UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998 or
[ ] 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 000-21659
EDnet, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1273795
- --------------------------------- -------------------
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Union Street, San Francisco, California 94111
- ------------------------------------------- -----------
Address of principal executive offices (Zip Code)
Issuer's telephone number, including area code (415) 274-8800
--------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ( ).
Number of shares outstanding of the issuer's common stock as of December 31,
1998: 16,761,836
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
<PAGE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months ended December 31, 1998 & 1997
Three Months Ended
December 31 (Unaudited)
------------------------
1998 1997
Revenues: ---------- ---------
Equipment sales $ 244,521 $ 283,581
Installation and monthly fees 155,371 155,382
Web design and consulting 191,661 168,062
Usage and hosting fees 413,395 362,307
Other fess 22,610 39,325
---------- ---------
1,027,558 1,008,657
Cost of sales 704,882 678,104
---------- ---------
Gross Profit 322,676 330,553
Sales and Marketing expenses 136,841 150,722
General and Administrative expenses 279,100 150,692
---------- ---------
415,941 301,414
Income (loss) before other income
(expenses)and provision for income taxes (93,265) 29,139
---------- ---------
Other income (expense):
Interest income (expense) (498) (17,269)
Gain on sale of subsidiary
- Internet Business Solution 663,530 -
Gain on sale of investment - 248,334
Other income (expense) (632) -
---------- ---------
Total other income (expense), net 662,400 231,065
---------- ---------
Income (loss) before provision for income taxes 569,135 260,204
Income taxes 4,000 2,400
---------- ---------
Net income (loss) before extraordinary item 565,135 257,804
---------- ---------
Extraordinary item-gain on restructuring of
debt (no applicable income taxes) - 88,451
Net income (loss) $ 565,135 $ 346,255
========== =========
Basic income (loss) per share
income (loss) before extraordinary item 0.03 0.04
Net income (loss) 0.03 0.05
Diluted income (loss) per share
Income (loss) before extraordinary item 0.02 0.04
Net income (loss) 0.02 0.05
Weighted average number of shares outstanding 16,761,836 7,264,345
Effect of dilutive stock options and warrants 11,886,878
---------- ---------
28,648,714 7,264,345
========== =========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Part I. FINANCIAL INFORMATION
EDnet, Inc.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and September 30, 1998
ASSETS 12/31/98 9/30/98
(Unaudited) (Audited)
CURRENT ASSETS ----------- ----------
Cash $559,473 $88,470
Cash - restricted 100,000
Accounts Receivable, net of allowance
for doubtful accounts of $2,908 and $8,500 377,779 574,800
in December 31, 1998 and September 30, 1998 -
Note Receivable - related party 29,056 33,008
Inventories 149,749 122,986
Other Current Assets 23,702 5,427
----------- ----------
TOTAL CURRENT ASSETS 1,239,759 824,691
PROPERTY AND EQUIPMENT, NET 209,488 380,416
OTHER ASSETS 1,754 6,455
----------- ----------
TOTAL ASSETS $1,451,001 $1,211,562
========== ==========
LIABILTIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $362,467 $303,628
Accrued expenses 79,046 239,476
Deferred revenue 21,577 33,421
Line of credit - 8,214
Notes payable - Related Party 40,500 240,500
Current portion of capital lease obligations 15,147 17,147
----------- ----------
TOTAL CURRENT LIABILITIES 518,737 842,386
Capital Lease obligations 13,077 15,058
----------- ----------
TOTAL LIABILITIES 531,814 857,444
STOCKHOLDERS' EQUITY
Common stock; par value $0.001 per share
Authorized 50,000,000 shares, 16,761,836 issued
and outstanding as of December 31, 1998
and September 30, 1998 respectively 16,761 16,761
Capital paid in excess of par
value of common stock 6,755,443 6,755,443
Secured note receivable (283,746) (283,746)
Accumulated deficit (5,569,271) (6,134,340)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 919,187 354,118
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,451,001 $1,211,562
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Month ended December 31, 1998 and 1997
12/31/98 12/31/97
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
Net income (loss) $565,135 $(202,992)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 53,195 97,808
Provision for doubtful accounts 1,848 275
Noncash compensation expenses - 400,000
Gain from sale of assets - IBS (663,530) -
Decrease (increase) in other current assets (67,479) (14,425)
Decrease (increase) in accounts receivable 47,570 (147,655)
Decrease (increase) in inventory (26,763) 50,879
Increase (decrease) in accounts payable
and accrued expenses (196,593) (646,483)
Increase (decrease) in deferred revenue (25,965) (3,919)
----------- -----------
Net cash used in operating activities (312,582) (466,512)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (4,220) -
Sale of property and equipment - 10,354
Proceeds from sale of assets - IBS &
Breakthrough Software investment 1,000,000 307,495
----------- -----------
Net cash provided by investing activities 995,780 317,849
----------- -----------
Cash flows from financing activities:
Repayment on borrowings (308,214) (73,392)
Proceeds from borrowings 150,000 222,600
Payment on Settlement of Claim in Equity (50,000) -
Repayments on capital leases (3,981) (20,343)
----------- -----------
Net cash (used) provided by
financing activities (212,195) 128,865
----------- -----------
Net increase (decrease) in cash 471,003 (19,798)
=========== ===========
Cash at beginning of period 88,470 31,067
----------- -----------
Cash at end of period $559,473 $11,269
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
EDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the unaudited consolidated condensed
financial statements included herein have been prepared on a consistent
basis with the June 30, 1998 and June 30, 1997 audited consolidated
financial statements and include all material adjustments, consisting of
normal recurring adjustments, necessary to fairly present the information
set forth therein. As reported in the audited financial statements of June
30, 1998, the Company ("EDnet, Inc.") was burdened by substantial credit
restrictions from many of its major suppliers, and the Company also faced
substantial outstanding debts to financial consultants and investors. The
Company sought to address those problems, to the extent possible, by
seeking a substantial equity investment from an independent investor. To
that end, in June, 1998, the Company agreed to issue eight million five
hundred sixty-three thousand four hundred seventeen (8,563,417) shares of
the Company's Common Stock at a price of $0.1635 per share to Visual Data
Corporation ("VDC") of Pompano Beach, Florida. Subsequently, VDC paid for
the shares in cash, in securities and by issuing to EDnet a promissory note
secured by a second mortgage on the real property occupied by VDC in
Florida. EDnet also granted VDC options to acquire up to an aggregate of
6,542,722 shares of EDnet's common stock, subject to increase should EDnet
grant options or warrants to other parties. The transaction gave VDC
ownership of 51% of the outstanding securities of EDnet with a mechanism in
place for VDC to ensure that it retains majority ownership of the Company's
securities.
With the proceeds received from the VDC transaction at the end of fiscal
year ended June 30, 1998, the Company paid off or restructured its past due
accounts payables, notes payables and liens and thereby corrected many
problems. The majority of the Company's suppliers eased their credit
restrictions and now allow the Company to resume purchasing equipment on
credit. Similarly, the Company settled all of the substantial outstanding
claims of third parties based on services performed for the Company and
based on various promissory notes previously issued by the Company. As a
result of the restructuring, the Company has greater access to vendors and
is able to negotiate better terms.
The Company negotiated a $250,000 Line of Credit with Union Bank of
California in December, thus assuring the Company funds for expansion of
its present business plus new products and services to be introduced during
the balance of its fiscal year.
On December 11, 1998, the company completed the sale of substantially
all of the assets of EDnet's wholly-owned subsidiary Internet Business
Solutions, Inc. ("IBS"), a California corporation, to Enterprise
Communications Consulting, Inc., a Washington Corporation ("Buyer") and a
5
<PAGE>
wholly-owned subsidiary of Attachmate Corporation of Bellevue, Washington,
for a total of one million dollars, of which $100,000 was deposited into an
escrow account, to be released in full to the Company in increments upon
the termination of the statute of limitations governing certain potential
claims against IBS or the Buyer connected with the disposition of IBS's
assets, or upon the earlier agreement of the Buyer.
2. Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries Entertainment Digital Network, Inc. (EDN)
and Internet Worldwide Business Solutions, Inc. (IBS). All financial
information for IBS was included through December 18, 1998. Material
inter-company transactions and balances have been eliminated.
3. Gain (Loss) per Share
Basic earnings (loss) per share is computed using the weighted average
number of shares of common stock outstanding during the periods. Diluted
earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding during the year. The
computation of net income (loss) per share was as follows:
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
-------- ---------- --------
Three months ended
December 31, 1998:
Basic income (loss)
per share $(98,395) 16,761,836 Nil
Extraordinary item 663,530 $.04
Effect of dilutive stock
options and warrants - 11,886,878
-------- ---------- --------
Diluted earnings per share $565,135 28,648,714 $.02
======== ========== ========
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
-------- ---------- --------
Three months ended
December 31, 1997:
Basic income (loss) per share $ 9,470 7,264,345 Nil
Extraordinary item 336,785 $.05
Effect of dilutive stock
options and warrants - -
-------- ---------- --------
Diluted earnings per share $346,255 7,264,345 $.05
======== ========== ========
6
<PAGE>
At December 31, 1998 options and warrants, for the purchase of 1,391,643
common shares at prices ranging from $.375 to $2.50 per share, for which
the exercise price was greater than the average market price of common
shares were not included in the computation of diluted earnings per share
4. Research and Development
The Company incurred no research and development expense during the three
months ended December 31, 1998.
5. Notes Payable - Related Parties
On August 4, 1998, a Promissory Note ("Note") in the amount of $200,000 was
executed between the Company and Eric Jacobs ("Jacobs") a member of the
Company's and VDC's Board of Directors. The Company transferred the
principal to a Equipment Purchase Repo Account ("Account") an interest
bearing account. This Account was restricted to use solely for the purchase
of equipment to fulfill existing customer orders. This Note was paid in
full including accrued interest to December 31, 1998 on December 30, 1998.
Notes payable-related party consist of the following
Dec 31, Sep 30,
1998 1998
------- --------
Note payable to Eric Jacobs, a director of VDC
and EDnet, with original principal of $200,000
at 12% interest. The principal balance and
accrued interest is due on August 3, 1999.
Accrued interest payable as of September 30,
1998 is $3,814. - $200,000
Notes payable to an officer and employees,
interest at 6% per annum, uncollateralized.
Accrued interest payable as of December 31,
1998 is $13,044. The notes are subordinated to
the $250,000 credit line credit line discussed
below for a period of six months. Notes are
due on demand thereafter. 40,500 40,500
-------- --------
Total notes payable-related party $ 40,500 $240,500
======== ========
6. Secured Note Receivable - Related Party
A note receivable, at the face value of $283,746, due from VDC is part of
the payment resulting from VDC's purchase of 8,563,417 shares of the
Company's common stock. The note is secured by the acquired common stock
and a second mortgage. Principal payment of $56,749 plus interest is due
annually commencing July 1, 1999 until July 1, 2003; the note bears a fixed
interest rate of 7% per annum.
7
<PAGE>
At December 31, 1998 VDC owed the Company $27,403 for the purchase of
equipment and $8,979 of accrued interest on the note receivable.
7. Sale of Subsidiary
On December 4, 1998, the Company entered into a binding letter of intent
for the sale of asset of its subsidiary, IBS. As consideration for the IBS
assets, Buyer has paid a total of one million dollars ($1,000,000), of
which nine hundred thousand dollars $900,000 was paid to EDnet on December
18, 1998, the closing date of the transaction (the "Closing Date"). The
remaining one hundred thousand dollars ($100,000) was paid into an interest
bearing escrow account established for the benefit of EDnet and will be
released in full to EDnet in increments upon the termination of the statute
of limitations governing certain potential claims against IBS or the Buyer
connected with the disposition of IBS's assets, or upon the earlier
agreement of the Buyer.
8
<PAGE>
EDNET, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended December 31, 1998, the Company's revenues were
$1,027,558, a slight increase compared to revenues of $1,008,657 in the
comparable period last year. This quarter is affected by the holidays, where
production and post-production of media for the entertainment and commercials is
usually completed prior to December or postponed to the new year.
Gross Profit decreased to $322,676 or 31% of sales, in the three months ended
December 31, 1998 compared to $330,553 or 33% of sales, in the equivalent period
last year. This slight change was due to the profit margins sales mix difference
between the two quarters.
Operating expenses (including Sales & Marketing, and General & Administrative)
decreased slightly from $415,941 in the three months ended December 31, 1998
compared to $419,895 in the equivalent period last year.
Interest expense decreased dramatically from $10,615 in the prior equivalent
quarter to $498 in the quarter ending December 31, 1998. This was attributed to
the re-organization of the Senior Notes Payable in June, 1998. In the prior
three months ended December 31, 1997 other income included the sale of Preferred
Shares of Breakthrough Software, Inc., of $248,334 and the restructuring of
certain accounts payable debts of $88,451.
For the three months ended December 31, 1998, the Company incurred a net profit
of $565,135 or $0.02 per share based on a weighted average of 28,648,714 shares
outstanding, compared with a net profit of 346,255, or $0.05 per share based on
a weighted average of 7,264,345 shares outstanding in the prior year.
Following the investment in the company by Visual Data Corporation it had become
apparent that the web development resources at IBS duplicated existing
facilities at Visual Data. The Company completed the sale of all the assets and
certain liabilities of its wholly owned subsidiary, Internet Business Solutions
("IBS") for $1,000,000 in cash on December 11, 1998.
With the sale of the assets of IBS, the Company anticipates the loss of 20% of
its annual projected sales for fiscal 1999 and corresponding expenses. The
company intends to offset this loss with the continued growth of its core audio
networking business and the aggressive introduction of its video networking
services in Spring, 1999. In addition the Company's revenues will benefit from
the support of Visual Data's Internet business through expanded hosting and
broadcasting capabilities over the Internet.
The Company has executed a OEM Agreement with a new supplier of a video codec
and will be one of their major beta users during the months of March and April.
Over 50% of the Company's current audio network clients will have the need to
send or receive video material for their work. In addition Visual Data and its
partnership with PRNewswire will provide expanded short form video transmission
opportunities during the approval process.
9
<PAGE>
Financial Condition, Liquidity, and Capital Resources
At December 31, 1998, the Company's accumulated deficit was $5,569,272 and the
Company had a positive net working capital of $721,022. The Company's
accumulated deficit was reduced due to the net profit achieved primarily from
the sale of the assets of its subsidiary Internet Business Solution (IBS) during
the three months ended December 31, 1998. The Company's working capital improved
from a negative $96,354 on June 30, 1998 to a positive net working capital of
$721,022 at the end of the current period. This increase was due primarily to
sale of the assets of its subsidiary, IBS.
The Company believes that it has sufficient working capital to fund its current
plan of operation. In the event that the introduction of our new video
networking and webcasting services accelerate at a greater pace than
anticipated, the Company has available its Line of Credit with Union Bank of
California and several leasing lines that are presently in place.
Readiness for Year 2000
The Company continues to assess the nature and extent of the Year 2000 ("Y2K")
issues that it must address, and is confident that it has already taken or will
be able to complete the work required to make its systems, products and
infrastructure Y2K ready. The Company has determined that the primary impact, if
any, of Y2K problems would be relegated to certain management information
systems, not to any operating revenue generating systems or services that it
provides. The Company has ordered the upgrades to be installed by the end of
March 31, 1999, that are necessary for the accounting system to handle year end
issues. There may be certain computer hardware and software replacements that
are necessary to handle Y2K issues as well. These have also been ordered and
will also be in place by March 31, 1999.. There are no technological issues in
the hardware or software that the Company sells or rents to its clients that
will be affected by Y2K issues.
The Company plans is evaluating the Y2K readiness of its consultants, vendors
and suppliers. Where the Company determines that critical suppliers are not Y2K
ready, the Company will monitor their progress and take appropriate actions. In
particular, the telephone companies that supply the Company with services, must
be Y2K ready in order to avoid major billing errors. Though the Company may
experience some temporary delay in its ability to accurately rebill its
customers, it does not foresee any permanent liability, should some error occur
on the part of these suppliers. The Company believes that the Y2K date change
will not significantly affect the Company's ability to deliver products and
services to its customers on a timely basis; however, given the uncertain
consequences of failure to resolve significant Y2K issues, there can be no
assurance that any one or more such failures would not have a material adverse
effect on the Company.
Disclosure Pursuant to the Private Securities Litigation Reform Act of 1995
When used in this Management's Discussion and Analysis, the words "anticipate,"
"estimate," "expect," and similar expressions are intended to identify
forward-looking statements. These statements are subject to certain risks and
uncertainties, including, but not limited to, the following: risks associated
with fundraising and the company's ability to secure resources necessary to
fully develop business products; risks associated with mergers and acquisitions,
the nature of any transaction consummated, and the ability to successfully
10
<PAGE>
operate a merged entity; business conditions in the telecommunications,
entertainment, advertising and Internet-related industries, and the general
economy; competitive factors such as rival networking technology, competing
products, and competitive pricing; risks associated with development,
introduction, and acceptance of new products; the company's ability to manage
its rapid growth and attract and retain key employees; and other risk factors.
Actual results may differ materially from management expectations as discussed
here.
11
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
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
(a) (27) Financial Data Schedule, filed electronically.
(b) Form 8-K filed November 18, 1998 to report change the
fiscal year from one ending June 30 of each year to a fiscal year ending each
September 30. Thus the fiscal year of the registrant will begin on October 1,
1998 and will end September 30, 1999.
12
<PAGE>
(c) Form 8-K filed December 7, 1998 to report agreement to
sell substantially all the assets of the Company's wholly-owned subsidiary,
Internet Business Solutions, Inc., to Enterprise Communications Consulting,
Inc., a wholly-owned subsidiary of Attachmate Corporation of Bellevue,
Washington, for a total of one million dollars.
(d) Form 8-KA filed December 22, 1998 to report close of sale
of substantially all the assets of the Company's wholly-owned subsidiary,
Internet Business Solutions, Inc., to Enterprise Communications Consulting,
Inc., a wholly-owned subsidiary of Attachmate Corporation of Bellevue,
Washington, for a total of one million dollars, of which $100,000 was deposited
into an escrow account, to be released in full to the Company in increments upon
the termination of the statute of limitations governing certain potential claims
against IBS or the Buyer connected with the disposition of IBS's assets, or upon
the earlier agreement of the Buyer. Additionally, the Company submitted
Unaudited Condensed Consolidated Pro Forma Statements of Operations for the year
ended June 30, 1998 and the three months ended September 30, 1998, and an
Unaudited Consolidated Proforma Balance Sheet of the Company as of September 30,
1998, which reflected adjustments to EDnet's results of operations and EDnet's
balance sheet to give effect to the transaction discussed above as if such
transaction had occurred at the beginning of each period presented.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDNET, INC.
February 12, 1999 By: /s/Tom Kobayashi
-----------------------
Tom Kobayashi
Chief Executive Officer
By: /s/David Gustafson
-----------------------
David Gustafson
Secretary
14
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 659,473
<SECURITIES> 0
<RECEIVABLES> 380,687
<ALLOWANCES> (2,908)
<INVENTORY> 149,749
<CURRENT-ASSETS> 1,239,759
<PP&E> 985,689
<DEPRECIATION> (776,201)
<TOTAL-ASSETS> 1,451,001
<CURRENT-LIABILITIES> 518,737
<BONDS> 0
0
0
<COMMON> 16,761
<OTHER-SE> 1,186,172
<TOTAL-LIABILITY-AND-EQUITY> 1,451,001
<SALES> 0
<TOTAL-REVENUES> 1,027,558
<CGS> 704,882
<TOTAL-COSTS> 1,120,823
<OTHER-EXPENSES> 632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 498
<INCOME-PRETAX> 569,135
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 565,135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 565,135
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.02
</TABLE>
