U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-27633
INTERNET INFINITY, INC.
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(Name of small business issuer in its charter)
Delaware 0-27633 95-4679342
------------------------------- -------------- ----------------------
(State or other jurisdiction of (SEC File No.) (I.R.S. Employer
incorporation or organization) Identification Number)
3303 Harbor Boulevard, K-5, Costa Mesa, CA 92626
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(Address of principal executive offices)
310-318-2244
---------------------------
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
None None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
------------------------------
(Title of Class)
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[ ]
<PAGE>
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $1,424,525
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days: $992,625 computed by
reference to the $0.375 average of the bid and asked price of the Company's
Common Stock on June 26, 2000.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 10,373,196 shares of Common
Stock, $0.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (3) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The list documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990). None.
Transitional Small Business Disclosure Format (check one): Yes[ ] No[X]
<PAGE>
TABLE OF CONTENTS
Page
----
Item 1. Description of Business .......................................... 1
Item 2. Description of Properties ........................................ 9
Item 3. Legal Proceedings ................................................ 9
Item 4. Submission of Matters to a Vote of
Security Holders ........................................... 9
Item 5. Market for Common Equity and Related
Stockholder Matters ........................................ 10
Item 6. Management's Discussion and Analysis ............................. 12
Item 7. Financial Statements ............................................. 16
Item 9. Directors, Executive Officers and Control Persons ................ 17
Item 10. Executive Compensation .......................................... 19
Item 11. Security Ownership of Certain Beneficial Owners and
Management ................................................. 20
Item 12. Certain Relationships and Related Transactions .................. 21
Item 13. Exhibits and Reports on Form 8-K................................. 25
Signatures ................................................................ 26
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
Internet Infinity, Inc. (the "Company") was incorporated on October 27,
1995 in the State of Delaware. We raised $375,000 under Rule 504 in a
non-registered public offering of our common stock during the period August 1996
through July 1997. We conduct our business from our sales headquarters office in
Costa Mesa, California. We first had revenues from operations in 1996.
Our initial focus was on selling Internet software. However, by late
1996 we began experiencing significant product returns from our software sales.
Sam=s Club returned $237,000 of a $257,000 single order of a new Internet Access
program. Sam=s Club=s reason for the return was a lack of retail sales for this
type of product caused by competitors' low- or free-of-cost browser and other
Internet utility programs. By early 1997 our software sales were slipping toward
zero and Internet Infinity had to find an alternative revenue opportunity to
survive.
We first turned our attention and efforts to selling electronic media
duplication and packaging services offered by an unaffiliated company, Video
Magnetics, LLC. Internet Infinity had experience with videotape duplication and
CD-ROM from prior sales of our special interest video programs and Internet
software programs. In addition, the growing digital media market offered
compatible alternative electronic media opportunities to Internet Infinity. One
of Internet Infinity=s early software packages for the retail market included a
combination of CD and access to the Internet. The 70-year-old owner of Video
Magnetics had primarily sold, to small local companies, video tape duplication
services, CD-ROM duplication services, new low quality and used blank video
tapes, video tape packaging supplies and used video tape duplication equipment.
In December 1996, the owner of Video Magnetics said he wanted to get rid of the
business and retire as soon as possible. He advised Internet Infinity that he
believed a new owner would not want to continue the distribution arrangement
Video Magnetics had with Internet Infinity. Therefore, the only way to guarantee
Internet Infinity's right to distribute the products and retain the existing
customer base that came from Video Magnetics was to acquire Video Magnetics.
Accordingly, George Morris, our chief executive officer and a director with his
wife, Dawn Morris, the controlling shareholders of our company, through another
company, L&M Media, Inc., in which they have had a 98 percent ownership for over
ten years, bought Video Magnetics' business in early 1997. If the Morrises had
not acquired Video Magnetics, the sales to existing Video Magnetics customers
that had been turned over by Video Magnetics to Internet Infinity and the
availability of Video Magnetics' low-cost, in-house manufacturing facilities
would probably have been lost to any other new owner of Video Magnetics.
L&M Media, Inc., the acquirer of Video Magnetics' business, had produced
and created special interest video programs, such as how-to sports, home, auto
and business training.
On December 1, 1998, Apple Media Corporation, a wholly owned subsidiary
of L&M Media, Inc., assumed all responsibility for business operations of the
former Video Magnetics, Inc. Apple Media focuses on the manufacturing and
duplication of video, CD and related products. Apple Media Corporation, as a
wholly-owned subsidiary of L&M Media, Inc. is indirectly 98 percent owned by
George and Dawn Morris since George and Dawn Morris own 98 percent of L&M Media,
Inc.
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Apple Media Corporation is the major supplier of products to Internet
Infinity and its subsidiaries. It provides blank video, video packaging supplies
and duplication of video and CD Media on credit terms as needed by Internet
Infinity and its subsidiaries.
At the time we acquired Video Magnetics we also added to the Internet
Infinity business the distribution of better quality blank videotapes,
recordable compact discs ("CDRs") and pre-recorded video programs on numerous
subjects. L&M Media, Inc. and its wholly-owned subsidiary Apple Media
Corporation, source new suppliers of electronic media materials and components
at the annual industry "Replitech Exposition" and through the industry trade
publication "Tape & Disk Business." In addition, we continuously check supplier
prices and request price competition between suppliers. The business rationale
is to increase Internet Infinity sales with more products and services. The
licensed, pre-recorded video programs are owned by L&M Media, Inc., an
affiliated company 98 percent owned by George and Dawn Morris. Internet Infinity
contacts school distributors by telephone to offer these licensed programs.
Program subjects include "how-to" for various sports, cooking, home and auto
repair, lawn and garden, crafts, business success and computer software
training.
In July 1997 we started to accumulate the distribution rights to
twenty-five Health and Medical video programs owned by L&M Media, Inc., which is
98 percent owned by George and Dawn Morris, the controlling shareholders and
officers and directors of Internet Infinity. Acquiring distribution rights from
L&M Media for the first five programs in July 1997 was a starting point for
Internet Infinity to work with the business possibilities of developing an
on-line Internet health and medical library. In order, to control the rights to
all the programs currently available from L&M Media and stop L&M Media from
granting the distribution rights to another company. Internet Infinity agreed to
acquire the distribution rights from L&M Media for the remaining twenty
completed health and medical programs in February 1998. In early 1999 we
purchased, from L&M Media and from Hollywood Riviera Studio, the distribution
rights to five video modules on Personal and Sales Skill Development. Hollywood
Riviera Studios is the "dab" of Apple Realty, Inc., which is 100 percent owned
by George and Dawn Morris, the controlling shareholders and principal officers
and directors of Internet Infinity. We propose to commence the marketing of the
programs and the Personal and Sales Skill Development video modules at the end
of calendar year 2000. The marketing of the Health and Medical video has been
delayed until a suitable and profitable use can be located with a partner.
Ideally, a partner would have an interest in preparing and selling short one to
five minute video segments as content for traffic building on web sites. At this
time no such use or partner has been identified for the programs. However,
Internet Infinity is retaining a part-time consultant as of April 2000 to work
with the development of the Health and Medical library. The five modules of the
Personal and Sales Skill Development are: The need/benefit approach to making
friends and selling more, Identifying the problem, Developing the need, Dealing
with doubts and objections, Closing for the order.
The first "Internet Infinity Business to Business" web site
www.mlmhub.com has been launched in March 2000 and it plans to begin sales of
our Personal and Sales Skill Development product by December 2000. This new B2B
site focuses on persons with an interest in the direct selling profession. It
includes a "direct selling" store with business success books, audiotape
programs, videotape programs, blank videotape and CD, and video tape duplication
services. In addition, the MLMHUB site plans to provide information gathered
from news media and research for the visitor interested in direct selling by the
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December 2000. The funding to expand this site is coming from the operating
profit of Internet Infinity and from loans of approximately $50,000 from George
Morris, the President of Internet Infinity.
Business of Internet Infinity
Internet Infinity
* distributes electronic media duplication services and electronic
blank media;
* distributes prerecorded special interest video programs;
* distributes Internet web site services and CD authoring services;
and
* operates a business-to-business community web site for direct sales
professionals.
Products
We have four principal products and services:
* electronic media duplication and packaging services of three types -
* mini-CD Business cards,
* CD - compact disks, and
* video tape;
* blank media of two types -
* video tape, and
* CDR B Recordable Compact Disc;
* pre-recorded special interest video programs of six types -
* personal development knowledge and skill development; and
* computer training,
* health and medical,
* sports and exercise training,
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* children's crafts,
* home and auto repair, and
* Internet site development and marketing support in two areas -
* non-affiliated clients of Internet Infinity, and
* subsidiaries of Internet Infinity.
Suppliers and Sub-Contractors
-----------------------------
Our duplication services and blank media product orders are manufactured
and fulfilled by an affiliated company, Apple Media Corporation, at a cost of 80
percent of the total invoice amount billed by us to a customer including
shipping. Apple Media Corporation is a wholly-owned subsidiary of L&M Media,
Inc., which is 98 percent owned by George and Dawn Morris, the controlling
shareholders, officers and directors of Internet Infinity. Apple Media is solely
responsible for equipment leases, raw materials and components, manufacturing,
sub-contractors, packaging and shipping labor, management and physical plant
overhead. We, through our Electronic Media Central Corporation wholly owned
subsidiary, are responsible for sales force compensation, direct sales and
accounting clerical support and executive management out of our 20 percent of
the invoice discount amount. In addition, Apple Media Corporation also provides,
at a cost of $900 a month or $10,800 for the twelve-month fiscal year ended
March 31, 2000, office facilities, telephone, and utilities to our sales and
management staff. The $10,800 is an allowance included in the 80% cost of goods
paid by Electronic Media Central to Apple Media Corporation.
Our prerecorded video programs are manufactured, duplicated and shipped
by Apple Media at a cost of 20 percent of the total invoice amount billed by us
to a customer for all costs including shipping. There is a significantly lower
percentage cost of goods and higher percentage gross profit margin for the
pre-recorded programs versus blank media or duplications services. This
difference allows our Morris & Associates wholly owned subsidiary to retain the
remaining 80 percent of the sales revenue. Morris & Associates is responsible
for sales force compensation, direct sales and accounting clerical support,
executive management and product packaging out of its 80 percent. Morris &
Associates also pays a licensing royalty fee of between 10 percent to 20 percent
of the gross sales dollars to L&M Media, Inc. which owns the programs. However,
the 80 percent gross margin after cost of goods less royalties of 10 percent to
20 percent generates a net profit of 60 percent to 70 percent on sales of the
programs licensed from L&M Media.
Internet Infinity has a non-exclusive distribution license Agreement
from L&M Media for approximately 200 special interest video programs that
automatically renews each year on August 1 until terminated by either party
without cause with thirty days written notice. Termination by either L&M Media
or Internet Infinity would result in a loss of revenue to Internet Infinity.
Sales for the twelve-month period ended March 31, 2000 were $49,549 down 44.9
percent from $89,959 for the twelve-month period ended March 31, 1999. Internet
Infinity is planning to re-introduce the 200 special interest video programs
through a partner with a low cost Abudget - ($2.95-$3.95 retail) line in an
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attempt to increase sales. There is no way to determine when and if such a
partner will be found. Internet Infinity also holds exclusive distribution
licenses from L&M Media for 25 programs on Health and Medicine and from L&M
Media and Hollywood Riviera Studios for five modules of Personal and Sales Skill
Development programs. Any royalties owed by Internet Infinity to L&M Media from
sales of the 200 special interest programs may be applied to the balance due on
the stock subscription agreements between Internet Infinity, L&M Media and
Hollywood Riviera Studios that are associated with both the Health and Medical
and the Personal Sales Skills Development program rights obtained from L&M Media
and Hollywood Riviera Studios. The Personal Sales Skills Development programs
were originally developed by L&M Media but were refined and improved by
Hollywood Riviera Studios. L&M Media and Hollywood Riviera Studios share in all
royalties earned by the five Personal Sales Skills Development programs. L&M
Media, Inc. is 98 percent owned by George and Dawn Morris, the controlling
shareholders of Internet Infinity and its principal officers and directors.
Hollywood Riviera Studios is 100 percent owned by George and Dawn Morris.
Therefore, with the pooling of earned royalties owed to L&M Media, Internet
Infinity is not required to use cash for royalty payments to L&M Media until all
the stock subscription agreements are completely paid by L&M Media and Hollywood
Riviera Studios.
Our Internet design and marketing services delivered to nonaffiliated
customers have declined since first introduced in 1996 due to low cost and free
services offered by competitive Internet service providers. The increased
competition for the creation of smaller Web sites that led to lower prices for
these services and the reduction of the Internet Infinity staff in this area due
to a cash shortage caused Internet Infinity to reduce its offerings of Internet
design services in 1997, 1998 and 1999. It became expedient for Internet
Infinity to focus on video and CD products and services sales to generate cash
and financially survive in 1997. Although revenues from Internet design services
have declined to zero in early 1999, the opportunity to provide these services
to the visitors of our new, under-construction, Internet Infinity business site
will be pursued. We are now focusing our Internet site design and marketing
services for our own Internet product sales activities. Our current mission is
to help market the products and services of our subsidiaries and selected
clients with multimedia promotion and financial and transactional services to
facilitate successful trade on the Internet. Therefore, Internet Infinity plans
to utilize its experience and resources to launch successful Internet sites that
sell its products and services. Multimedia promotion with CD's and video can
communicate a story to prospects for products and services just as American On
Line has used CD's to communicate their information about their products and
services. The Morris and Associates, Inc. and Electronic Media Central Corp.
subsidiaries of Internet Infinity have experience in creating, duplicating and
distributing electronic media for clients that can be applied to its own sales
and prospecting efforts. In addition, Internet Infinity is currently seeking an
agency relationship to enable it to offer Internet merchant card services and
Internet shopping cart services to clients and subsidiaries. If creating this
agency is successful, Internet Infinity will offer these services in the fiscal
year ending 2001.
Internet Infinity is currently working with past employees who are now
acting as lower cost independent contractors to Internet Infinity for Internet
site design and development and for the creation of mini-CD electronic business
cards. We have launched a first business to business site at www.mlmhub.com that
will offer business productivity tools such as special books, training tapes and
electronics. In addition, a site is now complete and ready for improvement and
promotion for the sale of duplication services at (www.iiemc.com). The Internet
Infinity plan calls for the utilization of CD's and videos like NetScape,
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American On-line to promote these sites since we have experience and a low
internal cost with this media in addition to telemarketing activities.
Our newly promoted blank video Internet site (www.blankvideo.com) is
currently generating prospects and smaller orders. This web site is being
promoted to search engines through the submit-it service and we get a small
amount of inquiries from prospects for blank videotape. The inquiries are
followed up on the telephone or email by an Internet Infinity salesperson.
Internet Infinity is making a marketing resource commitment to promote this site
with telemarketing and on-line promotion commencing through the fourth quarter
of calendar 2000. Sales of blank videotapes over the last twelve months ended
March 31, 2000 were $58,094, and Internet Infinity management believes there is
an opportunity to increase sales though the blankvideo Internet site. The
management belief in the blankvideo tape opportunity must result in an undefined
substantial sales increase over the next fiscal year or the resource commitment
to pursue this product area will be reduced or eliminated.
The first "Internet Infinity Business to Business" site www.mlmhub.com
was launched in the first calendar quarter of 2000. This new Internet Infinity
business to business site will also provide new opportunities to sell marketing
services to non-affiliated customers. The Internet Infinity marketing plan calls
for offering web services to members as part of belonging to an Internet
Infinity community of businesses with similar interests. The client as a member
of the business community would purchase Internet page development services and
promotion services such as banner advertisements from Internet Infinity to help
sell their services to the community. Providing sales opportunities and market
research information about the member market to a client as part of the design
and promotion bundle of services from Internet Infinity creates more value to
the client than a simple Internet site design service. These extra client sales
opportunity and services is how Internet Infinity will differentiate its
Internet and marketing services from the many competitors that offer only
Internet site design services on a low price basis. There are too many
competitors to name for Internet design services, as listed in the telephone
yellow pages, on the Internet, in all newspapers and in many business
periodicals. It is difficult for Internet Infinity to compete on a price only
basis.
The functional relationship of our wholly owned subsidiaries, Electronic
Media Central Corporation and Morris & Associates, Inc., to Internet Infinity
facilitates the focus of sales activities and future growth on different
markets. Electronic Media Central targets the business customer/user, and Morris
& Associates targets the retailer or reseller to the consumer and education
markets. Internet Infinity uses different personnel and tactics to market to
these different markets. However, both subsidiaries share many of the same
Internet Infinity resources to prepare and fulfill orders and to avoid
duplication of fixed costs such as office, administration and shipping.
Distribution Methods
--------------------
We distribute our products both through in-house employee sales persons
and independent contractors working the telephone, fax, mail and the Internet.
Shipments are made throughout the United States with a majority in California.
Our sales representative employees are paid on a salary plus an
incentive bonus based on the gross profit generated each month. The independent
contractor sales persons are paid on a commission basis with an advance draw
against future commission. The sales representatives are responsible for
managing their account orders and customer service.
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Competition
-----------
The electronic blank media and duplication industry is highly
competitive. Large competitors such as Technicolor Corporation dominate the
large volume market from the movie studios and advertising premium business.
Numerous small regional competitors such as our company serve the smaller
regional business and nonprofit organization markets. We have over 200 customers
that have purchased more than once, and that constitutes our core customer base.
We compete with both price and customer services. Internet Infinity is
located close to competitive suppliers near the Pacific Coast ports of entry for
video materials from China and Korea and is constantly shopping for the best
price from competing suppliers. This allows us to compete better on price to our
customers. Internet Infinity management is constantly shopping the market for
better supplier products, services and prices concerning shipping, packaging and
materials that allow Internet Infinity to offer more value to its customers. In
addition, Internet Infinity monitors offers from competitors on the Internet,
through direct mail and through comparison-shopping, to remain competitive. With
Internet Infinity competitive prices and by offering special delivery service
with our truck in Southern California, special design consultation and fast
order fulfillment, customers are willing to leave their masters with us for
convenient repeat orders. Internet Infinity management has the flexibility to
handle many special duplication orders and situations at little or no extra
charge to the customer. Special services can include conversion from one master
format like one-inch videotape to a beta master before duplicating VHS copies.
Internet Infinity can do the conversion with Apple Media Corporation, an
affiliated company owned by George Morris, the president of Internet Infinity,
versus sending the conversion to an outside supplier at a higher cost. Apple
Media's cost to do such a transfer is only an insignificant few dollars, and
this cost is absorbed in the total cost to do the job. Internet Infinity sales
and management personnel are able to provide advice and assistance to a customer
as they prepare their job for duplication with Internet Infinity. Special
situations include handling special orders requiring faster turnaround time than
normal delivery. Internet Infinity tries to maintain a high level of customer
service to be competitive.
The pre-recorded video business of selling special interest programs for
the public has few customers in the form of large distributors like Baker and
Taylor, and there are many small independent production companies. "Special
interest" refers to how-to, information and other non-entertainment programs.
Examples of Internet Infinity special interest programs are how-to subjects
including various sports, cooking, home and auto repair, lawn and garden,
crafts, business success and computer software training tapes. We have
experienced a gradually declining sales over the past three years of our fully
priced line for consumers to only $49,549 for the twelve months ended March 31,
2000. We are considering new opportunities to sell these programs as a low
priced budget line for impulse purchases in retail stores at $2.95 to $3.95
retail. We have an existing trade relationships with GlobalVideo, Miles Kimball
and Click Smart that have supported sales for our programs in the past. Internet
Infinity currently sells prerecorded video programs on a non-contract limited
return basis. Our customers can return up to 20 percent of their total purchases
over the last twelve months for credit, not for cash, against future purchases.
Internet site development is an area that has become extremely
competitive over the past two years. Many services originally offered by us are
now free or are offered at very low cost from competitive Internet service
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providers. However, we will begin to promote these services to our existing
customer base and to non-affiliated associates of our new "Internet Infinity
Business to Business" web site as part of our community member value added
services. The first of several planned addresses for the site is: www.mlmhub.com
Advertising and Promotion
-------------------------
Our advertising and promotion is primarily electronic-media focused. We
engage in telephone and fax campaigns to prospect for new customers in the
electronic duplication and blank media business. In addition, we are attempting
to recruit straight-commission, independent-contractor sales representatives.
Dependence on Major Customers
-----------------------------
We are not dependent on any single major customer.
Patents, Trademarks and Licenses
--------------------------------
We plan to apply for an Internet Infinity trademark.
Government Approval and Regulations
-----------------------------------
We need no governmental approval for the design and marketing of our
electronic media. We are not aware of any proposed governmental regulations that
would affect our operations.
Year 2000 Computer Problems
---------------------------
We have determined that we do not face material costs, problems or
uncertainties about the Year 2000 computer problems. We have purchased new sales
and accounting software and hardware that are Year 2000 compliant. We anticipate
any problems with integrated circuits will be minimal in effect on the remaining
office equipment.
Research and Development
------------------------
We are budgeting approximately $50,000 in Fiscal Year 2001 for the
development of an "Internet Infinity Business to Business" site in addition to
using our internal non-cash company resources for this development. Our chief
executive officer, George Morris, as a loan will provide cash to Internet
Infinity to retain independent software and back-office information technology
sub-contractors for this development.
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Cost of Compliance with Environmental Laws
------------------------------------------
There are no environmental laws that impact any of our operations of
marketing and distributing electronic duplication and blank media, pre-recorded
video programs or Internet services.
Seasonality
-----------
Our sales are almost evenly distributed at this time across the year.
There are slight variations with the fall and winter exceeding the spring and
summers seasons for a variety of factors including vacation, school and holiday
cycles.
Employees
---------
We employ three full-time persons and three part-time persons.
New Products & Services
-----------------------
We have launched a new "Internet Infinity Business to Business"
eCommerce site www.mlmhub.com in March 2000 for the sale of business products to
help small businesses succeed. Products currently include duplication services
and blank video, audio, CD and packaging, books and will also ultimately include
software, tapes and electronics. We have signed an agreement with Ingram Book
Company, a national book distributor that will provide us with up to 38,000
business book titles. A prior agreement with Ingram Micro, a national computer
software distributor, has been abandoned at this time solely by Internet
Infinity due to a lack of resources to implement it in a timely manner. We plan
to start offering the new products in the last quarter of 2000.
ITEM 2. DESCRIPTION OF PROPERTIES
Apple Media Corporation ("AMC"), controlled by George and Dawn Morris,
provides Internet Infinity with approximately 800 square feet of office space in
Costa Mesa, California, and George Morris, chief executive officer of Internet
Infinity, provides it approximately 600 square feet in Redondo Beach,
California. Both locations with telephone and utilities are at a cost of $900 a
month total to Internet Infinity. However, the $900 per month is included as an
allowance in the 80% cost of goods Electronic Media Central pays Apple Media
Corporation. The space provided is part of Internet Infinity's distributorship
arrangement with AMC, and AMC may terminate the arrangement for free space at
any time with a 30-days notice to Internet Infinity. There is a large amount of
office space available for less than $2.00 a square foot within three miles of
the existing office. Internet Infinity reserves the right to move at any time.
ITEM 3. LEGAL PROCEEDINGS
Neither Internet Infinity nor its property is a party to any pending
legal proceeding or any known proceeding that a governmental authority is
contemplating.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Internet Infinity's Common Stock is quoted on the Electronic OTC
Bulletin Board. Its symbol is "ITNF."
During the last two fiscal years and the subsequent interim period for
which financial statements are provided, the range of high and low bid
information for our common stock is set forth below. The source of this
information is the OTC Bulletin Board.
The quotations reflect the inter-dealer prices without markup, markdown
or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
1997
----
<S> <C> <C>
1st Qtr. 2.5000 1.25
2nd Qtr. 1.5000 0.5625
3rd Qtr. 0.8750 0.4375
4th Qtr. 0.5625 0.25
1998
----
1st Qtr. 0.3125 0.1875
2nd Qtr. 1.3125 0.2300
3rd Qtr. 0.96875 0.5625
4th Qtr. 1.1200 0.4000
1999
----
1st Qtr. 1.7188 0.3750
2nd Qtr. 2.0625 0.3750
3rd Qtr. 0.6875 0.4800
4th Qtr. 0.53125 0.3500
2000
----
1st Qtr. 0.6000 0.3500
</TABLE>
On March 31, 2000 there were 10,373,196 shares of common stock
outstanding. There are 1,672,242 shares subject to outstanding options. No
shares are subject to securities convertible into such shares of stock.
Holders
As of March 31, 2000 there were approximately 45 holders of record of
our common stock. Some 1,483,280 shares of common stock are held in brokerage
accounts under the record name of "Cede & Co."
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Dividends
We have paid no cash dividends to our stockholders and do not plan to
pay dividends on our Common Stock in the foreseeable future. We currently intend
to retain any earnings to finance future growth.
Recent Sales of Unregistered Securities
During the past three years, Internet Infinity sold 3,598,138 shares of
our common stock in eight transactions exempt from registration pursuant to the
provisions of Regulation D, Rule 506 of the Securities and Exchange Commission.
No underwriters were used to effect the sales. The names of the persons who
bought the shares of stock, the dates the shares sold, the number of shares
issued, the prices paid in cash or services for the shares and the nature of the
consideration received by Internet Infinity are as follows.
<TABLE>
<CAPTION>
No. of
Shares Price per Nature of
Person Date Issued Share Consideration
------ ---- ------ ----- -------------
<S> <C> <C> <C> <C>
L&M Media, Inc. 07-30-97 125,000 $0.60 (1)
L&M Media, Inc. 02-27-98 2,142,897 $0.14 (1)
Kiowa Oil 03-24-98 100,000 $0.25 Cash
Newport Underwriters 03-24-98 100,000 $0.25 Cash
Thomas J. Kenan 03-24-98 50,000 $0.14 Legal Services
Gary Bryant 08-28-98 50,000 $0.50 Cash
Hollywood Riviera Studios 01-04-99 517,241 $0.29 (2)
George Morris 02-25-99 75,000 $0.25 (3)
Dawn Morris 02-25-99 75,000 $0.25 (3)
Thomas J. Kenan 03-28-00 60,000 $0.25 Legal Services
David G VanHorn 03-28-00 120,000 $0.25 (4)
Anna Moras 03-28-00 160,000 $0.25 (4)
Minh Nguyen 03-28-00 2,000 $0.25 (5)
Pac-Max Inc. 03-28-00 1,000 $0.25 (5)
Roger Casas 03-28-00 10,000 $0.125 (6)
Shirlene Bradshaw 03-28-00 10,000 $0.125 (6)
</TABLE>
(1) Assignment of distribution rights to 25 Health and Medical video programs.
(2) Assignment of distribution rights to five Personal Development and Sales
Skill Development training programs.
11
<PAGE>
(3) Reduction of debt owed by Internet Infinity to this person upon this
person's exercise of a stock option.
(4) Reduction of debt owed by Internet Infinity to this person by conversion to
shares of stock.
(5) Suppliers consulting services paid with shares of stock rather than cash.
(6) Employee exercise of stock option.
Internet Infinity's Common Stock presently trades on the OTC Bulletin Board.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The following table presents, as a percentage of sales, certain selected
financial data for the two fiscal years ended March 31, 1999 and March 31, 2000.
<TABLE>
<CAPTION>
Year Ended 3-31
2000 1999
------ ------
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 78.8 74.1
----- -----
Gross margin 21.2 25.9
Selling, general and
administrative
expenses 20.1 19.3
Interest Income .8 ---
----- -----
Net income (loss) before
income taxes 1.9 6.6
</TABLE>
Sales
-----
Sales increased by $112,073 from $1,312,452 in the fiscal year ended
March 31, 1999 to $1,424,525 in the fiscal year ended March 31, 2000, an
increase of 8.5 percent. The increase in sales was attributable primarily to an
increase of $152,523 in sales of Electronic Media Central from $1,222,453 in
1999 to $1,374,976 in 2000, an increase of 12.5 percent, and a decrease of
$40,410 in sales of Morris & Associates, Inc. from $89,959 in 1999 to $49,549 in
2000, a decrease of 44.9 percent. These changes were due, we believe, to an
increased effort by the sales representatives and the resulting increase in the
number of customers for Electronic Media Central products. The industry growth
for electronic media duplication has helped Internet Infinity sales. This trend
should continue with the proliferation of CD drives in computers, DVD players
and large installed base of videocassette recorders. In addition, the new
12
<PAGE>
management focus on blank videotape sales and www.mlmhub.com for Internet
Infinity is expected to continue with the management commitment of additional
resources. Internet Infinity is also expanding its telemarketing sales force to
prospect for sales of duplication services, blank media and accessory product
such as packaging materials. On the other hand, we have experienced gradually
declining sales over the past three years of our fully priced, special interest,
video line for consumers sold by Morris & Associates.
Gross Margin
------------
Gross margin decreased by $37,872 from $339,547, or 25.9 percent of
sales, in fiscal year 1999 to $301,675, or 21.2 percent of sales, in fiscal year
2000, a decrease in gross margin of 4.7 percent. This decrease is primarily
attributed to a cost of goods increase from an obsolete inventory markdown and
use for Morris & Associates. The Morris & Associates inventory was reduced by
$20,879. The decrease in gross margin was also attributable to a $1,365 increase
in gross margin of our Electronic Media Central subsidiary from $274,988 in 1999
to $276,353 in 2000, an increase of .5 percent, and a $39,237 decrease in gross
margin of Morris & Associates, Inc. from $64,559 in 1999 to $25,322 in 2000, a
decrease of 60.8 percent. There was an increased effort by the sales
representatives that resulted in an increase in the number of customers for
Electronic Media Central products. The increasing age of the original 200
special interest video programs licensed by Internet Infinity with gross profit
margins as high as 70 percent is leading to a gradual decrease in the sales of
these programs at their intended full retail price range of $9.95 to $19.95. In
addition, the increase in higher volume, lower 20 percent margin, duplication
sales reflects the increasing marketing opportunity for this product for
Internet Infinity. Therefore, the proportion of pre-recorded video program sales
to total sales should continue to decrease versus duplication. Reducing the
retail price of the pre-recorded video to a range of $2.95 to $3.95 will
increase unit sales, but it cannot be determined at this time whether total
revenue will increase enough to offset the trend in product sales.
Selling, General and Administrative Expense
-------------------------------------------
Selling, general and administrative expenses increased by $32,459 from
$253,866, or 19.3 percent of sales in fiscal year 1999, to $286,325, or 20.1
percent of sales in fiscal year 2000, an increase of 12.8 percent or only 0.8
percent if measured as a percent of sales. Morris & Associates had a bad debt
expense of $14,295 or 28.9 percent of sales to clean up accounts receivable in
fiscal year 2000 versus no write-off in 1999. Electronic Media Central had
$6,300 bad debt expense or .5% of $1,374,976 sales in the fiscal year 2000.
Insurance increased to $10,655 or .8 percent of sales for insurance expense in
fiscal year 2000 versus $5,532 or .4 percent in fiscal year 1999 primarily from
the new director and officer insurance premiums. Professional fees increased to
$48,685 or 3.4 percent of sales for fiscal year 2000 versus $21,959 or 1.7
percent of sales in fiscal year 1999. The higher accounting and legal fees were
the result of a Form 10-SB filing with the United States Securities and Exchange
Commission. Although the sale of Morris & Associates products is decreasing,
they still have low overhead before non-recurring bad debt expense. Essentially,
Morris & Associates sales are little more than simple order taking. Because
sales are increasing for Electronic Media Central and decreasing for Morris &
Associates, the operating expense increases are almost totally associated with
the Electronic Media Central operations.
13
<PAGE>
Royalties Expense
-----------------
Our distribution rights to both the health and medical programs and the
personal development and sales training programs require the payment of
royalties equal to fifteen percent of gross sales for the health and medical
programs and twenty percent of the gross sales of the personal development and
sales training programs. The royalties are owed to L&M Media and Hollywood
Riviera Studios, both of which are controlled by George and Dawn Morris,
controlling shareholders and principal officers and directors of Internet
Infinity. The three-year exclusive distribution rights granted to Internet
Infinity for these programs allow the royalties to be applied to the
extinguishment of the stock subscription agreement payments owed to Internet
Infinity by L&M Media and Hollywood Riviera Studios before any cash payment is
made to Internet Infinity. In addition, Internet Infinity has a similar but
non-exclusive distribution license from L&M Media for approximately 200
special-interest video programs for which it owes royalties equal to ten percent
of gross sales. Royalties owed to L&M from the sales of these L&M programs by
Internet Infinity are also applied to the subscription agreement balance due
from L&M Media.
The benefits to Internet Infinity in dealing with L&M Media programs can
be measured by the positive cash flow generated over the past two fiscal years.
Sales of these products have a high 80 percent gross margin before dilution
caused by the payment of royalties. For the year ended March 31, 1999, these
royalties accounted for $7,368 of the $64,519 gross margin obtained from the
sale of these products. For the year ended March 31, 2000, these royalties
accounted for $7,582 of the $24,277 gross margin obtained from the sale of these
products.
Net Profit (Loss)
-----------------
We had a net profit from operations, after a provision for income taxes,
in the fiscal year ended March 31, 1999 of $121,495, or $0.01 a share of our
common stock. In the fiscal year ended March 31, 2000 we had a net profit from
operations, after a provision for income taxes, of $16,937, or $0.002 a share of
common stock. The profit of 1.9 percent of sales for fiscal year 2000 versus the
9.2 percent for the fiscal year ended 1999 is due to the 7.8 percent increase in
sales in fiscal year 2000 of $1,424,525 over fiscal year 1999's $1,312,452 while
operating expenses increased by 12.8 percent from $253,666 for fiscal year 1999
to $286,325 for fiscal year 2000.
Balance Sheet Items
-------------------
Net income from operations of $16,937 for the fiscal year ended March
31, 2000 reduced the retained earnings deficit from $445,886 on March 31, 1999
to $428,949 on March 31, 2000. In addition, the conversion of $70,000 of note
debt to 280,000 shares of common stock and the exercise of 20,000 shares of
employee stock options for $2,500, the payment of $15,000 legal fees with 60,000
shares and $750 in consulting fees with 3,000 shares in fiscal 2000 all
increased the paid in capital to $997,546 at March 31, 2000. Our cash position
decreased from $64,458 for the fiscal year ended March 31, 1999 to $20,049 for
the fiscal year ended March 31, 2000. Accounts receivable from non affiliates
decreased from $129,537 at the end of fiscal year 1999 to $116,780 at the end of
fiscal year 2000, while inventory decreased from $59,918 to $39,039 at the end
of fiscal year 2000.
14
<PAGE>
Liquidity and Outlook
---------------------
We have been able to stay in operation only (1) with the services
provided by Apple Media Corporation, a wholly-owned subsidiary of L&M Media,
Inc., a supplier of electronic media duplication services and blank electronic
media, which is under the control of George and Dawn Morris, the controlling
shareholders and principal officers of Internet Infinity and (2) from the cash
flow generated for Internet Infinity from the sale of high gross margin,
pre-recorded video licensed from L&M Media, Inc. and Hollywood Riviera Studios,
a d/b/a of Apple Realty, Inc., which is 100 percent owned by George and Dawn
Morris. With both the lack of sales and the returns of Internet Infinity
software from retail customers in early 1997, Internet Infinity was in jeopardy
of failing with large accounts payable balances and little cash or accounts
receivable available to pay debts. George and Dawn Morris personally advanced
funds to Internet Infinity. They also acquired Video Magnetics, an insolvent
electronic media duplication company with their personal cash and proceeded to
turn around the situation for the benefit of Internet Infinity, Inc. and its
sales and survival. Since early 1997, sales from electronic blank media and
duplication services have continued to grow and provide the funds to reduce
Internet Infinity debt and to create a new Internet product and service line.
Internet Infinity has been developing for over one year a small business site
called www.mlmhub.com, an "Internet Infinity Business to Business" site launched
in March 2000. The site will be used for the sale of business productivity
books, software, tapes, electronics and supplies. George Morris has loaned funds
to Internet Infinity to aid in the development of the site and is providing a
personal development and sales training program in exchange for company stock
granted to Hollywood Riviera Studios, a company he controls.
Internet Infinity management believes that we will generate sufficient
cash flow to support operations during the twelve months ended March 31, 2001.
Sales continue to grow, and Internet Infinity continues to generate a net profit
and positive cash flow from operations.
In addition to cash provided from operations, stock subscription
payments from L&M Media and Hollywood Riviera Studios - both controlled by
George Morris - and additional loans from George Morris, the president of
Internet Infinity, for the further development of the Internet Infinity
eCommerce sites will provide additional cash to Internet Infinity. A credit line
for $25,000 from George Morris as well as a trade credit from Apple Media, Corp.
will support the cash flow needs of Internet Infinity.
The $93,492 notes payable owed to a group of investors could be paid
from additional lines of credit, operations' cash flow and additional officer
loans. Internet Infinity carries an accounts receivable insurance policy with
CNA Insurance to indemnify it against any large bad debts.
The most serious factors affecting the liquidity of Internet Infinity in
the fiscal year ending March 31, 2000 have been slow-pay accounts receivable and
returns from retailer customers that bought special interest video programs and
computer software products from Morris & Associates. Internet Infinity has
stopped doing business with these "slow paying" accounts. The payment record of
our existing customers has been good with low bad debt losses for over two years
from duplication services customers. Accordingly, management believes the risk
of non-payment in the future has been reduced. In addition, Internet Infinity
accounts receivable are insured against loss by CNA Insurance to further protect
Internet Infinity from loss.
15
<PAGE>
The trade relationship between Internet Infinity and L&M Media, which is
owned 98 percent by George Morris, president of Internet Infinity, has resulted
in a $245,560 note receivable to Internet Infinity from L&M Media. The current
amount of $30,000 is due and payable at the rate of $3,000 or more per month
plus six percent simple interest commencing June 30, 2000. This is an extension
from the original March 31, 2000, plus 6 percent interest, due date for the
entire balance. This note receivable from L&M Media is partially secured by
George Morris using the $147,141 notes due to him by Internet Infinity, Inc.
Payment of the note will generate additional cash flow. Internet Infinity has
received an extension on note payments due to George Morris now payable at the
rate of $3,000 or more per month plus six- percent simple interest commencing
June 30, 2000 to match the cash flows.
ITEM 7. FINANCIAL STATEMENTS
There appears below the following financial statements of Internet Infinity:
Report of Independent Auditor ......................................... F-1
Consolidated Balance Sheet at March 31, 2000........................... F-2
Consolidated Statements of Operations for the Years Ended
March 31, 2000 and March 31, 1999 ................................ F-3
Statements of Changes in Stockholders' Equity
for the Years Ended March 31, 2000 and
March 31, 1999 ................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2000 and March 31, 1999 ................................ F-6
Notes to Consolidated Financial Statements
March 31, 2000 ................................................... F-8
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Internet Infinity, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Internet
Infinity, Inc. (a Delaware Corporation) and its Subsidiaries (California
Corporations) as of March 31, 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the two years ended March
31, 2000. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Internet Infinity,
Inc. and Subsidiaries as of March 31, 2000, and the results of their operations
and their cash flows for the two years ended March 31, 2000 in conformity with
generally accepted accounting principles.
/s/ Caldwell, Becker, Dervin, Petrick & Co.
-----------------------------------------------
CALDWELL, BECKER, DERVIN, PETRICK & CO., L.L.P.
Woodland Hills, California
July 6, 2000
F-1
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
ASSETS
<TABLE>
CURRENT ASSETS
<S> <C>
Cash $ 20,049
Accounts receivable, net of allowance for
doubtful accounts of $6,500 (Notes 2 and 9) 116,780
Inventory (Note 2) 39,039
Note receivable - related companies - current (Note 7) 31,500
Net current deferred tax asset (Note 10) 28,577
Prepaid expenses 1,516
-----------
Total Current Assets 237,461
-----------
PROPERTY AND EQUIPMENT, AT COST (Note 2)
Office equipment 16,955
Office furniture 15,366
-----------
32,321
Less Accumulated Depreciation (32,321)
-----------
Net Property and Equipment --
-----------
OTHER ASSETS
Note receivable - related company (Note 7) 215,560
Programming costs, net (Note 5) 7,617
-----------
Total Other Assets 223,177
-----------
Total Assets $ 460,638
===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-2
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
MARCH 31, 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
CURRENT LIABILITIES
<S> <C>
Notes payable (Note 6) $ 93,492
Accounts payable and accrued expenses 48,960
Accounts payable - related company (Note 7) 84,689
Accrued payroll 3,212
Interest payable 1,125
Income tax payable 1,600
Due to officer - current (Note 8) 30,000
Due to related company (Note 7) 2,000
-----------
Total Current Liabilities 265,078
LONG-TERM LIABILITIES
Due to officer - non-current (Note 8) 117,141
-----------
Total Liabilities 382,219
-----------
STOCKHOLDERS' EQUITY (Page F-6)
Preferred stock, par value $.001;
authorized 1,000,000 shares; issued
and outstanding 0 shares --
Common stock, par value $.001;
authorized 20,000,000 shares; issued
and outstanding 10,373,196 shares 10,373
Paid-in capital 997,546
Retained earnings (deficit) (428,949)
Unpaid stock subscription (500,551)
-----------
Total Stockholders' Equity 78,419
-----------
Total Liabilities and Stockholders' Equity $ 460,638
===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
REVENUE (NET) $ 1,424,525 $ 1,312,452
-------------- --------------
COST OF SALES
Beginning inventory 59,918 65,175
Purchases (Note 9) 1,099,836 961,923
Labor and video costs 2,135 5,725
-------------- --------------
1,161,889 1,032,823
Less ending inventory 39,039 59,918
-------------- --------------
Total Cost of Sales 1,122,850 972,905
-------------- --------------
Gross Profit 301,675 339,547
OPERATING EXPENSES (Page F-21) 286,325 253,666
-------------- --------------
Net Income Before Other
Income (Expense) 15,350 85,881
OTHER INCOME (EXPENSE)
Interest income (Note 7) 11,024 --
-------------- --------------
Net Income Before Income Taxes 26,374 85,881
(PROVISION) BENEFIT FOR INCOME TAXES (Note 11)
Current (1,600) (800)
Deferred (7,837) 36,414
-------------- --------------
Net Income $ 16,937 $ 121,495
============== ==============
Basic net income per share (Note 12) $ .00 $ .01
============== ==============
Diluted net income per share (Note 12) $ .00 $ .01
============== ==============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Additional Unpaid Total
Paid-In Accumulated Stock Stockholders'
Shares Amount Capital (Deficit) Subscription Equity
----------- ------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998 8,575,714 $ 8,576 $ 795,924 $ (567,381) $ -- $ 237,119
Reclassification of
unpaid
portion of stock
subscriptions
(Note 3) -- -- -- -- (356,883) (356,883)
Issued in consideration
for note conversion 300,000 300 37,200 -- -- 37,500
Issued in consideration
for prepaid royalties 1,034,482 1,034 148,966 -- (150,000) --
(Note 3)
Common stock for cash 100,000 100 24,900 -- -- 25,000
Non cash dividend (Note 4) -- -- (108,131) -- -- (108,131)
Fair market value for
expenses -- -- 10,800 -- -- 10,800
(Note 7)
Net Income at March 31, -- -- -- 121,495 -- 121,495
1999
----------- ------- ---------- ---------------------------------------
Balance at March 31, 1999 10,010,196 10,010 909,659 (445,886) (506,883) (33,100)
Issued in consideration
for notes conversion
(Note 14) 280,000 280 69,720 -- -- 70,000
Issued in consideration
for
professional services
(Note 15) 63,000 63 15,687 -- -- 15,750
Issued in consideration
with 20,000 20 2,480 -- -- 2,500
exercise of options
(Note 13)
Issued in consideration of
employee loan receivable
(Note 13) -- -- -- -- (1,250) (1,250)
Royalties earned (Note 3) -- -- -- -- 7,582 7,582
Net Income at March 31, -- -- -- 16,937 -- 16,937
2000
----------- ------- ---------- ------------ ------------ -------------
Balance at March 31, 2000 10,373,196 $ 10,373 $ 997,546 $ (428,949) $(500,551) $ 78,419
=========== ======= ========== ============ ============ ============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
--------- ---------
CASH FLOWS PROVIDED (USED ) BY OPERATING
ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 16,937 $ 121,495
Adjustment to reconcile net income to
cash provided (used) by operating activities:
Rent, telephone and utilities related to paid
in capital increase -- 10,800
Professional fees related to stock issued 15,750 --
Amortization of programming costs 9,778 5,970
Royalty expense used against unpaid stock 7,582 7,368
subscription
(Increase) decrease in accounts receivable 16,257 (36,076)
(Decrease) in allowance for doubtful accounts (3,500) (15,000)
Decrease in inventory 20,879 5,257
Increase (decrease) in accrued payroll (915) 4,127
(Increase) in prepaid expense (1,516) --
Increase (decrease) in interest payable (2,065) 3,190
(Decrease) in accounts payable (2,163) (68,863)
Increase (decrease) in accounts payable - (63,026) 147,715
related company
Increase in income taxes payable 1,600 --
(Increase) decrease in deferred tax asset 7,837 (36,414)
--------- ---------
Net Cash Flows Provided by
Operating Activities 23,435 149,569
--------- ---------
CASH FLOWS PROVIDED (USED) BY INVESTING
ACTIVITIES:
(Increase) in programming costs (11,426) --
Deposit -- 600
--------- ---------
Net Cash Flows (Used) by
Investing Activities (11,426) 600
--------- ---------
CASH FLOWS PROVIDED (USED) BY FINANCING
ACTIVITIES:
Increase (decrease) in note receivable -
related companies (59,351) (115,809)
Increase (decrease) in due to officer 577 (4,929)
Decrease (increase) in note payable 1,106 (583)
Common stock issued 1,250 25,000
-------- ---------
Net Cash Flows (Used) by Financing (56,418) (96,321)
Activities
-------- ---------
NET INCREASE (DECREASE) IN CASH (44,409) 53,848
CASH - BEGINNING OF THE YEAR 64,458 10,610
-------- ---------
CASH - END OF THE YEAR $ 20,049 $ 64,458
======== =========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-6
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
--------- ---------
ADDITIONAL DISCLOSURES:
<S> <C> <C>
Interest paid $ 4,875 $ 5,000
========= =========
Taxes paid $ -- $ 800
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unpaid stock subscription issued for prepaid
royalties (Note 3) $ 7,582 $ 150,000
(Note 3)
========= ==========
Notes payable converted to stock $ 70,000 $ 37,500
========= ==========
Non-cash dividend (Note 4) $ -- $ 108,131
========= ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-7
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 - ORGANIZATION AND PRESENTATION
Organization
Internet Infinity, Inc. (III) was incorporated in the State of Delaware on
October 27, 1995.
On April 1, 1998, Morris and Associates, Inc., (M&A) was incorporated in
California. Morris and Associates Inc. (formerly a division of Internet
Infinity, Inc.) is owned 100% by III. M&A is licensed to distribute special
interest video programming to educational and consumer distributors for health
and medical titles, and computer software training including internet
information, golf, sports, home and garden titles.
On April 1, 1998, Electronic Media Central Corporation (EMC) was incorporated in
California. Electronic Media Central Corporation (formerly a division of III) is
owned 100% by III. EMC is engaged in the sale of blank electronic media such as
video tapes and the duplication, replication and packaging of DVD's, CD's, video
tapes and audio tapes.
The Company has registered the web address: www.ib2b.com for its new eCommerce
trade center. The new "ib2b.com" site will offer a variety of productivity
increasing products and services for business. The site will support both
distributors and manufacturers offering services in a cooperative marketing
eCommerce environment.
The Company declared a 2 for 1 stock split on March 17, 1999 to shareholders of
record on that date. The number of shares increased by 5,005,098 to 10,010,196.
This split has been shown retroactively.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Internet Infinity,
Inc. and its wholly owned subsidiaries, Morris & Associates, Inc. and Electronic
Media Central Corporation. All significant inter-company transactions and
balances have been eliminated in the consolidation.
Reclassifications
Certain prior year balances have been reclassified to conform with the current
year presentation.
Inventory
The Company's inventory (all on the books of "M & A"), consists of the
following:
Duplicated tapes and display boxes $ 39,039
============
Duplicate tapes and display boxes are valued at the lower of cost or market
(first-in, first-out basis). Inventory has been written down by $20,879 for
possible obsolescence for the year ended March 31, 2000.
F-8
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation
The Company's equipment and furniture are carried at cost. Depreciation is
provided over the estimated useful lives of the assets, which are fully
depreciated.
Long-Lived Assets
In 1999, the Company adopted SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." In accordance
with SFAS 121, long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicated that the
carrying amount of an asset may not be fully recoverable. For purposes of
evaluating the recoverability of long-lived assets, the estimated future cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash and cash
equivalents to include cash on hand, bank balances and short-term investments
with a maturity of three months or less.
Deferred Income Tax Accounts
Deferred tax provisions/benefits are calculated for certain transactions and
events because of differing treatments under generally accepted accounting
principles and the currently enacted tax laws of the federal government. The
results of these differences on a cumulative basis, known as temporary
differences, result in the recognition and measurement of deferred tax assets
and liabilities in the accompanying balance sheet. The liability method (FASB
109) is used to account for these temporary differences.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Accordingly,
actual results could differ from those estimates.
Year 2000 Compliance
Management does not believe any material year 2000 problems with the Company's
vendors, service providers, or other third parties will affect the Company's
financial information. As of the date of this report, the Company has not
experienced any year 2000 problems.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion (APBO) No.
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock-based compensation and to provide the disclosures
required under Statement of Financial Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation."
F-9
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation (Continued)
APBO No. 25 requires no recognition of compensation expense for most of the
stock-based compensation agreements provided by the Company where the exercise
price is equal to the market value at the date of grant. However, APBO No. 25
requires recognition of compensation expense for variable award plans over the
vesting periods of such plans, based upon the then-current market values of the
underlying stock.
In contrast, SFAS No. 123 requires recognition of compensation expense for
grants of stock, stock options, and other equity instruments over the vesting
periods of such grants, based on the estimated grant-date fair values of those
grants. See Note 14 for pro forma disclosures required by FAS 123 plus
additional information on the Company's stock options.
Accounts Receivable
Uncollectible accounts receivable are written off as bad debt expense at the end
of each year. For the fiscal year ended March 31, 2000, bad debt expense totaled
$32,565. Allowance for bad debts are recorded at 5% of accounts receivable.
Increase or decrease in the allowance for bad debts is offset against bad debt
expense. For the fiscal year ended March 31, 2000, allowance for bad debts were
reduced by $3,500 bringing its balance to $6,500.
Revenue Recognition
Income and expenses are recorded on the accrual basis of accounting. Revenue is
recognized from sales when a product is shipped, collection is probable and the
fee is fixed and determinable. Expenses are recognized when incurred.
Segment Reporting
The Company is a single segment reporting entity. At the current time all sales
and related expenses are from video media programs, which includes tapes and
CD's.
Earnings Per Share of Common Stock
The Company adopted Statement of Financial Accounting Standards No. 128 -
Earnings Per Share (SFAS No. 128) in the fourth quarter of fiscal 1999. SFAS No.
128 is intended to simplify the earnings per share computations and make
them more comparable from company to company. All prior year earnings per share
amounts have been recalculated in accordance with the earnings per share
requirements under SFAS No. 128; however, such recalculation did not result
in any change to the Company's previously reported earnings per share for all
years presented.
NOTE 3 - SUBSCRIPTION AND ROYALTY AGREEMENTS
The Company has royalty agreements with two separate related entities. In July
1997, the Company entered into an agreement with L&M Media, Inc. for the rights
to market pre-recorded health and medical programs. The agreement specifies that
the Company shall pay a 15% royalty to L&M Media, Inc. on gross sales for all of
these programs sold between April 1, 1998 and March 31, 2001. In consideration
for these rights, the Company entered into a stock subscription agreement for
2,267,857 shares of common stock, with a trading value of $375,000. Royalties
earned will go toward the reduction of the stock subscription obligation. George
Morris, President of Internet Infinity, Inc. owns 98% of the stock of L&M Media,
Inc.
F-10
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 3 - SUBSCRIPTION AND ROYALTY AGREEMENTS (CONTINUED)
In January 2000 the Company entered into an agreement with Apple Realty, Inc.
(DBA Hollywood Riviera Studios), for the rights to market pre-recorded personal
and sales development multimedia success programs. The agreement specifies that
the Company shall pay a 20% royalty to Apple Realty, Inc. on gross sales for all
of these programs sold between April 1, 1999 and March 31, 2001. In
consideration for these rights, the Company entered into a stock subscription
agreement for 517,241 shares of common stock, with a trading value of $150,000.
In addition the Company issued 517,241 options at a market price of $.3135 per
share (See Note 13). Royalties earned will go toward the reduction of the stock
subscription obligation. George Morris owns 100% of the stock of Apple Realty,
Inc.
Currently, the royalty agreement amounts of $375,000 and $150,000, less the
royalties earned of $25,699 are included in the equity section as unpaid
subscription receivable. During the fiscal year ended March 31, 2000, royalties
earned were $7,582.
In addition, the Company has a non-exclusive distribution license from L&M Media
Inc. for approximately 200 special interest video programs for which it has not
prepaid any royalties. Royalties owed to L&M Media Inc., from the sales of any
special interest programs, are applied to the prepaid royalties associated with
the health, medical and sales development training programs.
NOTE 4 - NON CASH DIVIDEND
At March 31, 1998, the Company had an investment of $108,131 in a wholly owned
subsidiary, More Media, Inc. In 1999, the Company distributed its stock in More
Media, Inc. to the Company's stockholders as a noncash dividend.
NOTE 5 - PROGRAMMING COSTS
Programming costs, consisting of video production and editing, and web site
development costs which are capitalized and amortized over three years.
Accumulated amortization was $21,716 at March 31, 2000. Additional program
development costs incurred during the fiscal year ended March 31, 2000 totaled
$11,426. For the fiscal year ended March 31, 2000 and 1999, the amortization
expense was $9,778 and $5,970, respectively.
NOTE 6 - NOTES PAYABLE
The Company has nine notes payable with various unrelated individuals, totaling
$93,492. The notes are due upon 90 days written notice from the individuals. The
notes are unsecured, with interest ranging from 6% to 12% payable quarterly. The
notes have been outstanding since 1990. Interest expense related to these notes
totaled $9,220 for the fiscal year ended March 31, 2000.
F-11
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 7 - RELATED COMPANIES TRANSACTIONS
<TABLE>
<CAPTION>
2000 1999
---------- ---------
Note receivable from L&M Media, Inc., payable
at $36,526 per year, plus interest
at 6% per annum. Monthly installments of
$3,000, due beginning June 30, 2000.
L&M Media, Inc. is 98% owned by George Morris,
<S> <C> <C>
President of Internet Infinity, Inc. $ 245,560 $ 187,710
Less Current Portion 30,000 36,526
---------- ----------
Long-Term Portion $ 215,560 $ 151,184
========== ==========
Trade accounts payable to Apple Media Corporation.
Apple Media Corporation is owned 98% by George
Morris. As of the fiscal year ended March 31,
2000, Apple Media became a subsidiary of L&M Media,
Inc. (See Note 9) $ (84,689) $(147,715)
========== ==========
Loan receivable from Apple Realties, Inc., without
interest. There are no specific terms of repayment. $ 1,500 $ --
========== ==========
Loan payable to Morris Financial, without interest.
Loan was paid subsequent to year end. Morris
Financial is owned 100% by George Morris. $ (2,000) $ (2,000)
========== ==========
</TABLE>
Interest income accrued for note receivable from L&M Media, Inc. totaled $11,024
for the year ended March 31, 2000. L&M Media's note receivable is secured by
George Morris, President of the Company. Mr. Morris is using the notes due to
him by Internet Infinity, Inc. (see Note 8) as the collateral. L&M Media, Inc.
owns 45.3% of the outstanding stock of Internet Infinity, Inc.
Future minimum note receivable from L&M Media, Inc. as of March 31, 2000 are as
follows:
<TABLE>
<CAPTION>
March 31,
-------------
<S> <C>
2001 $ 30,000
2002 36,000
2003 36,000
2004 36,000
2005 36,000
Thereafter 71,560
-------------
$ 245,560
=============
</TABLE>
F-12
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 7 - RELATED COMPANIES TRANSACTIONS (CONTINUED)
The Company utilizes office space, telephone and utilities provided by Apple
Media Corporation (AMC) at an estimated fair market values are as follows:
<TABLE>
<CAPTION>
Monthly Annually
-------------- --------------
<S> <C> <C>
Rent $ 300 $ 3,600
Telephone 300 3,600
Utilities 300 3,600
-------------- --------------
$ 900 $ 10,800
============== ==============
</TABLE>
Prior year expenses were charged against paid in capital. During the fiscal year
ended March 31, 2000, the Company entered in a month to month agreement with AMC
for a total monthly fee of $900. George Morris owns 98% of Apple Media
Corporation.
NOTE 8 - DUE TO OFFICER
<TABLE>
Unsecured note payable to George Morris,
with interest at 6% per annum, with monthly
installments of $3,000 beginning June 30, 2000.
George Morris is the President of Internet
<S> <C>
Infinity, Inc. (See Note 7). $ 147,141
--------------
Less Current Portion 30,000
--------------
Long-Term Portion $ 117,141
==============
Maturities of due to officer are as follows:
March 31,
2001 $ 30,000
2002 36,000
2003 36,000
2004 36,000
2005 9,141
--------------
$ 147,141
==============
</TABLE>
Interest charged to expense for the year ended March 31, 2000 on the above notes
was $8,683.
F-13
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 9 - CONCENTRATION OF CREDIT RISK
For the fiscal year ended March 31, 2000, revenue from two customers represents
30% of the Company's total revenue, and 46% of the Company's outstanding
accounts receivable.
The Company's only supplier of products is Apple Media Corporation. The
Company's cost for the product is approximately 80% of the selling price, net of
sales tax. Apple Media Corporation is owned 98% by George Morris. During the
fiscal year ended March 31, 2000, Apple Media became a subsidiary of L&M Media,
Inc., which is 98% owned by George Morris, President of Internet Infinity, Inc.
NOTE 10 - DEFERRRED INCOME TAXES
The net deferred tax amounts included in the accompanying balance sheet include
the following amounts of deferred tax assets and liabilities:
<TABLE>
<S> <C>
Deferred tax asset - current $ 28,577
Deferred tax liability - current --
--------------
Net Asset - Current $ 28,577
==============
Deferred tax asset - non-current $ 103,335
Deferred tax liability - non-current --
Less valuation allowance (103,335)
--------------
Net Asset - Non-current $ --
==============
</TABLE>
The deferred tax asset results from reserves for bad debts that are deductible
when the accounts receivable is written off as an impairment of assets, which is
not currently deductible for tax purposes, and from a net operating loss
carryforward for federal and state income tax purposes.
The Company has recorded a valuation allowance to reflect the estimated amount
of deferred tax asset which may not be realized. For the year ended March 31,
2000 valuation allowance decreased by $218,758.
NOTE 11 - (PROVISION) BENEFIT FOR INCOME TAXES
The components of the (provision) benefit for income taxes are as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
Current (Provision) Benefit
<S> <C> <C>
Federal $ -- $ --
State (1,600) (800)
------------- -------------
$ (1,600) $ (800)
============= =============
</TABLE>
F-14
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 11 - (PROVISION) BENEFIT FOR INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
Deferred (Provision) Benefit
<S> <C> <C>
Federal $ (4,931) $ 28,900
State (2,906) 7,514
------------ ------------
$ (7,837) $ 36,414
============ ============
</TABLE>
The Company has a net operating loss carryforward of approximately $401,000 for
tax purposes. For federal income tax purposes, the net operating loss
carryforwards expire through 2012.
NOTE 12 - NET INCOME (LOSS) PER SHARE
Following is a reconciliation of net income and weighted average common shares
outstanding for purposes calculating basic and diluted net income per share:
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
Basic net income (loss) per share $ 16,937 $ 121,495
============= ============
Weighted average common shares outstanding 10,020,141 8,910,234
------------- ------------
Basic net income (loss) per share $ .00 $ .01
============= ============
Weighted average common shares outstanding 10,020,141 8,910,234
Dilutive stock options 413,452 53,424
------------- ------------
Weighted average common shares outstanding for
purposes of computing diluted net income per share 10,433,593 8,963,658
============= ============
Diluted net income per share $ .00 $ .01
============= ============
</TABLE>
NOTE 13 - STOCK OPTIONS
The Company's 1996 stock option plans provides that incentive stock options and
nonqualified stock options to purchase common stock may be granted to directors,
officers, key employees, consultants, and subsidiaries with a exercise price of
up to 110% of market price at the date of grant. Generally, options are
exercisable one or two years from the date of grant and expire three to ten
years from the date of grant. As of March 31, 2000, the maximum of 4 million
shares were approved for issuance under the plan, of which 2.33 million shares
were available for future grants.
For the years ended March 31, 2000 and 1999, the Company granted 275,000 and
1,017,241 shares to various individuals at the average exercise price of $0.400
and $.311, including its officers who received 200,000 and 450,000,
respectively. All options and exercise prices for 1999 have been adjusted to
reflect a 2 for 1 stock split effective March 17, 1999.
F-15
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 13 - STOCK OPTIONS (CONTINUED)
In electing to follow Accounting Principles Board Opinion (APBO) No. 25,
Accounting for Stock Issued to Employees, the Company recognizes no compensation
expense related to employee stock options for the fiscal year ended March 31,
2000 and 1999, as no options are granted at a price below the market price on
the date of grant.
Of the 1,017,241 options granted in the fiscal year ending March 31, 1999, the
Company granted 517,241 options to an affiliate entity, in conjunction with the
stock issued (see Note 3).
On March 22, 2000, 20,000 options were exercised by two employees at the price
of $.125 per share for the total value of $2,500. The Company set up an unpaid
stock subscription account of $1,250 for the 10,000 shares, which have not been
paid for by the employee. A note payable to an employee in an amount of $1,250
was used to offset against the issuance of the remaining 10,000 shares.
Presented below is a summary of stock option plans activity for the year shown:
<TABLE>
<CAPTION>
Weight-
Average
Stock Exercise
Options Price
------------- --------------
<S> <C> <C>
Outstanding at March 31, 1998 720,000 $ 0.125
Granted 1,017,241 0.308
Exercised (300,000) 0.125
Forfeited -- --
Expired -- --
------------- --------------
Outstanding at March 31, 1999 1,437,241 0.219
Granted 275,000 0.400
Exercised (20,000) 0.125
Forfeited (20,000) 0.253
Expired -- --
------------- --------------
Outstanding at March 31, 2000 1,672,242 $ 0.282
============= ==============
Shares exercisable at March 31, 1998 720,000 $ 0.125
============= ==============
Shares exercisable at March 31, 1999 420,000 $ 0.125
============= ==============
Shares exercisable at March 31, 2000 394,000 $ 0.125
============= ==============
</TABLE>
F-16
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 13 - STOCK OPTIONS (CONTINUED)
Exercise prices for options outstanding as of March 31, 2000 range from $0.125
to $0.480. The following table summarizes information for options outstanding
and exercisable at March 3, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted
Weight- Average Weight-
Stock Average Remaining Stock Average
Exercise Options Exercise Contractual Options Exercise
Prices Outstanding Price Life Exercisable Price
---------------------------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.125 394,000 $0.1250 .9 394,000 $0.125
$3.3080-0,3135 1,003,242 $0.3080 1.8 -- --
$0.4000 275,000 $0.4000 3.0 -- --
--------- --------
1,672,242 394,000
--------- --------
</TABLE>
In electing to continue to follow APBO No. 25 for expense recognition purposes,
the Company is obliged to provide the expanded disclosures required under SFAS
No. 123 for stock-based compensation granted since 1996, including if materially
different from reported results, disclosure of pro forma net income and earnings
per share had compensation expense relating to the fiscal year ended March 31,
2000 and 1999 grants been measured under the fair value recognition provisions
of SFAS No. 123.
The weighted-average fair values at the date of grant for options granted during
the fiscal year ended March 31, 2000 and 1999 were $0.3600 and $0.2825,
respectively and were estimated using the Black-Scholes option valuation model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Expected life in years 3.00 3.00
Interest Rate 5.91% 5.00%
Volatility 78.26% 110.2%
Dividend Yield 0% 0%
</TABLE>
The weighted-average fair values, at date of grant for options granted, were
either the same or higher than the market values during the fiscal year ended
March 31, 2000 and 1999. The Company's net income and earnings per share will be
the same as the pro forma net income and earnings per share; therefore, the
Company's pro forma information had not been presented.
NOTE 14 - COMMON STOCK ISSUED FOR NOTES CONVERSION
On October 22, 1999, the Company issued 280,000 restricted common shares in
consideration for $70,000 of notes payable at the value of $0.25 per shares. In
addition, the Company issued to the note holders 70,000 stock options at the
average exercise price of $0.40 per share (See Note 13).
F-17
<PAGE>
INTERNET INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 15 - STOCK ISSUED FOR SERVICES
On March 22, 2000, the Company issued 60,000 restricted common shares for legal
expenses at the value of $0.25 per share for the total amount of $15,000.
In addition, the Company issued 3,000 restricted shares for various consulting
services that have a fair market value of $750.
NOTE 16 - COMMITMENT
During the fiscal year ended March 31, 2000, the Company entered into an
agreement with an outside sales representative, Lexington Media, Inc., to sell
the Company's product for a minimum weekly fee of $450. An additional 10% of
commissions will be accrued and paid for sales that exceed $6,000 during a given
month. The agreement may be cancelled by either party. Payments to Lexington
during the current fiscal year totaled $3,835. Annual minimum commitment as of
March 31, 2000 is $23,400.
F-18
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
Internet Infinity's directors, officers and significant employees
occupying executive officer positions, their ages as of September 30, 1999, the
directors' terms of office and the period each director has served are set forth
in the following table:
Person Positions and Officers Since Expires
George Morris, 61 Chairman of the Board of Directors - 1996 2000
Acting President/CEO
Vice President Marketing
Roger Casas, 51 Director 1999 2000
Vice President Operations
Dawn Morris, 44 Member of the Board of Directors 1996 2000
Vice President Internet Sales
Kathy Boag, 46 Vice President Traditional Sales 1999 2000
Shirlene Bradshaw, 61 Member of the Board of Directors 1999 2000
Business Manager
GEORGE MORRIS, Ph.D. Dr. Morris has been the full time Chairman of the
----------------------
Board of Directors, principal shareholder, Vice President or Acting
President/Chief Executive Officer and Secretary of Internet Infinity since
Internet Infinity went public in 1996. George Morris has also been the Chairman
and Vice President of Apple Realty, Inc. doing business as Hollywood Riviera
Studios since 1974 and the Chairman of the Board of Directors of L&M Media, Inc.
since 1990. Dr. Morris is also the Founder and has been the President, Chairman
of the Board of Directors and principal of Morris Financial, Inc., a NASD member
broker-dealer firm, since its inception in 1987. He has been active in
designing, negotiation and acquiring all equipment, facilities and systems for
manufacturing, accounting and operations of Internet Infinity and its
17
<PAGE>
affiliates. Morris has produced over 20 computer training programs in video and
interactive hypertext multimedia CD-ROM versions, as well as negotiating
Internet Infinity's and its affiliate distribution and licensing agreements. Dr.
Morris earned a Bachelor of Business Administration and Masters of Business
Administration from the University of Toledo, and a Ph.D. (Doctorate) in
Marketing and Finance and Educational Psychology from the University of Texas.
Prior to founding Internet Infinity and its Affiliates, Dr. Morris had 20 years
of academic experience as a professor of Management, Marketing, Finance and Real
Estate at the University of Southern California (1969 - 1971) and the California
State University (1971 - 1999). During this period Dr. Morris served a
Department Chairman for the Management and Marketing Departments. Morris has
since retired from full time teaching at the University. Dr. Morris was the West
Coast Regional Director of the American Society for Training and Development, a
Director of the South Bay Business Roundtable and a speaker on a number of
topics relating to business, training and education. Morris has created or been
directly involved in the design, writing and development of numerous Internet
web sites for Internet Infinity, blank video, Greg Norman, Northwestern
University, etc. He most recently taught University courses about Internet
Marketing for domestic and foreign markets and Sales Force Management.
ROGER CASAS. Mr. Casas has been a Member of the Board of Directors since
------------
1998 and the Vice President of Operations since Internet Infinity went public in
1996. Roger has managed production, personnel, helped coordinate marketing
efforts and managed packaging, printing and shipping on a daily basis. Prior to
joining Internet Infinity, Mr. Casas was a computer software marketing manager
at More Media and a Financial Consultant for Stonehill Financial in Bel Air,
California an Account Executive for Shearson Lehman Brothers in Rolling Hills,
California and Dean Witter Reynolds in Torrance, California, and the owner and
operator of the Hillside restaurant in Torrance, California. Mr. Casas earned a
Bachelor of Science in Business Administration, from Ashland University in
Ashland, Oregon, along with a Bachelor of Art in Marketing and Psychology. Mr.
Casas holds Series 22 and 7 licenses with the National Association of Securities
Dealers, Inc. and is a registered representative with Morris Financial.
KATHY BOAG. Ms. Boag has been the Sales Manager and/or Vice President of
-----------
Sales since joining Internet Infinity in 1997 where she has developed and
managed major accounts. Ms. Boag manages sales and coordinates the production of
her large orders. Prior to joining Internet Infinity, she was the President of
the International Television Association of Orange County. She has also been the
co-owner of a marketing and distribution company for Special Interest video. She
also handled the marketing, distribution and promotion for Jack LaLanne exercise
programs. Ms Boag has over 20 years experience in the electronic media industry
as a Sales Manager and Vice President for numerous companies. Her clients
include major corporations like Yamaha, Olivetti, Sprint and the major
automobile companies.
DAWN MORRIS. Ms. Morris has been the President, Vice President, a
-------------
principal shareholder and a Director of Internet Infinity since it went public
in 1996. She has also been the Vice President of L&M Media, Inc. since 1990, now
an affiliate of Internet Infinity. Ms. Morris has also been the Manager of
Corporate Finance/Mergers and Acquisitions and a registered representative with
Morris Financial, Inc., a NASD member broker-dealer firm, since 1994. She has
been responsible for the development of educational and computer training video
programs, some of which have been, produced in CD-ROM and other multimedia
versions. Ms. Morris has produced finance and investment, as well as commercial
18
<PAGE>
and infomercial programs. Prior to joining the predecessor company in 1984, Ms.
Morris was a Senior Account Representative in the Office Products Division of
Xerox Corporation, and a Sales Manager at Joseph Magnin Stores. Ms Morris earned
a Bachelor of Business Administration in Marketing from California State
University and studied television production and directing at UCLA and
California State University. Dawn Morris was nominated for Woman Graduate of the
Year in the California State University System.
SHIRLENE BRADSHAW. Ms. Bradshaw has been a Member of the Board of
------------------
Directors since 1999 and Internet Infinity Business Manager since 1997. She has
managed accounting including, receivable and payable processing and helped
coordinate the supplier relationship with the Apple Media Corporation supplier.
She was the Business Manager for More Media, a predecessor company of Morris &
Associates, Inc. for over six years. She had extensive experience in office
management and accounting before joining Internet Infinity.
ITEM 10. EXECUTIVE COMPENSATION
Set forth below is the aggregate compensation during fiscal years 1998,
1999 and 2000 of the chief executive officer of Internet Infinity and his
spouse.
Salaries
<TABLE>
<CAPTION>
Fiscal Year Annual Compensation
----------- -------------------
<S> <C> <C>
George Morris(1) 2000 31,000
1999 37,700
1998 38,400
Dawn Morris(1) 2000 9,960
1999 1,000
1998 0
</TABLE>
George Morris received a salary of $31,000 for internet management
activities, and Dawn Morris received $9,960 for only a limited amount of
consulting to Internet Infinity. George and Dawn Morris will each draw a salary
of $500 per week commencing January 1, 2000 for their management of Internet
Infinity.
Stock Options
Set forth below are the stock options granted to the officers and
directors of Internet Infinity.
19
<PAGE>
During the last three fiscal years, the officers and directors of
Internet Infinity have received the following Stock Options:
<TABLE>
<CAPTION>
Fiscal Year No. of Shares Exercise Price Expiration Date
----------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
George Morris 2000 100,000 $0.360 9/30/04
1999 200,000 $0.308 1/24/04
1998 150,000 $0.125 3/29/03
Dawn Morris 2000 100,000 $0.360 9/30/04
1999 200,000 $0.308 1/24/04
1998 150,000 $0.125 3/29/03
Kathy Boag 1999 20,000 $0.308 (2)
1998 5,000 $0.125 9/30/01
Roger Casas 1999 30,000 $0.308 (3)
1998 10,000 $0.125 9/30/01
Shirlene Bradshaw 1999 20,000 $0.308 (4)
1998 10,000 $0.125 9/30/01
Hollywood Riviera
Studios(1) 1999 517,242 $0.314 1/3/04
------------------------
</TABLE>
(1) These options are under the control of George Morris, chief executive
officer of Internet Infinity.
(2) 10,000 of these options expire on 3/30/03 and 10,000 expire on 3/30/04
(3) 10,000 of these options expire on 3/30/03, 10,000 expire on 3/30/04 and
10,000 expire on 1/24/04
(4) 10,000 of these options expire on 3/30/03 and 10,000 expire on 3/30/04
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of March 31, 2000 the number of shares of
common stock of Internet Infinity beneficially owned by each officer and
director of Internet Infinity individually and as a group, and by each owner of
more than five percent of the common stock.
<TABLE>
<CAPTION>
Percent of
Number Outstanding
Name and Address of Shares Shares
-------------------------------- --------- -----------
<S> <C> <C>
L&M Media, Inc. (1) 4,535,714 43.73
663 the Village
Redondo Beach, CA 90277
Dawn Morris 1,238,000 11.93
663 the Village
Redondo Beach, CA 90277
Apple Realty, Inc. d/b/a
Hollywood Riviera Studios (1) 1,034,482 9.97
663 the Village
Redondo Beach, CA 90277
George Morris, Chairman/CEO 938,000 9.04
663 the Village
Redondo Beach, CA 90277
Kathy Boag, Vice President 500 .01
16548 Bolsa Chica St #154
Huntington Beach, CA 92649
Roger Casas, Vice President 12,000 .12
108 E. 228th St
Carson, CA 90745
20
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Shirlene Bradshaw, Director 10,000 .10
1900 W. Artesia #38
Gardena, Ca 90745
Officers and Directors
as a group (5 persons)(2) 7,769,196 74.90
------------------------
</TABLE>
(1) The shares owned of record by L&M Media, Inc. and Hollywood Riviera
Studios are under the control of George Morris.
(2) These officers and directors are George Morris and Dawn Morris, his
spouse.
Changes in Control
There are no arrangements, which may result in a change in control of
Internet Infinity.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our company is under the control of George and Dawn Morris, husband and
wife, who beneficially own 74.7 percent of all outstanding stock of Internet
Infinity, Inc. The basis of their control, and the relationship of all
affiliates of Internet Infinity, are depicted in the following chart:
1. George and Dawn Morris
----------------------
a. They own 98 percent of L&M Media, Inc.
---------------
i. It owns 100 percent of Apple Media Corporation
-----------------------
ii. It owns 43.73 percent of Internet Infinity, Inc.
-----------------------
b. They own 100 percent of Apple Realty, Inc., d/b/a
-----------------------------
Hollywood Riviera Studios
--------------------------
i. It owns 9.97 percent of Internet Infinity, Inc.
-----------------------
21
<PAGE>
c. They own 20.97 percent of Internet Infinity, Inc.
-----------------------
i. It owns 100 percent of Electronic Media Central
-------------------------
Corp.
-----
ii. It owns 100 percent of Morris & Associates, Inc.
-------------------------
Summary
-------
<TABLE>
<S> <C> <C> <C>
.98 x .453 = .4373
1.00 x .103 = .0997
.218 = .2097
</TABLE>
George and Dawn Morris
beneficially own .7467 of Internet Infinity, Inc.
The Fiscal Year 1998 L&M Media, Inc. Transactions
-------------------------------------------------
On July 30, 1997, L&M Media, Inc. subscribed to purchase 125,000 shares
of Internet Infinity Common Stock, valued at $0.60 a share, $0.02 below the
closing price and $0.10 more than the bid price for Internet Infinity common
shares on August 1, 1997. In addition to its obligation to pay for these
subscribed shares, L&M Media assigned to Internet Infinity a three-year
exclusive distribution right for five health and medical video programs. L&M
Media is 98 percent owned by George and Dawn Morris, husband and wife, and they
are directors and executive officers of Internet Infinity.
On February 27, 1998, L&M Media, Inc. subscribed to purchase 2,142,897
restricted shares of Internet Infinity Common Stock at $0.14 a share, or 50
percent of the lowest closing price of $0.28 for Internet Infinity Common Stock
within last sixty days prior to February 27, 1998. In addition to its obligation
to pay for these subscribed shares, L&M Media assigned to Internet Infinity a
three-year exclusive distribution right for 20 additional health and medical
video programs.
The 50 percent value of the "free-trading" stock price assigned to the
February 27, 1998 stock subscription for licensing rights to 20 additional
health and medical programs is deemed reasonable considering the inability of
L&M Media to dispose of the restricted stock for a long period of time. In
addition, standard media industry practice usually requires cash advance
payments for the acquisition of distribution rights of programs.
To summarize, L&M Media subscribed to purchase 2,267,897 shares of
Internet Infinity's Common Stock in exchange for:
* a subscription agreement obligation to pay $375,000 to Internet
Infinity,
* the exclusive distribution rights to twenty-five health and medical
video programs, and
* royalties set at fifteen percent of sales, the payment of which
royalties will go to the reduction of the stock subscription
obligation until the stock subscriptions are paid in full.
22
<PAGE>
The Fiscal Year 1999 Hollywood Riviera Studios Transaction.
-----------------------------------------------------------
On January 4, 1999, Apple Realty, Inc., d/b/a Hollywood Riviera Studios
subscribed to purchase 517,241 restricted shares of Internet Infinity Common
Stock at $0.29 a share, or 50 percent of the closing price of $0.57 for Internet
Infinity Common Stock on January 4, 1999. In addition to its obligation to pay
for the subscribed shares, Apple Realty, Inc. assigned to Internet Infinity a
three-year licensing distribution right for five training modules on Personal
and Sales Skill Development. Apple Realty, Inc., d/b/a Hollywood Riviera
Studios, is a company 100 percent owned by George Morris.
The 50 percent value of the "free-trading" stock price assigned to the
January 4, 1999 stock subscription for licensing distribution rights for five
training modules on Personal and Sales Skill Development is deemed reasonable
considering the inability of Hollywood Riviera Studios to dispose of the
restricted stock for a long period of time. In addition, standard media industry
practice usually requires cash advance payments for the acquisition of
distribution rights of programs.
Also, as part of the same transaction, Internet Infinity issued 258,621
stock options to Hollywood Riviera Studios exercisable at $0.627 a share. The
options were priced at 110 percent of the $0.57 Common Stock closing price on
January 4, 1999. The Hollywood Riviera stock options, after the two-for-one
stock split of February 25, 1999, are now for 517,241 shares at a $0.3135
exercise price.
To summarize, Apple Media, d/b/a Hollywood Riviera Studios subscribed to
purchase 517,241 shares of Internet Infinity's Common Stock and obtained stock
options to purchase 517,241 shares of our Common Stock at $0.3135 a share in
exchange for:
* a subscription agreement obligation to pay $150,000 to Internet
Infinity,
* the exclusive distribution rights to five training program modules
on Personal and Sales Skill Development,
* royalties set at twenty percent of sales, the payment of which
royalties will go to the reduction of the stock subscription
obligation until the stock subscription is paid in full.
As of March 31, 2000 there have been no sales by Internet Infinity or
its affiliates of any of the twenty-five video programs on Health and Medicine
or of any of the five video modules on Personal and Sales Skill Development.
However, no resources were available to promote sales of these products. We
project that sales will commence of the Personal and Sales Skill Development
modules during the third quarter of the fiscal year to commence April 1, 2000
and that sales will commence of the Health and Medicine programs during the
fourth quarter of the fiscal year to commence April 1, 2000. However, Internet
Infinity cannot guarantee any sales of these programs.
Internet Infinity also sells special interest video programs on other
subjects, which video programs are owned by L&M Media. There are approximately
200 of these programs. Internet Infinity pays a ten-percent royalty on these
sales to L&M Media. L&M Media's cost of goods is set at twenty percent of sales
with its cost of goods to cover all its manufacturing and assembly costs as well
as the shipping costs to our customers' doors. L&M Media agreed to purchase the
Health and Medicine program library in 1986 for $400,000. It consists of 400
hours of video footage and partially or fully edited titles. We estimate the
replacement cost of each of the completed twenty-five programs to be
approximately $62,500 or a total value in excess of $1,500,000.
23
<PAGE>
L&M Media developed the Personal and Sales Skill Development modules and
has sold them over the last ten years. Hollywood Riviera Studios is revising and
expanding the multimedia delivery of the programs. We estimate the replacement
cost of each module to be $150,000 or $750,000 for the set of five.
We buy all of our duplication and blank video products and services from
Apple Media Corporation ("AMC"), a manufacturing company under the control of
and owned by George and Dawn Morris, directors, executive officers and major
shareholders of Internet Infinity. Due to a lack of working capital available to
Internet Infinity, George and Dawn Morris acquired the predecessor to AMC, known
as Video Magnetic, LLC, in order that it would continue to provide a sales
distribution opportunity for Internet Infinity. Internet Infinity had earlier
established a distribution arrangement with Video Magnetics, LLC in 1996. When
the previous owner indicated he would sell Video Magnetics and terminate the
distribution arrangement with our company, the Morrises bought Video Magnetics
to maintain the product source. Video Magnetics was an insolvent company at the
time of the Morris' acquisition. However, the successor company to Video
Magnetics, Apple Media Corporation, is solvent. George and Dawn Morris finally
settled the purchase transaction for Video Magnetics through mediation and are
paying the purchase notes over the next four years.
Internet Infinity takes title to the products it purchases from Apple
Media Corporation, which is 98 percent owned by George Morris, president of
Internet Infinity, just as it did under the original distributorship agreement
with independently owned Video Magnetics, LLC. Internet Infinity will take title
to products under the independent distributorship agreement with Ingram Book
Company. This distributorship model for taking title is planned for other,
future distributorship arrangements.
Internet Infinity, Inc. and L&M Media, Inc. Operating Structure
---------------------------------------------------------------
Under this distributorship arrangement, Internet Infinity, Inc. is
responsible for the collection of accounts receivable and must collect them or
take a bad debt loss. However, Internet Infinity carries CNA accounts receivable
loss insurance. As is standard business practice with a drop-ship arrangement,
Electronic Media Central, the 100 percent owned subsidiary of Internet Infinity,
does not carry an inventory. However, Morris & Associates does carry a small,
finished goods inventory of special interest videos from time to time and a
$39,039 packaging inventory as of March 31, 2000 to prepare orders for the 200
special interest videos. An Internet hosting service handles the server computer
equipment for the Internet. By these means the management of Internet Infinity
attempts to minimize the risk of loss from inventory and accounts receivable as
well as technology obsolescence.
The process for taking orders, shipping, billing and collection is as
follows: When Internet Infinity sells Electronic Media Central products and
services to an independent customer, we first determine the sales credit terms
that will be given to the customer based on a credit worthiness review. If the
order will be shipped on an open account basis and is over approximately $5,000,
we contact our accounts receivable insurance company, CNA, for credit insurance
approval. After credit terms and freight are determined by Internet Infinity, we
issue a purchase order to Apple Media Corporation, which is 98 percent owned by
George Morris, the president of Internet Infinity, for the products and services
ordered including shipping. Apple Media sources materials and components,
manufactures or assembles and drop ships the order to the Internet Infinity
customer. Internet Infinity invoices the customer for the products and services
24
<PAGE>
delivered and credits its sales account and debits the accounts receivable
account in Internet Infinity's general ledger at the time of shipment and
invoicing. Internet Infinity is responsible for collecting the accounts
receivable from the customers. Apple Media grants a 20 percent wholesale trade
discount to Internet Infinity on the order amount and charges Internet Infinity
at the time of shipping. Internet Infinity is solely responsible for the payment
of its accounts payable to Apple Media, Inc. The CNA accounts receivable loss
insurance does not cover losses under $5,000 and the policy has a $10,000
deductible.
The major risk for Internet Infinity is the non-payment of accounts
receivable from an order. Internet Infinity remains responsible for payment of
the wholesale cost of the order to Apple Media even if a customer doesn't pay.
Internet Infinity maintains a $39,039 packaging inventory and thereby reduces
potential losses on inventory shrinkage and obsolescence. However, the absence
of a complete Internet Infinity inventory and the control of any inventory by a
supplier to Internet Infinity has operated to reduce our control over the
shipping priority of orders.
When we sell pre-recorded video programs to media retailers, wholesalers
and school suppliers, we place an order with Apple Media for the products and
services, including shipping. Apple Media sources, manufactures or assembles,
with Morris & Associates' packaging, and drop ships the product to our customer.
Apple Media gives Internet Infinity an 80 percent discount off the total order
amount including freight. The 80 percent gross margin before packaging and
royalties remaining for Internet Infinity gives Internet Infinity a very
profitable, low volume, distribution opportunity. The 80 percent gross profit
margin for Internet Infinity from pre-recorded video sales versus the 20 percent
for duplication and blank media sales to independent customers reflects the
significantly higher price and profit margin associated with selling a video
tape with a program on it versus a blank tape or the lower margin for
duplicating an independent customer tape or CD. During fiscal year 2000, the 80
percent of these sales amounted to $39,639.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed, by incorporation by reference, as part of
this form 10-KSB.
Exhibit No. Description
----------- -----------
2 - Certificate of Ownership and Merger of Morris &
Associates, Inc., a California corporation, into
Internet Infinity, Inc., a Delaware corporation*
3 - Articles of Incorporation of Internet Infinity,
Inc.*
3.1 - Amended Certificate of Incorporation of Internet
Infinity, Inc.*
3.2 - Bylaws of Internet Infinity, Inc.*
10.1 - Master License and non-exclusive Distribution
Agreement between Internet Infinity, Inc. and
Lord & Morris Productions, Inc.*
10.2 - Master License and Exclusive Distribution Agreement
between L&M Media, Inc. and Internet Infinity,
Inc.*
10.3 - Master License and Exclusive Distribution Agreement
between Hollywood Riviera Studios and Internet
Infinity, Inc.*
10.4 - Fulfillment Supply Agreement between Internet
Infinity, Inc. and Ingram Book Company*
*Previously filed and incorporated herein by reference.
(b) Reports on form 8-K
None
25
<PAGE>
SIGNATURES
In accordance with Section 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNET INFINITY, INC.
Date: July 10, 2000 By /s/ George Morris
--------------------------------------
George Morris, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: July 10, 2000 By /s/ George Morris
----------------------------------
George Morris, Chief Financial
Officer, Chief Accounting
Officer and Director
Date: July 10, 2000 By /s/ Roger Casas
---------------------------------
Roger Casas, Vice President and
Director
Date: July 10, 2000 By /s/ Dawn Morris
---------------------------------
Dawn Morris, Vice President and
Director
Date: July 10, 2000 By /s/ Shirlene Bradshaw
---------------------------------
Shirlene Bradshaw, Director
