with its employees are good and
eLinear has not experienced any work stoppages attributable
to employee disagreements.
ITEM 2: PROPERTIES
Kinetiks' principal offices are located in approximately
2774 square feet of leased office space in Westminster,
Colorado. Imagenuity, Inc. entered into a lease agreement
for this space in August 1, 1999 at a rate of $4737 per
month. That space is adequate to meet its needs for the
foreseeable future. However, management intends to move its
executive offices to Tampa, Florida by April 1, 2000.
ITEM 3: LEGAL PROCEEDINGS
Kinetiks is not a party to any material legal proceedings.
Prior to completing the merger of eLinear and Imagenuity,
Inc., Imagenuity redeemed 125 shares of its stock from an
officer, Chris Sweeney. Mr. Sweeney initiated an action in
Florida against Imagenuity for alleged breach of his
employment contract, which Imagenuity contends was
terminable at will. eLinear has filed an action in Colorado
requesting a declaration that Mr. Sweeney's rights as a
shareholder of Imagenuity were terminated effective October
4, 1999. Jon V. Ludwig, the president and majority
shareholder of Kinetiks has indemnified Kinetiks against all
costs and losses arising from the Colorado and Florida
actions.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Kinetiks did not hold any shareholders' meeting during 1999.
ITEM 5: MARKET OF COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Kinetiks' Common Stock trades on the electronic bulletin
board of the OTC market under the symbol "KNET". The
following table summarizes the reported high and low bid
prices for Kinetiks' Common Stock for each quarter within
the last two years.
Bid Ask
Sales Price: High Low High Low
1998Q1 0.06 0.06 0.06 0.06
1998Q2 0.06 0.05 0.06 0.05
1998Q3 0.09 0.05 0.09 0.05
1998Q4 0.20 0.06 0.20 0.06
1999Q1 0.16 0.11 0.18 0.11
1999Q2 0.94 0.14 0.90 0.14
1999Q3 1.09 0.27 1.13 0.26
1999Q4 5.00 1.00 5.00 1.06
As of February 29, 2000, based on information received from
Kinetiks' transfer agent, the number of shareholders of
record were 109. There was one holder of Series A Preferred
Stock, Jon V. Ludwig, who is the president and chairman of
the board.
Dividend Policy
Kinetiks has never paid cash dividends on its common stock
and there is no prospect that it will pay dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
Merger Agreement
In October 1999, Imagenuity, Inc. ("Imagenuity")
executed an Agreement and Plan of Merger (the "Plan") with
Kinetiks.com, Inc. ("Kinetiks") and Kinetiks' wholly owned
subsidiary Elinear Corporation. The Plan was subject to Kinetiks
successfully completing a private placement in the amount of
$1,000,000 from the sale of 2,500,000 shares of Kinetiks common
stock, the execution of an Inducement Agreement whereby two
shareholders of Kinetiks were to deliver a written indemnity by
which these two shareholders assumed and agreed to hold Kinetiks,
Elinear and the Company and their officers, directors and
shareholders harmless from Kinetiks liabilities, and due
diligence. Additionally, the Plan required that the sole
shareholder of the Company indemnify Kinetiks and Elinear from
and against any and all loss, liability, damage and expense
suffered or incurred by Kinetiks or Elinear resulting from or
arising out of the defense of the threatened action by a former
shareholder of the Company. In satisfaction of the requirement,
the sole shareholder of Imagenuity delivered to Kinetiks and
Elinear an Indemnification and Pledge Agreement covering
4,500,000 shares of stock.
The requirements of the Plan were satisfied on December
9, 1999; accordingly, the Company was entitled to receive
22,500,000 shares of Kinetiks common stock. Because the
authorized number of common shares of Kinetiks was insufficient
to satisfy the number of shares to be issued to the sole
shareholder of Imagenuity, Kinetiks issued 10,000,000 shares of
its common stock and 250,000 shares of its preferred stock, that
is convertible into 12,500,000 shares of its common stock.
The Plan also provided that since Imagenuity was an S
corporation for income tax purposes, the sole shareholder of
Imagenuity was entitled to receive distributions of approximately
$315,000, to satisfy the income taxes that would be allocated to
this shareholder. The Company paid this shareholder approximately
$ 144,000 in October 1999, and paid the remaining portion in the
amount of approximately $ 171,000 in February 2000.
This reorganization has been accounted for as though it
were a recapitalization of Imagenuity and a sale of shares by
Imagenuity in exchange for the net assets of Kinetiks.
Accordingly, since Imagenuity is the surviving entity in the
reorganization, the financial statements presented herein are
those of Imagenuity.
Upon the completion of the merger, Imagenuity terminated
its S corporation status for income tax purposes. The Company
has present proforma income expense in the consolidated statement
of operations which presents the income tax expense that would
have been recorded had the Company not been a pass through entity
for income tax purposes. The income tax effects for the period
from December 9, 1999 through December 31, 1999 are not material
to the consolidated financial statements taken as a whole.
Results of Operations
Period ended December 31, 1997 compared to 1998
Total revenue increased $423,090 or 2,099% to $443,240 in 1998.
The Company commenced operations on October 20, 1997. During
this period, the Company's revenues were primarily derived from
technical training classes the Company conducted through one of
its former divisions, Tech Instruct. Essentially, all the
Company's revenues were derived from one customer. During the
latter part of 1998, the Company decided to change its business
focus from training activities to Internet web based consulting,
design and technology services. Approximately $80,000 of the
Company's revenue in 1998 consisted of consulting services
Operating expense increased by $215,014 or 4,414% from $4,871 in
1997. The increase was largely comprised of increases in wages
and benefits ($121,274), professional services, consisting
primarily of contract labor ($40,433), and travel and
entertainment ($22,705), which the Company incurred in the
delivery of its training programs.
Income from operations increased $208,076 or 1,362% from $15,279
in 1997, that was largely due to a full year of operations in
1998.
Proforma income tax expense was $77,223 in 1998 compared to $0 in
1997. Since the Company was an S corporation for income tax
purposes, no income tax expense was recorded on the Company's
financial statements. However, proforma income tax expense is
presented in the consolidated financial statements to display the
amount of income tax expense that the Company would have recorded
had it been a tax paying entity instead of a pass through entity
for income tax purposes.
Proforma net income was $143,278 in 1998 compared to $15,279 in
1997. This reflects a full year of operations in 1998.
Year ended December 31, 1999 compared to 1998
Total revenue increased $318,060 or 72%, to $761,300 from
$443,240 in 1998. The Company's revenues were comprised of
Internet web based consulting fess of approximately $593,000
(78%) and technical training fees of approximately $168,000
(22%). The revenue percentages reflect the Company's change in
focus to Internet web based consulting that was initiated during
the latter part of 1998. The Company's revenues during 1999 were
again primarily derived from one customer.
Operating expenses increased by $262,622 or 119% from 1998. The
increase was largely comprised of wages and benefits ($184,443,
an increase of 152% from 1998), sales and marketing ($30,548, and
increase of 1,518% from 1998), rent ($18,016, an increase of 77%
from 1998) and telephone ($8,064, an increase of 55% from 1998).
The increase in operating expenses reflects increased costs
necessary to sustain the increase in revenues.
Income from operations increased $55,438 or 25% to $278,793 from
$223,355 in 1998. Income from operations as a percentage of
revenue decreased to 37% in 1999 from 50% in 1998. This decrease
in profit margin is primarily due to increased expenses
associated with the Company change in revenue mix from technical
training to Internet web based consulting. Operating profits
also were impacted by additional employees that the Company added
to enable the Company to deliver its consulting services.
Proforma income tax expense was $102,454 in 1998 compared to
$77,223 in 1997. Since the Company was an S corporation for
income tax purposes, no income tax expense was recorded on the
Company's financial statements. However, proforma income tax
expense is presented in the consolidated financial statements in
order to display the amount of income tax expense that the
Company would have recorded had it been a tax paying entity
instead of a pass through entity for income tax purposes.
Proforma net income was $179,390 in 1999 compared to $143,278 in 1998.
Management believes that inflation has not had a material impact
on the Company's results of operations.
Liquidity and Capital Resources
The Company currently derives essentially all of its revenues
from a single client. The loss of this client might have an
adverse material impact on the financial condition of the
Company. The Company is implementing strategies and hiring
additional employees in order to diversify the client base, both
geographically and by industry, to minimize the risks associated
with the concentration of revenues with one client. There can be
no assurances, however, that these efforts will be successful.
Revenues and earnings may also fluctuate based on the number and
size of projects undertaken at the Company during any period of
time. Additionally, the Company is actively pursuing merger
candidates that can compliment the services presently
provided by the Company. The Company believes that it will need
additional equity capital or debt financing in order to complete
any merger or acquisition.
Cash and cash equivalents as of December 31, 1999 were $939,493
and $36,269 in 1998. In connection with the merger with Kinetiks
in December 1999, the Company received net proceeds from the
private placement in the amount of $957,705. The Company has
funded its operations from the cash flows generated from
operations and the issuance of equity securities.
For the period ended December 31, 1998, cash provided by
operating activities was $199,619. The Company purchased
property and equipment in the amount of $7,373 and made
distributions to the S corporation stockholders in the amount of
$138,000.
For the year ended December 31 1999, cash provided by operating
activities was $360,551. The Company purchased property and
equipment and other assets in the amount of $41,193, repurchased
625 shares of its common stock in the amount of $38,279, and made
distributions to S corporation stockholders in the amount of
$335,560.
On April 12, 2000, the Company entered into a Letter of
Agreement for a Private Equity Line (the "Agreement") of Common
Stock with Swartz Private Equity ("Swartz"). The Agreement
provides that Swartz, upon satisfactory completion of due
diligence and the execution of a definitive agreement, shall make
a firm commitment to purchase shares of the Company's common
stock in a private placement at a purchase price equal to 92% of
the market price, as defined, and resell these shares under a
qualified prospectus. Subject to an effective registration
statement and for a period of three years, the Company, in its
sole discretion, has the right to "put" common stock to Swartz,
subject to certain restrictions relating to trading volume and
pricing criteria. The Company may not put more than $2 million
of common stock to Swartz at any given time. For each "put,"
Swartz shall receive an amount of warrants equal to 10% of the
number of shares purchased, exercisable at a price equal to 110%
of the market price of each "put."
As compensation to enter into the Agreement, the Company
granted Swartz a warrant to purchase 612,000 shares of the
Company's common stock that expire in 2005. Of these warrants,
204,000 are exercisable upon the completion of due diligence,
204,000 are exercisable upon the completion of a definitive
agreement, and 204,000 are exercisable upon the sooner of six
months from the date of the Agreement or upon the effectiveness
of a registration statement. The exercise price is equal to the
lesser of the lowest closing bid price for five days prior to the
execution of the Agreement or the lowest bid price for five
trading days prior to the execution of the definitive agreement.
There can be no assurances, however, that the Company will be
successful in negotiating a definitive agreement with Swartz or
successful in filing a registration statement.
Management expects that its current working capital will be
sufficient to cover operating activities, excluding acquisitions,
during the next year. There can be no assurance, however, that
cash generated from operating activities will be sufficient to
cover the current operating activities of the Company
Year 2000 Readiness
The Company is dependent on numerous systems that could be
affected by Year 2000 related problems, including internal
hardware and software systems, communications networks, hardware
and software systems of customers and suppliers, and non-
information technology systems such as utilities.
The Company completed a Year 2000 readiness plan that included
review of internal systems and the services provided by the
Company. In addition, contingency plans were developed to address
any problems that may arise as a result of Year 2000
malfunctions.
To date, including January 1, 2000, we have not encountered any
material Year 2000 problems with our internal hardware and
software systems and internal non-information technology systems.
We have not experienced any material problems resulting from the
systems of third parties with which we do business. We also have
no knowledge of any material Year 2000 problems in any of the
services we have provided or implemented for our clients. There
can be no assurance that any Year 2000 related problems will not
arise in the future, and the future occurrence of any such
problems could have a material adverse impact on our results of
operations and financial condition.
New Accounting Pronouncements
In fiscal year 2001, the Company plans to adopt SFAS No. 133,
Accounting for Derivative Instruments in Hedging Activities.
Management of the Company believes that the adoption of SFAS 133
will not have a material impact on the Company's financial
position or results of operations.
ITEM 7: FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Imagenuity, Inc. d/b/a eLinear
We have audited the accompanying consolidated balance sheet of
Imagenuity, Inc. d/b/a eLinear as of December 31, 1999, and the
related consolidated statements of operations, stockholders'
equity, and cash flows for the each of the years in the two year
period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Imagenuity, Inc. d/b/a eLinear as of
December 31, 1999, and the results of their operations and their
cash flows for each of the years in the two year period ended
December 31, 1999, in conformity with generally accepted
accounting principles.
March 16, 2000, expect for Note 8, the date
of which is April 12, 2000
Westminster, Colorado
IMAGENUITY, INC.
d/b/a eLINEAR
CONSOLIDATED BALANCE SHEET
December 31, 1999
ASSETS
Current assets:
Cash and cash equivalents 939,493
Accounts receivable, no allowance
deemed necessary 32,490
Advances to employees 3,000
Total current assets 974,983
Property and equipment, net 38,423
Other assets 7,547
Total assets 1,020,953
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 38,384
Accrued liabilities 8,956
Deferred income 9,250
Total current liabilities 56,590
Commitments 0
Stockholders' equity:
Preferred stock; $.001 par value; 500,000 shares
authorized; 250,000 shares outstanding 250
Common stock; $.001 par value; 20,000,000 shares
authorized; 17,500,000 outstanding 17,500
Additional paid in capital 948,650
Accumulated deficit (2,037)
Total stockholders' equity 964,363
Total liabilities and stockholders' equity 1,020,953
The accompanying notes are an integral part of these financial statements.
IMAGENUITY, INC.
d/b/a eLINEAR
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
December 31,
1999 1998
Net revenues 761,300 443,240
Operating expenses:
Wages and benefits 305,717 121,274
Professional services 21,533 41,724
Travel and entertainment 40,964 22,705
Rent 23,429 5,413
Sales and marketing 32,582 2,034
Stock compensation expense 8,320 0
Telephone 14,565 6,501
Depreciation 4,413 2,880
Other 30,984 17,354
Total operating expenses 482,507 219,885
Income from operations 278,793 223,355
Other income (expense):
Interest income 5,259 624
Other expense (2,208) (3,478)
Income before proforma
income tax 281,844 220,501
Proforma income tax expense (102,454) (77,223)
Proforma net income 179,390 143,278
Proforma basic earnings per share 0.01 0.01
Proforma diluted earnings per share 0.01 0
Weighted average shares outstanding:
Basic 26,774,013 26,774,013
Diluted 28,715,263 28,715,263
The accompanying notes are an integral part of these financial statements.
<TABLE>
IMAGENUITY, INC.
d/b/a eLINEAR
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Additional
Common Preferred Paid In Retained
Shares Amount Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,January 1,1997 1,000 1,000 0 0 0 6,832 7,832
Distribution to "S"
corporation stockholders 0 0 0 0 0 (138,000) (138,000)
Net income for the year 0 0 0 0 0 220,501 220,501
Balance,December 31,1998 1,000 1,000 0 0 0 89,333 90,333
Compensation expense on
issuance of common stock 125 125 0 0 8,195 0 8,320
Purchase and retirement of
common stock (625) (625) 0 0 0 (37,654) (38,279)
Issuance of stock in a
private placement, net
of offering costs of
$42,294 2,500,000 2,500 0 0 955,205 0 957,705
Shares issued for
reorganization 14,999,500 14,500 250,000 250 (14,750) 0 0
Distribution to "S"
corporation stockholders 0 0 0 0 0 (335,560) (335,560)
Net income for the period 0 0 0 0 0 281,844 281,844
Balance,Dec 31,1999 17,500,000 17,500 250,000 250 948,650 (2,037) 964,363
</TABLE>
The accompanying notes are an integral part of these financial statements.
IMAGENUITY, INC.
d/b/a eLINEAR
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended
December 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 281,844 220,501
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 4,413 2,880
Compensation expense on employee
arrangement 8.230 0
Changes in operating assets and liabilities:
Accounts receivable 34,816 (46,194)
Advances to employees (3,000) 0
Accounts payable 29,872 8,512
Accrued expenses (4,964) 13,920
Deferred income 9,250 0
78,707 (20,882)
Net cash provided by operating
activities 360,551 199,619
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (33,646) (7,373)
Increase in other assets (7,547) 0
Net cash used in investing activities (41,193) (7,373)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit 69,000 0
Payments on borrowings on line of credit (69,000) 0
Checks written in excess of bank balance 0 (18,391)
Sale of common stock,net of offering costs 957,705 0
Distributions to "S" corporation stockholders (335,560) (138,000)
Purchase and retirement of common stock (38,279) 0
Net cash provided by (used in)
financing activities 583,866 (156,391)
Net increase in cash and cash equivalents 903,224 35,855
Cash and cash equivalents at beginning of
year 36,269 414
Cash and cash equivalents at end
of year 939,493 36,269
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest 1,327 0
Cash received for interest (5,259) 0
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING TRANSACTIONS
Shares issued in reorganization 14,750 0
The accompanying notes are an integral part of these consolidated
financial statements
IMAGENUITY, INC.
d/b/a eLinear
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Significant Accounting Policies
Inagenuity, Inc. (the "Company") is a leading Internet
professional services firm providing strategic consulting,
creative design,technology services, and training to companies seeking
to capitalize on the Internet. The Company's current customers are
based in the United States. Historically, the Company's revenues
have been derived primarily from one customer.
Reorganization
On December 9, 1999, the Company completed a
reorganization with Kinetiks.com, Inc. ("Kinetiks") and its
wholly owned subsidiary, Elinear Corporation ("Elinear"). In
conjunction therewith, Kinetiks issued 10,000,000 shares of its
common stock and 250,000 shares of its preferred stock that is
convertible into 12,500,000 shares of its common stock for all of
the issued and outstanding common shares of the Company. This
reorganization has been accounted for as though it were a
recapitalization of the Company and a sale of shares by the
Company in exchange for the net assets of Kinetiks.
Principle of Consolidation
The accompanying financial statements include the
accounts of the Company and its wholly owned subsidiary. The
subsidiary has no operations.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with
an original maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of
cash equivalents and accounts receivable. All of the Company's
cash equivalents are held at high credit quality financial
institutions. Accounts receivables are typically unsecured and
are derived from revenues earned primarily from one client
located in the United States. The Company performs ongoing
credit evaluations of its client's financial condition and
maintains reserves for potential credit losses based upon the
expected collectibility of total accounts receivable. To date,
losses resulting from uncollectible receivables have not exceeded
management's expectations.
Fair Value of Financial Instruments
Financial instruments that are subject to fair value
disclosure requirements are carried in the financial statements
at amounts that approximate fair value and include cash and cash
equivalents, accounts receivables and accounts payable. Fair
values are based on quoted market prices and assumptions
concerning the amount and timing of estimated future cash flows
and assumed discount rates reflecting varying degrees of
perceived risk.
Property and Equipment
Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated
useful lives of the assets, generally three years.
1. Description of Business and Significant Accounting Policies, continued
Stock-Based Compensation
The Company accounts for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued to Employees." Accordingly, no
compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to
the fair market value of the Company's common stock at the date
of grant.
Revenue Recognition
Substantially all of the Company's revenues are derived
from professional services that are generally provided to clients
on a fixed-price, fixed-time basis. Revenues on fixed-price
engagements are recognized using the percentage of completion
method (based on the ratio of costs incurred to the total
estimated project cost at completion). Unbilled receivables
represent revenue recognized in advance of amounts billed.
Billings received in advance of services performed are recorded
as deferred revenues. Provisions for estimated losses on
contracts are made during the period in which such losses become
probable and can be reasonably estimated. To date, such losses
have not been significant. The Company reports revenues net of
reimbursable expenses that are billed to and collected from
clients.
Use of 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 revenue and expenses during the
reported period. Actual results could differ from those
estimates.
Income Taxes
Income taxes are accounted for under Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities
are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Per Share Amounts
Earnings per share represents the net income available
to common stockholders divided by the weighted average number of
common shares outstanding during the year. Diluted earnings per
share reflect the potential dilution that could occur if
securities to issue common stock were exercised or converted into
common stock.
Comprehensive Income
The Company follows Statement of Financial Accounting
Standards No. 130, `"Reporting Comprehensive Income." FAS 130
establishes standards for reporting and display of comprehensive
income and its components in the financial statements. For all
periods presented, there were no differences between reported net
income and comprehensive income.
2. Property and Equipment
Property and equipment consist of the following:
December 31,
1999
Computer equipment 43,275
Equipment 2,716
45,991
Less: accumulated depreciation (7,568)
38,423
Depreciation expense was $4,413 and $2,880 for the years ended
December 31, 1999 and 1998, respectively.
3. Credit Facilities
In April 1999, the Company secured a credit facility
with a bank that provided for borrowings of up to $50,000.
Borrowings under the credit facilities bore interest at the
bank's prime rate plus 2.25%. The credit facility was secured by
substantially all of the Company's assets and was repaid in
December 1999.
In November 1999, the Company secured an additional
credit facility with a bank that provided for borrowings of up to
$20,000. Borrowings under the line of credit bore interest at
the bank's prime rate plus 2.25%. The credit facility was
secured by essentially all of the Company's assets, and was
repaid in December 1999.
Interest expense incurred pursuant to these credit
facilities was $1,327 for the year ended December 31, 1999.
4. Lease Commitment
The Company leases office facilities for its corporate
operations conducted in Colorado under an operating lease that
expires in January 2002. The Company is required to make monthly
payments of $4,737, which includes the Company's proportionate
share of operating expenses. Additionally, during the year ended
December 31, 1999, the Company leased temporary office space on a
month-to-month basis prior to relocating to its corporate
offices. Rent expense was $23,429 and $5,413 for the years ended
December 31, 1999 and 1998, respectively.
Minimum future lease commitments under the noncancelable
operating lease are $56,844, $56,844, and $4,737 for the
years ending December 31, 2000, 2001 and 2002, respectively.
5. Common Stock
In October 1997, the Company issued 1,000 shares of its
common stock to two individuals for cash in the aggregate amount
of $1,000.
On March 1, 1999, the Company repurchased and retired
500 shares of its common stock by paying cash in the amount of $
33,279.
In May 1999, the Company issued to an individual 125
shares of its common stock in connection with an employment
agreement (the"Agreement"). The Company received no
consideration for the issuance of these shares. The Board of
Directors determined that the value of these shares would be
equivalent to the value of the shares purchased by the Company in
March 1999. Accordingly, the Company recorded $ 8,320 as stock
issuance expense and additional paid in capital. In October 1999,
Imagenuity and this employee severed their relationship and
Imagenuity purchased and retired these shares for $ 5,000. This
amount was returned to the Company and is included in the
accompanying financial statements in accrued liabilities. Prior
to the closing of the merger transaction described in Note 6, the
former shareholder threatened to bring an action against
Imagenuity, and in December 1999 filed suit against the Company.
(See Note 7)
In August 1995, the Company approved a stock option plan
under which up to 1,000,000 shares of the Company's common stock
could be issued. In June 1996, the stockholders approved an
amendment to the plan increasing the Company's total common stock
shares available under the plan to 1,600,000. Incentive and
nonqualified stock options may be granted to employees,
directors, and consultants of the Company. Incentive stock
options are granted at an exercise price of not less than 100%
(110% for individuals owning 10% or more of the Company's common
stock at the time of grant) of the stock's fair market value at
the time of grant. Nonqualified stock options may be granted at
an exercise price determined by the Company. The stock option
activity under this plan is as follows:
Option price
Options Per Share
Balance, January 1, 1997 495,500 $.50 to $7.00
Granted 0 0.00
Forfeited (53,000) $.50 to $3.69
Balance, December 31, 1998 442,500 $.50 to $7.00
Granted 70,000 1.00
Forfeited (151,250) $.50 to $7.00
Balance, December 31, 1999 361,250 $1.00 to $6.50
As of December 31, 1999, 361,250 shares were exercisable and
1,238,750 options are available for future grants. The options
are generally exercisable for up to ten years following the date
of grant.
In connection with various consulting and financing
arrangements, the Company has issued warrants to purchase the
Company's common stock at prices that range from $.25 per share
to the lesser of $1.25 per share or a 15% discount to the closing
bid price of the Company's stock price on the date of exercise.
The warrants are generally exercisable for a ten-year period and
provide for "piggy-back" registration rights for the underlying
shares at the request of the majority of the warrant holders.
Outstanding warrants were 1,895,000 and 2,195,000 at December 31,
1999 and 1998, respectively.
6. Merger Agreement
In October 1999, Imagenuity executed an Agreement and
Plan of Merger (the "Plan") with Kinetiks and Kinetiks' wholly
owned subsidiary Elinear Corporation. The Plan was subject to
Kinetiks successfully completing a private placement in the
amount of $1,000,000 from the sale of 2,500,000 shares of
Kinetiks common stock, the execution of an Inducement Agreement
whereby two shareholders of Kinetiks were to deliver a written
indemnity by which these two shareholders assumed and agreed to
hold Kinetiks, Elinear and the Company and their officers,
directors and shareholders harmless from Kinetiks liabilities,
and due diligence. Additionally, the Plan required that the sole
shareholder of the Company indemnify Kinetiks and Elinear from
and against any and all loss, liability, damage and expense
suffered or incurred by Kinetiks or Elinear resulting from or
arising out of the defense of the threatened action by a former
shareholder of the Company. In satisfaction of the requirement,
the sole shareholder of Imagenuity delivered to Kinetiks and
Elinear an Indemnification and Pledge Agreement covering
4,500,000 shares of stock.
The requirements of the Plan were satisfied on December 9,
1999, and the company received net proceeds from the private placement
in the amount of $957,705; accordingly, the Company was entitled to receive
22,500,000 shares of Kinetiks common stock. Because the
authorized number of common shares of Kinetiks was insufficient
to satisfy the number of shares to be issued to the sole
shareholder of Imagenuity, Kinetiks issued 10,000,000 shares of
its common stock and 250,000 shares of its preferred stock, that
is convertible into 12,500,000 shares of its common stock.
The Plan also provided that since Imagenuity was an S
corporation for income tax purposes, the sole shareholder of
Imagenuity was entitled to receive distributions of approximately
$315,000, to satisfy the income taxes that would be allocated to
this shareholder. The Company paid this shareholder approximately
$ 144,000 in October 1999, and paid the remaining portion in the
amount of approximately $ 171,000 in February 2000.
Upon the completion of the merger, the Company
terminated its S corporation status for income tax purposes. The
Company has presented proforma income expense in the consolidated
statement of operations which presents the income tax expense
that would have been recorded had the Company not been a pass
through entity for income tax purposes. The income tax effects
for the period from December 9, 1999 through December 31, 1999
are not material to the consolidated financial statements taken
as a whole.
7. Litigation
As discussed in Note 5, a former shareholder filed a
lawsuit against the Company alleging breach of his employment
agreement and filed suit against Kinetiks alleging breach of its
fiduciary obligation to deliver the proportionate number of
shares that the former shareholder claims is due to him pursuant
to the merger with Kinetiks. The lawsuit demands judgment
against Imagenuity and Kinetiks that would require Imagenuity and
Kinetiks to deliver to the former shareholder 20% of the issued
and outstanding shares of stock of Imagenuity or its equivalent
in shares of Kinetiks. The Company has filed an action against
the former shareholder requesting a declaratory judgment that the
former shareholder's interest in Imagenuity was terminated effective
October 4, 1999. The Company believes that the former shareholder's
action is without merit and plans to vigorously defend itself.
The Company believes that should it be unsuccessful in defending
itself, an unfavorable outcome would not have a material impact on
the financial statements taken as a whole.
8. Subsequent Events
Stock Option Plan
On March 31, 2000, the Company's board of directors
approved the 2000 Stock Option Plan (the "Plan") under which up
to 4,000,000 shares of the Company's common stock may be issued.
Under the Plan, incentive and nonqualified stock options may be
granted to employees, directors, and consultants of the Company.
Incentive stock options are granted at an exercise price of not
less than 100% (110% for individuals owning 10% or more of the
Company's common stock at the time of grant) of the stock's fair
market value at the time of grant. Nonqualified stock options
may be granted at an exercise price determined by the Company.
Pursuant to this plan, the Company granted 1,400,000 incentive
stock options and 296,000 nonqualified stock options to various
employees, directors and consultants. The options generally vest
over a four-year period and expire ten years from the date of
grant. The exercise price of the options granted was $1.97,
which approximated the fair market value at the date of grant.
Additionally on March 31, 2000, the Company granted
3,600,000 nonqualified options to two employees not pursuant to
any plan. These options vest of over a one-year period and
expire ten years from the date of grant. The exercise price of
these options was $1.97, which approximated the fair market value
at the date of grant.
Financing Arrangement
On April 12, 2000, the Company entered into a Letter of
Agreement for a Private Equity Line (the "Agreement") of Common
Stock with Swartz Private Equity ("Swartz"). The Agreement
provides that Swartz, upon satisfactory completion of due
diligence and the execution of a definitive agreement, shall make
a firm commitment to purchase shares of the Company's common
stock in a private placement at a purchase price equal to 92% of
the market price, as defined, and resell these shares under a
qualified prospectus. Subject to an effective registration
statement and for a period of three years, the Company, in its
sole discretion, has the right to "put" common stock to Swartz,
subject to certain restrictions relating to trading volume and
pricing criteria. The Company may not put more than $2 million
of common stock to Swartz at any given time. For each "put,"
Swartz shall receive an amount of warrants equal to 10% of the
number of shares purchased, exercisable at a price equal to 110%
of the market price of each "put."
As compensation to enter into the Agreement, the Company
granted Swartz a warrant to purchase 612,000 shares of the
Company's common stock that expire in 2005. Of these warrants,
204,000 are exercisable upon the completion of due diligence, 204,000
are exercisable upon the completion of a definitive agreement, and
204,000 are exercisable upon the sooner of six months from the
date of the Agreement or upon the effectiveness of a registration
statement. The exercise price is equal to the lesser of the
lowest closing bid price for five days prior to the execution of
the Agreement or the lowest bid price for five trading days prior
to the execution of the definitive agreement.
There can be no assurances that the company will successfully
negotiate a definitive agreement or complete a Registration Statement.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no changes in Kinetiks' principal independent
accountant in the prior two years. However, upon Kinetiks'
moving its executive offices to Florida, it intends to recommend
to the shareholders that they approve the appointment of an
independent accountant with offices in Florida.
ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by
reference to the Company's definitive proxy statement to be filed
by April 30, 2000.
ITEM 10: EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference to the Company's definitive proxy statement to be filed
by April 30, 2000.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by
reference to the Company's definitive proxy statement to be filed
by April 30, 2000.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference to the Company's definitive proxy statement to be filed
by April 30, 2000.
ITEM 13: EXHIBITS
NONE
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IMAGENUITY, INC. d/b/a eLinear
Date: 4/14/00 By:/s/ Jon V. Ludwig
Jon V. Ludwig,President
By:/s/Paul Thomas
Paul Thomas, Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> 12-31-2000
<PERIOD-END> 12-31-1999
<CASH> 939,493
<SECURITIES> 0
<RECEIVABLES> 32,490
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 974,983
<PP&E> 45,991
<DEPRECIATION> 7,568
<TOTAL-ASSETS> 1,020,953
<CURRENT-LIABILITIES> 56,590
<BONDS> 0
0
250
<COMMON> 17,500
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,020,953
<SALES> 761,300
<TOTAL-REVENUES> 761,300
<CGS> 0
<TOTAL-COSTS> 482,507
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,208
<INCOME-PRETAX> 281,844
<INCOME-TAX> 122,454
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179,390
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
