<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO ______________________
COMMISSION FILE NUMBER: 000-25129
AFFILIATED NETWORKS, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0354269
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2701 SOUTH BAYSHORE DRIVE, SUITE 403
COCONUT GROVE, FLORIDA 33133
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(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 285-2003
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- ------
The number of shares of Common Stock of the registrant outstanding as of May 10,
1999 was 5,003,256.
Transitional Small Business Disclosure Format: Yes No X
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AFFILIATED NETWORKS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998.................................. 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998............................ 4
Condensed Consolidated Statements of Shareholders' Equity (Deficit)
Three Months Ended March 31, 1999 and 1998............................ 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998............................ 6
Notes to Condensed Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis.................................. 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................... 12
Item 6. Exhibits and Reports on Form 8-K...................................... 12
</TABLE>
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AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,873 $ 350,042
Receivables, net 9,635 9,635
Other current assets 410 --
----------- -----------
Total current assets 12,918 359,677
----------- -----------
Property and equipment, net 79,239 71,270
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Other assets:
Copyright, net 3,500 4,000
Software development costs, net 135,376 156,610
Deposits 5,039 5,039
----------- -----------
Total other assets 143,915 165,649
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Total assets $ 236,072 $ 596,596
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of notes payable $ 101,849 $ 116,206
Current portion of capital lease obligations 10,565 11,296
Accounts payable and accrued expenses 195,914 106,307
Customer deposits 66,737 76,297
Due to related party 197,671 35,750
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Total current liabilities 572,736 345,856
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Long-term liabilities:
Notes payable, net of current portion 15,980 23,521
Capital lease obligations, net of current portion 3,694 5,126
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Total long-term liabilities 19,674 28,647
----------- -----------
Total liabilities 592,410 374,503
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Shareholders' equity (deficit):
Common stock, par value $.01 per share, 25,000,000
shares authorized, 4,928,180 shares issued and
outstanding 49,282 49,282
Additional paid-in capital 2,373,000 2,373,000
Accumulated deficit (2,778,620) (2,200,189)
----------- -----------
Total shareholders' equity (deficit) (356,338) 222,093
----------- -----------
Total liabilities and shareholders' equity (deficit) $ 236,072 $ 596,596
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
3
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AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
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1999 1998
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<S> <C> <C>
Sales $ -- $ 11,512
Administrative fee 643 --
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Total revenues 643 11,512
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Costs and expenses:
Direct costs -- 4,582
Selling, general and administrative expenses 576,441 214,721
----------- -----------
Total costs and expenses 576,441 219,303
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Operating loss (575,798) (207,791)
----------- -----------
Other income (expense):
Interest income 79 --
Interest expense (2,712) (8,219)
Other -- (912)
----------- -----------
Total other income (expense) (2,633) (9,131)
----------- -----------
Net loss $ (578,431) $ (216,922)
=========== ===========
Loss per common share - basic and diluted $ (.12) $ (.05)
=========== ===========
Weighted average number of common shares
outstanding - basic and assuming dilution 4,928,180 4,471,158
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
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AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Shareholders'
Stock Capital Deficit Equity (Deficit)
----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ 42,602 $ 974,698 $(1,045,136) $ (27,836)
Issuance of 543,000 shares of
common stock 5,430 899,552 -- 904,982
Net loss -- -- (216,922) (216,922)
----------- ----------- ----------- -----------
Balance, March 31, 1998 $ 48,032 $ 1,874,250 $(1,262,058) $ 660,224
=========== =========== =========== ===========
Balance December 31, 1998 $ 49,282 $ 2,373,000 $(2,200,189) $ 222,093
Net loss -- -- (578,431) (578,431)
----------- ----------- ----------- -----------
Balance, March 31, 1999 $ 49,282 $ 2,373,000 $(2,778,620) $ (356,338)
=========== =========== =========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
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AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
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1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(578,431) $(216,922)
Adjustments to reconcile net loss to net cash used in operations-
Depreciation 7,043 7,000
Amortization 21,734 17,000
Provision for doubtful accounts -- --
Decrease in receivables -- 17,463
Increase in other current assets (410) --
Increase in accounts payable and accrued expenses 89,607 33,893
Decrease in customer deposits (9,560) (292)
Decrease in trading securities -- 34,875
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Net cash used in operating activities (470,017) (106,983)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (15,012) --
Additions to software development costs -- (3,638)
Net decrease in due from shareholder -- 61,038
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Net cash provided by (used in) investing activities (15,012) 57,400
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 189,551 77,863
Principal payments on due to related party (27,630) (11,900)
Principal payments on notes payable, net (21,898) (42,574)
Principal payments on capital lease obligations (2,163) (1,959)
Proceeds from stock issuance -- 204,982
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Net cash provided by financing activities 137,860 226,412
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Increase (decrease) in cash (347,169) 176,829
CASH, beginning of period 350,042 28,778
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CASH, end of period $ 2,873 $ 205,607
========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For the three months ended March 31, 1999 and 1998, interest paid was
approximately $1,791 and $6,294, respectively.
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
During the three months ended March 31, 1998, $700,000 of stock subscriptions
were received in exchange for 420,000 shares of common stock.
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
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AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
In management's opinion, the accompanying unaudited condensed consolidated
financial statements of Affiliated Networks, Inc., and subsidiary (the
"Company") contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's financial position and
the results of its operations.
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for the reporting on Form 10-QSB. Pursuant to such rules and
regulations, certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The condensed consolidated
financial statements should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements included
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
1998.
The accounting policies followed for interim financial reporting are the same as
those disclosed in Note 2 of the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
(2) ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(3) LOSS PER COMMON SHARE
Basic earnings or loss per common share is computed by dividing income or loss
available to common shareholders by the weighted average number of common shares
outstanding. Diluted earnings or loss per common share includes the diluting
effect of stock options and warrants. For the three months ended March 31, 1999
and 1998, the effect of stock options and warrants were not included in the
computation because such inclusion would have been antidilutive.
(4) INCOME TAXES
The Company did not record a benefit for income taxes due to the full valuation
that has been recorded on the taxable loss recorded for the period.
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(5) UNCERTAINTY
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
incurred recurring operating losses, and has a working capital and shareholders'
deficit as of March 31, 1999. Realization of the major portion of the assets in
the accompanying condensed consolidated balance sheets is dependent upon
continued operations of the Company, which in turn is dependent upon the
Company's ability to meet its financing requirements and the success of future
operations. The Company is proceeding on a private placement of up to
$5,000,000.
(6) SUBSEQUENT EVENT
Subsequent to March 31, 1999 the Company received $487,994 from the issuance of
common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
The "Management's Discussion and Analysis" included herein should be read in
conjunction with the Consolidated Financial Statements, the related Notes to
Consolidated Financial Statements and Management's Discussion and Analysis
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998, and the Condensed Consolidated Financial Statements and the
related Notes to Condensed Consolidated Financial Statements included in Item 1,
of this quarterly report on Form 10-QSB.
OVERVIEW
Affiliated Networks, Inc. has developed an internet based wholesale trading
exchange for the marine industry ("E-Commerce business"). The Exchange, known
as MAREX - The National Marine Exchange ("MAREX") allows buyers to solicit
quotes on-line from sellers for specific equipment, parts and supplies. MAREX
displays to the buyer the best price available, which are updated on a real-time
basis as bids are posted. MAREX seeks to provide a worldwide search capability
to buyers for hard-to-find equipment, parts and supplies and create a lowest
price forum for buyers to take advantage of spot market pricing of sellers'
overstocked and available inventory. Sellers utilizing MAREX will gain access to
an expanded wholesale customer base and have greater opportunity to resell slow
moving inventory. The Company anticipates that MAREX members may act as sellers
and buyers on a daily basis to take advantage of differences in regional pricing
and supply availability. The MAREX system was in the development stage until
November 1998. In addition, the Company, through its wholly owned subsidiary,
published research reports, stock handbooks and global industry guides (the "FIS
business").
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES
For the three months ended March 31, 1999, all of the Company's sales were
generated by its E-Commerce business. The Company generates revenues from its
E-Commerce business by charging an administrative fee, which is based on a
sliding scale ranging from approximately 10% for smaller transactions to 4% for
larger transactions. Revenues are recognized at the completion of a transaction.
A transaction is considered completed when the buyer has received and approved
the merchandise that was purchased through MAREX and the Company remitted the
purchase price, less the administrative fee, to the seller. For the three months
ended March 31, 1999, completed transactions through MAREX totaled $16,050. The
Company's E-Commerce business did not generate any revenues in 1998 due to MAREX
not being operational until November 1998. The Company's FIS business did not
generate any sales in 1999 primarily due to the shift of substantially all of
the Company's resources to the E-Commerce business. For the three months ended
March 31, 1998, all of the Company's sales were generated by the FIS business.
DIRECT COSTS
The Company's direct costs have historically been incurred as a result of the
production costs for the research reports, stock handbooks and global industry
guides. For the three months ended March 31, 1999, the Company did not incur
production costs due to the focus of the Company on the E-Commerce business.
9
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased 168% to $576,411
for the three months ended March 31, 1999 from $214,721 for the three months
ended March 31, 1998. The change consisted of an increase in the E-Commerce
business of approximately $515,000, which was partially offset by the decrease
in the FIS business of approximately $153,000.
In November 1998, the E-Commerce business launched its first trading exchange,
the MAREX system, and began to develop its membership. For the three months
ended March 31, 1999 the Company incurred approximately $532,000 in SG&A
expenses for the development of the MAREX business which were primarily
comprised of payroll costs of approximately $176,000, advertising and promotion
costs of approximately $124,000 and other operating costs. The Company expects
to continue to increase its SG&A expenses for the operations, development of
infrastructure and marketing of the E-Commerce business.
For the three months ended March 31, 1999 the FIS business incurred
approximately $44,000 in SG&A expenses primarily relating to payroll costs. The
decrease in SG&A expenses from the FIS business was primarily due to the shift
of the Company's resources to the E-Commerce business.
OPERATING LOSS
The Company's operating loss increased 177% to $575,798 for the three months
ended March 31, 1999 from $207,791 for the three months ended March 31, 1998.
The increase in the operating loss consisted of an increase of approximately
$514,000 in the E-Commerce business which was partially offset by the decrease
of approximately $146,000 in the FIS business. The increase in the E-Commerce
business was primarily due to the SG&A expenses relating to the launch of the
MAREX system. The decrease in the FIS business was primarily due to the decrease
in SG&A expenses, as described above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily through
the private sale of common stock, short-term borrowing from banks and the
majority shareholder who is also the Chief Executive Officer of the Company.
Net cash used in operating activities were approximately $470,000 and $107,000
for the three months ended March 31, 1999 and 1998, respectively, which was
primarily due to the loss reported during the period.
Net cash used in investing activities was approximately $15,000 for the three
months ended March 31, 1999, which was due to the purchase of computer equipment
for the E-Commerce operations. For the three months ended March 31, 1998 net
cash provided by investing activities was approximately $57,000 which was
primarily due to repayment of amounts due from shareholder.
Net cash provided by financing activities were approximately $138,000 and
$226,000 for the three months ended March 31, 1999 and 1998, respectively, which
was primarily due to borrowings and the issuance of common stock. For the three
months ended March 31, 1998, the Company received $204,982 from the issuance of
common stock.
The Company's working capital deficit was $559,818 at March 31, 1999 compared to
the working capital of $13,821 at December 31, 1998. The deterioration is
primarily due to the cash utilized for the development of the E-Commerce
business.
The Company currently maintains lines of credit and term loans with several
banks, which total $118,000 as of March 31, 1999. At March 31, 1999, however,
the Company had no availability under its lines of credit. The majority
shareholder, who is also the Chief Executive Officer, personally guarantees all
of the Company's bank loans. Loans to the Company from an entity that is owned
by the majority shareholder, who is also the Chief Executive Officer, total
$197,671 at March 31, 1999. Interest rates for all loans fluctuate from prime
plus 2.5% to prime plus 6.75% or have fixed terms of 11.7% or 12.5%.
10
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Subsequent to March 31, 1999 the Company received $487,994 from the issuance of
common stock that was utilized for working capital purposes.
Management believes that funds that will be generated from operations are not
sufficient to meet the Company's anticipated capital needs in connection with
its present and proposed activities. Management plans to pursue sources of
equity and debt financing to fund the operations of the Company. There has been
no firm commitment of any kind with regard to such financing and no assurance
can be given that such financing will be obtained, and if obtained, whether they
will be obtained on terms favorable to the Company.
SEASONALITY
The E-Commerce business is seasonal due to the impact of the buying and selling
patterns of the members in the MAREX system and the marine industry. The Company
believes that the second and third quarters are the peak periods for the
recreational marine industry. In addition, the recreational marine industry is
highly cyclical and is highly affected by a number of factors which includes but
not limited to (i) economic conditions (ii) consumer confidence levels and (iii)
weather conditions.
Historically, the Company's revenues and operating results from the FIS business
experience a small decrease in the late second and early third quarters as a
result of decreased demand for the FIS products.
YEAR 2000 ISSUES
Many computer systems and software products are coded to accept only two-digit
entries in the date code field and cannot reliably distinguish dates beginning
on January 1, 2000 from dates prior to the year 2000. Many companies' software
and computer systems may need to be upgraded or replaced in order to correctly
process dates beginning in 2000. The Company has reviewed its internal programs
and determined that there are no significant Year 2000 issues within the
Company's programs or services. However, the Company utilizes third-party
equipment and software that may not be Year 2000 compliant although the Company
believes that the third-party systems that are material to its business are Year
2000 compliant based on representations made by these suppliers. Failure of the
Company's or such third-party equipment or software to properly process dates
for the year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any such problems, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
FORWARD LOOKING STATEMENTS
From time to time, the Company publishes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
certain statements in the Management's Discussion and Analysis of this Form
10-QSB, which relate to such matters as anticipated financial performance,
business prospects, technological developments, and similar matters. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from those expressed or implied by
such forward-looking statements. Such factors include, among others; (i) the
ability to develop the E-Commerce business specifically the growth of members
and transactions in the MAREX system; (ii) the ability to obtain financing for
the Company's operations; (iii) competition in the Company's E-Commerce
business; (iv) dependence on key personnel.
11
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual shareholders' meeting on January 27, 1999. At such
meeting the shareholders:
(1) Elected four members to the Board of Directors as follows:
VOTES FOR VOTES AGAINST
--------- -------------
Dan Gallagher 3,444,910 0
George Glazer 3,444,910 0
David A. Schwedel 3,444,910 0
Roger A. Trombino 3,444,910 0
(2) Ratified the reappointment of McClain & Company, LLP as the Company's
independent public accountants. (2,819,910 shares voted for 0 shares
voted against)
(3) Approved and adopted the Amended and Restated Articles of Incorporation
of the Company (the "Amended Articles"), which incorporated amendments
to change the authorized capital stock of the Company by authorizing
the issuance of Preferred Stock, par value $.01 per share, consisting
of 1,000,000 shares, issuable in one or more classes or series, the
rights and preferences of which Preferred Stock may be established from
time to time by the Board of Directors (3,444,910 shares voted for 0
shares voted against)
(4) Approved and ratified the Company's Amended and Restated Bylaws (the
"Amended Bylaws"), which incorporated amendments effecting (i) certain
procedures for a shareholder to introduce business at a shareholders
meeting or nominate director candidates, (ii) certain procedures and
other matters relating to the indemnification of and advancement of
expenses to directors, officers, employees and agents of the Company
and (iii) certain related and other changes. (3,444,910 shares voted
for 0 shares voted against)
(5) Approved certain amendments to the Company's stock option plans and
ratified the issuance of certain stock option agreements. (3,444,910
shares voted for 0 shares voted against)
(6) Approved and adopted the Amended and Restated 1997 Stock Option Plan.
(3,444,910 shares voted for 0 shares voted against)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1999.
12
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AFFILIATED NETWORKS, INC.
Date: May 14, 1999 By: /s/ David A. Schwedel
------------ ----------------------------------
David A. Schwedel
Chief Executive Officer
Date: May 14, 1999 By: /s/ Kenbian A. Ng
------------ ----------------------------------
Kenbian A. Ng
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,873
<SECURITIES> 0
<RECEIVABLES> 136,611
<ALLOWANCES> 126,976
<INVENTORY> 0
<CURRENT-ASSETS> 12,918
<PP&E> 181,563
<DEPRECIATION> (102,324)
<TOTAL-ASSETS> 236,072
<CURRENT-LIABILITIES> 572,736
<BONDS> 0
0
0
<COMMON> 2,422,282
<OTHER-SE> (2,778,620)
<TOTAL-LIABILITY-AND-EQUITY> 236,072
<SALES> 643
<TOTAL-REVENUES> 643
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 576,441
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,712
<INCOME-PRETAX> (578,431)
<INCOME-TAX> 0
<INCOME-CONTINUING> (578,431)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (578,431)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
