<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 2 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES ACT OF 1934
AFFILIATED NETWORKS, INC.
(Name of Small Business Issuer 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
- --------------------------------------------- ----------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(305) 285-2003
--------------------------------
(Issuer's Telephone Number)
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
TO BE SO REGISTERED WHICH EACH CLASS IS TO BE REGISTERED
------------------------------ ------------------------------------
None
SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(Title of Class)
================================================================================
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
COMPANY
Affiliated Networks, Inc. (the "Company") is developing proprietary
internet based trading exchanges for the wholesale trade of equipment, parts and
supplies in selected industries. In addition, the Company publishes financial
and strategic corporate information for use in evaluating and operating various
companies on an industry by industry basis through a number of publications and
on-line services.
The electronic commerce ("E-Commerce") division of the Company's
operations will focus on creating proprietary internet based wholesale trading
exchanges (the "Exchanges") for the marine, medical and dental industries. The
Exchanges, when fully operational, will allow buyers to solicit quotes on-line
from sellers for specific equipment, parts and supplies. The Exchanges will
display to the buyer the best price available, including shipping information
and delivery dates, which will be updated on a real-time basis as bids are
posted. The Exchanges seek 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 the Exchanges will gain access to an
expanded wholesale customer base and have greater opportunity to resell slow
moving inventory. The Company anticipates that Exchange members may act as
sellers and buyers on a daily basis to take advantage of differences in regional
pricing and supply availability. Certain types of inventory, such as outboard
engines, are seasonal in most parts of the country as weather precludes
recreational boating in winter months. The Company believes that the marine
Exchange ("MAREX") will facilitate boat dealers' ability to reduce inventory
levels during slower periods and maintain lower in-stock inventory levels during
peak periods because of greater purchasing power.
The Exchanges are designed to create a low price and low risk
environment for both buyers and sellers. Members must satisfy certain credit
standards based on one of three parameters: (1) participating in a credit
protection option; (2) having annual revenues in excess of $25 million and
having been in business for 10 years or more, or (3) having cash or credit in an
established trading account. Buyers using the Exchanges will request quotes for
equipment, parts and supplies by indicating the manufacturer, make or model,
quantity and color, and will set a deadline for posting quotes. Sellers will
receive requests for bids on their terminals through a flashing icon and have
the opportunity to underbid posted quotes on a real time basis, up to the
buyer's deadline. The buyer selects the desired quote and electronically
confirms the purchase, thereby notifying the seller of acceptance of the quote.
The seller ships the goods via the selected common carrier to the buyer, who
must accept delivery prior to the purchase price (net of commission) being
released to the seller.
The Financial Information Services ("FIS") division of the Company,
which operates through Sovereign Financial Information Services, Inc., a wholly
owned subsidiary, is developing a number of industry specific stock handbooks
and periodicals that provide financial and
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corporate information on public companies within selected industries. The
Company's publications include research reports, stock handbooks and global
industry guides and are supplemented with information accessed via the internet.
The Company intends to generate revenue through the sale of the Company's
research reports, stock handbooks and global industry guides.
INDUSTRY OVERVIEW
The internet has emerged as a global medium enabling millions of people
worldwide to share information, communicate and conduct business electronically.
The Company expects that the number of users of the worldwide web (the "Web")
will continue to grow. This growth is expected to be driven by the large and
growing number of personal computers ("PCs") installed in homes and offices, the
decreasing cost of PCs, easier, faster and cheaper access to the internet,
improvements in network infrastructure, the proliferation of internet content
and the increasing familiarity and acceptance of the internet by businesses and
consumers. The internet possesses a number of unique characteristics that
differentiate it from traditional media: users communicate or access information
without geographic or temporal limitations; users access dynamic and interactive
content on a real-time basis; and users communicate and interact instantaneously
with a single individual or with entire groups of individuals. As a result of
these characteristics, the Company expects that Web usage will continue to grow
rapidly.
The Company believes that the growing adoption of the Web represents an
enormous opportunity for businesses to conduct commerce over the internet. The
internet offers the opportunity to create a compelling global marketplace that
overcomes the inefficiencies associated with traditional trading while offering
the benefits of internet-based commerce to the wholesale trading market. An
internet-based centralized trading place facilitates buyers and sellers meeting,
listing items for sale, exchanging information, interacting with each other and,
ultimately, consummating transactions. It allows buyers and sellers to trade
directly, bypassing traditional intermediaries and lowering costs for both
parties. This trading place is global in reach, offering buyers a significantly
broader selection of goods to purchase and providing sellers the opportunity to
sell their goods efficiently to a broader base of buyers. It offers significant
convenience, allowing trading at all hours and providing continually-updated
information. By leveraging the interactive nature of the internet, the Company
believes that this trading place also facilitates a sense of community through
direct buyer and seller communication, thereby enabling the interaction between
parties with mutual interests. As a result, the Company believes that there
exists a significant market opportunity for an internet-based centralized
trading place that applies the unique attributes of the internet to facilitate
business-to-business trading.
BUSINESS STRATEGY
GROWTH OF E-COMMERCE BUSINESS - Initially, the Company intends to
market the Exchanges to retailers, distributors and exporters within the marine,
medical and dental industries. The Company intends to market the Exchanges to
each such industry segment by advertising in industry publications, utilizing
direct mail, telemarketing and attending trade shows. Once the Exchanges are
operational, the Company hopes to capitalize on significant referral business.
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TARGET SPECIFIC INDUSTRIES - The Company is currently focusing the
development of its Exchanges on the marine industry. Once the MAREX Exchange is
operating, the Company plans to expand into other industries such as the medical
and dental industries. Such expansion would be geared towards industries similar
to those mentioned above which, due to their size, fragmented nature and
purchasing inefficiencies, would most benefit from the use of the Exchanges.
CUSTOMER ASSURANCE - The Exchanges are designed to lower the risks
typically associated with conducting business with unknown parties. Buyers remit
payment to an escrow account. It is only upon receipt of such funds that a
Seller is instructed to ship the items to the Buyer. This mechanism is designed
to help alleviate a Seller's concern about a Buyer's willingness and ability to
remit payment upon receiving the products. Similarly, Buyers are given the
opportunity to inspect the purchased items prior to the release of the funds
from the escrow account to the Seller. This mechanism is designed to alleviate a
Buyer's concern about pre-payment when it has not had the opportunity to inspect
the products.
CUSTOMER SERVICE - The Company intends to provide a lowest price and
user friendly environment, staffed with high quality customer service.
STRATEGIC RELATIONSHIPS - The Company has formed a marketing
relationship with GTE Intelligent Network Services Incorporated d/b/a GTE
Internetworking ("GTE") and has, as of October 1998, retained Raymond James &
Associates, Inc. to assist it with obtaining financing for the Company.
PRODUCTS AND SERVICES - E-COMMERCE
MAREX - THE NATIONAL MARINE EXCHANGE
MAREX - The National Marine Exchange is an on-line service designed to
provide the marine industry with an Exchange to purchase virtually any
equipment, parts and supplies in the marine industry that would be used on a
recreational or commercial vessel. The service is accessed via the internet at
www.marex.com. The Company has focused initially on the marine industry because
of its size, fragmented nature and purchasing inefficiencies. MAREX is designed
to speed up the purchasing process, simplify payment procedures and provide a
low cost forum for the marine industry, which the Company believes is
predominantly operated by small business owners.
PRODUCT AND SERVICES - FINANCIAL INFORMATION SERVICES
The Company also provides financial information services for certain
industries through its research reports, its stock handbooks and its global
industry guides. The research reports, which currently consist of THE NATURAL
RESOURCES RESEARCH REPORT and THE TECHNOLOGY RESEARCH REPORT, are biannual
publications that provide financial and other strategic information on North
American publicly traded companies. The stock handbooks will be published
annually and provide, among other things, company profiles, corporate
backgrounds, stock charts, earnings, industry data, historical research and
competitive intelligence information relating to industries
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including mining, oil & gas, high technology and biotechnology. It is
anticipated that each stock handbook will be accompanied by an internet access
code which will enable the user to access updated information in such areas. The
global industry guides will be published annually and will initially focus on
industry information in Latin America and the Caribbean. The Company has
cultivated strategic relationships with certain private and public entities
which it feels will allow it to provide valuable and timely information
regarding legal developments, finance policies, tax and accounting practices,
political assessments, regional news, competition and industry specific data.
These relationships include those with Data Broadcasting Corporation, PR
Newswire, Baker & McKenzie, Kroll Associates and 17 foreign government
ministries. The Company expects to publish the first series of stock handbooks
and global industry guides during the year 1999.
MARKETING
The Company's primary marketing efforts for its E-Commerce business
include advertising in industry publications, utilizing direct mail,
telemarketing and presence at trade shows. The Company's strategy is to use
telemarketing to identify industry participants that have a desire to expand
their sales by the use of the internet. The marketing focus is to encourage
potential new members to visit the Exchange online, take a virtual tour, and
encourage the business to become a registered member. Upon the registration of a
business, a customer service representative will call the new member to describe
the available services and to qualify such member. In addition, the Company
advertises its E-Commerce services in industry publications such as the MARINE
BUSINESS JOURNAL, BOAT & MOTOR DEALER, BOATING INDUSTRY, MARINA/DOCK AGE, MARINE
BUSINESS JOURNAL, PROFESSIONAL BOAT BUILDER AND SOUNDINGS TRADE ONLY.
INTELLECTUAL PROPERTY
The Company regards obtaining protection of its copyrights, service
marks, trademarks, trade dress and trade secrets as critical to its future
success and will rely on a combination of copyright, trademark, service mark and
trade secret laws and contractual restrictions to establish and protect its
proprietary rights in products and services. While the Company plans to pursue
the registration of its trademarks and service marks in the U.S. and
internationally, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which the Company's services
are made available online. The Company does not currently own the trademark
"MAREX" and there can be no assurance that it will be able to obtain the right
to use this name.
The Company has entered into confidentiality and invention assignment
agreements with its employees and certain vendors in order to limit access to
and disclosure of its proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by the Company to
protect its intellectual property will prove sufficient to prevent
misappropriation of the Company's technology or to deter independent third-party
development of similar technologies.
To date, the Company has not been notified that its technologies
infringe the proprietary rights of third parties, but there can be no assurance
that third parties will not claim infringement by the Company with respect to
past, current or future technologies. The Company expects that
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participants in its markets will be increasingly subject to infringement claims
as the number of services and competitors in the Company's industry segment
grows. Any such claim, whether meritorious or not, could be time-consuming,
result in costly litigation, cause service upgrade delays or require the Company
to enter into royalty or licensing agreements. Such royalty or licensing
agreements might not be available on terms acceptable to the Company or at all.
As a result, any such claim could have a material adverse effect upon the
Company's business, results of operations and financial condition.
SOFTWARE DEVELOPMENT
The Company has invested approximately $300,000 on proprietary software
development for both its internal needs and E-Commerce products under
development. To date, the Company has developed several internal proprietary
softwares that include a full suite of administrative, data collections and
sorting, and marketing management tools. All of these programs are maintained
in-house. The Company's databases contain data on more than 25,000 companies on
a global basis that may be accessed by the sales force on both an intranet and
internet pass-coded protected basis. The Company has developed a proprietary
electronic commerce software program. The software has been designed to enable
the easy migration to other industry platforms with relatively little, if any,
changes.
COMPETITION
E-Commerce has attracted numerous new businesses and many established
businesses are expanding to take advantage of this medium. Many companies are
using electronic data systems to facilitate production and shipping schedules.
Other companies are focusing on direct access to the consumer through on-line
retail sales and catalogs. While the Company is not aware of any services
equivalent to the Exchange currently being offered to the wholesale marine,
trade, there can be no assurance that other businesses are not developing
similar technology that will compete directly with the Company's Exchange. Many
of the companies that currently participate in the E-Commerce market are larger,
more established and have greater financial resources than the Company. There
can be no assurance that direct competition with the Company's products will not
be quickly developed and operated by such companies. Additionally, since the
electronic commerce industry is in its infancy, many companies are attempting to
enter this industry. The field is, and will remain for a period of time,
extremely competitive.
There are several on-line companies providing products and service
competing with those offered by the Company. Some of these companies are larger,
more established and have greater financial resources than the Company.
GOVERNMENT REGULATION
Due to the increasing popularity and use of the internet and other
online services, it is possible that a number of laws and regulations may be
adopted with respect to the internet or other online services covering issues
such as user privacy, freedom of expression, pricing, content and quality of
products and services, taxation, advertising, intellectual property rights and
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information security. The nature of such legislation and the manner in which it
may be interpreted and enforced cannot be fully determined and, therefore,
legislation could be enacted which could subject the Company and/or its
customers to potential liability, which in turn could have an adverse effect on
the Company's business, results of operations and financial condition. The
adoption of any such laws or regulations might also decrease the rate of growth
of internet use, which in turn could decrease the demand for the MAREX service
or increase the cost of doing business or in some other manner have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, applicability to the internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of such laws were adopted prior to the advent of the internet and
related technologies and, as a result, do not contemplate or address the unique
issues of the internet and related technologies.
Numerous states, including the State of Florida, in which the Company's
headquarters are located, have regulations regarding the manner in which
"auctions" may be conducted and the liability of "auctioneers" in conducting
such auctions. Due to the fact that these laws were promulgated prior to the
advent of the internet and exchanges in the nature of MAREX, it is not clear,
and there is little guidance from the courts and the legislature as to, whether
a system like MAREX would fall within their purview. While the Company is in the
process of seeking a determination as to the applicability of the Florida laws
to the Company's business, there can be no assurance that the State of Florida,
or any other state, will not attempt to impose these regulations upon the
Company or that such imposition will not have a material adverse effect on the
Company's business, results of operations and financial condition.
Several states have also proposed legislation that would limit the uses
of personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also recently
settled a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, could create uncertainty in the marketplace that could reduce demand for
the services of the Company or increase the cost of doing business as a result
of litigation costs or increased service delivery costs, or could in some other
manner have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, because the Company's services
are accessible worldwide, and the Company facilitates sales of goods to users
worldwide, other jurisdictions may claim that the Company is required to qualify
to do business as a foreign corporation in a particular state or foreign
country. The Company is currently only qualified to do business in the State of
Florida, and failure by the Company to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject the Company to taxes
and penalties for the failure to qualify and could result in the inability of
the Company to enforce contracts in such jurisdictions. Any such new legislation
or regulation, or the application of laws or regulations from jurisdictions
whose laws do not currently apply to the Company's business, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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EMPLOYEES
The Company currently has 17 full-time employees. The Company considers
its relations with its employees to be good. The Company believes that its
future success will depend in part on its continued ability to attract,
integrate, retain and motivate highly qualified technical and managerial
personnel, and upon the continued service of its senior management and key
technical personnel, none of whom is bound by an employment agreement.
Competition for qualified personnel in the Company's industry and geographical
location is intense, and there can be no assurance that the Company will be
successful in attracting, integrating, retaining and motivating a sufficient
number of qualified personnel to conduct its business in the future.
RECENT HISTORY
The Company is incorporated under the laws of the State of Florida and
conducts its business from its offices at The Coconut Grove Bank Building, 2701
South Bayshore Drive, Coconut Grove, Florida 33133. The internet address for the
Company is http://www.an.net. The Company was originally incorporated in 1992
under the name Florida Marine Management, Inc. On April 19, 1995, the Company
changed its name to Affiliated Networks, Inc. Originally, the Company provided
strategic data and information, and marketing and management services to the
marine industry. By 1995, the Company was providing research and data to other
industries including mining, oil & gas and high technology. In order to more
appropriately reflect the Company's broadened business objectives, the Company
changed its name to Affiliated Networks, Inc.
AVAILABLE INFORMATION
Upon the effective date of this Form 10-SB, February 2, 1999, the
Company will become subject to the reporting requirements of the Securities
Exchange Act of 1934 as amended and will file periodic reports with the
Securities and Exchange Commission (the "Commission"). Copies of any documents
that the Company files with the Commission may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fees prescribed by the Commission, or may be examined without charge at
the offices of the Commission. The Commission also maintains a World Wide Web
site on internet at http://www.sec.gov that contains reports, proxy and
information statements and other information filed electronically with the
Commission.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements that have been certified by its
independent public accountants, and quarterly reports containing unaudited
summary financial information for each of the first three quarters of each
fiscal year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following discussion and analysis reflects management's assessment
and understanding of the Company's results of operations and financial condition
and should be read in conjunction with the Company's financial statements and
the notes thereto.
OVERVIEW
Affiliated Networks has two primary business segments: E-Commerce and
the FIS business. Since late 1997, the Company's activities for its E-Commerce
business have consisted of raising capital, recruiting personnel and developing
and enhancing the software and hardware. The E-Commerce business is developing
internet based wholesale trading exchanges for specific industries. The Marex
system, a trading exchange for the marine industry, was in the development stage
until November 1998 and therefore has not generated any significant revenues to
date. The Company expects to generate revenues from its E-Commerce operations by
charging an administrative fee. The fee will be based on a sliding scale ranging
from approximately 10% for smaller transactions to 4% for larger transactions.
Since inception, the Company has expended approximately $300,000 developing
proprietary software, including a prototype Exchange, which development has been
funded primarily by capital raising transactions and bank borrowings.
The FIS business generates revenues by charging customers a fee to
appear in its research reports, which include THE NATURAL RESOURCES RESEARCH
REPORT and THE TECHNOLOGY RESEARCH REPORT. The Company publishes its research
reports biannually and recognizes revenue over the life of the contract.
Beginning in the first half of 1998, the Company has focused its publishing
efforts on developing new products such as stock handbooks, global industry
guides, and a supplementary online service, which will generate revenues upon
sales to customers.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
SALES. Through December 31, 1998, all of the Company's sales
were generated by its FIS business. Sales in 1998 decreased 76.6% to $90,227
from $385,765 in 1997. The decrease in sales was primarily due to the lack of
renewals from existing clients of the Company's mining research report products
due to a near all time low in the price of gold. Therefore, the FIS business has
focused its efforts on developing new products such as stock handbooks, global
industry guides, and a supplementary online service. For the years ended
December 31, 1998 and 1997, the Company recorded provision for doubtful accounts
totaling $101,647 and $25,329, respectively, as a result of a decline in the
mining industry. As such, management has delayed its collection efforts towards
these receivables until the mining industry recovers. The Company does not
expect significant additional increases in the allowance for doubtful accounts
relating to the decline in the mining industry.
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The Company's E-Commerce business did not generate any revenues in 1998 or 1997.
In November 1998, the E-Commerce business launched its first trading exchange,
the Marex system, and began to develop its membership.
DIRECT COSTS. Direct Costs are comprised of production costs
for the research reports. The Company's direct costs' decreased 59.6% to $51,851
in 1998 from $128,473 in 1997, which was primarily due to the decrease in sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general
and administrative expenses ("SG&A") increased 34.0% to $1,192,517 in 1998 from
$889,936 in 1997. The change consisted of an increase in the FIS business of
approximately $20,000 and an increase in the E-Commerce business of
approximately $283,000. The increase in the SG&A of the FIS business was
primarily due to the hiring of additional employees for the development and
subsequent sales of the new products and an increase in promotional costs, which
were partially offset by the decrease in the provision for doubtful accounts.
The E-Commerce business incurred SG&A expenses in 1998 totaling approximately
$283,000 primarily relating to advertising and promotional expenses of
approximately $160,000 incurred for the Marex system and for payroll costs. The
Company expects to increase its SG&A expenses for the operations and marketing
of the E-Commerce business.
NET LOSS. The Company's net loss increased 76.1% to $1,155,053
in 1998 from $655,857 in 1997. The increase in the net loss consisted of an
increase of approximately $216,000 in the FIS business and $283,000 in the
E-Commerce business. The increase in the FIS business was primarily due to the
decrease in sales and increase in SG&A expenses, as described above. The
increase in the E-Commerce business was primarily due to the SG&A expenses
relating to the launch of the Marex system.
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.
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Net cash used in operating activities were approximately $1,049,000 and
$512,000 in 1998 and 1997, respectively, which was primarily due to the loss
before income taxes reported during the period.
Net cash provided by investing activities was approximately $16,000 in
1998, which was primarily due to the decrease in the amount due from
shareholder. In 1997, net cash used in investing activities was approximately
$261,000, which was primarily due to the software development costs incurred
during the period.
Net cash provided by financing activities were approximately $1,354,000
and $733,000 in 1998 and 1997, respectively, which was primarily due to the
issuance of common stock. For the years ended December 31, 1998 and 1997, the
Company received approximately $1,405,000 and $700,000, respectively, from the
issuance of common stock.
The Company's working capital at December 31, 1998 was $13,821 compared
to the working capital deficit of $226,200 at December 31, 1997. The improvement
was primarily due to the increase of cash to $350,042 at December 31, 1998 from
$28,778 at December 31, 1997. The increase in cash resulted from the issuance of
common stock during 1998.
At December 31, 1998, the principal source of liquidity for the Company
was approximately $350,000 of cash. The Company currently maintains lines of
credit and term loans with several banks, which total $139,727 as of December
31, 1998. At December 31, 1998, however, the Company had no availability under
its lines of credit. The majority shareholder and CEO of the Company 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 $35,750 at December 31, 1998. 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%. Management believes that existing working capital and 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. See Note 12 in the accompanying audited
financial statements regarding an uncertainty about the ability of the Company
to continue as a going concern.
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SEASONALITY
Historically, the Company's revenues and operating results experience a
small decrease in the late second and early third quarters as a result of
decreased demand for the Company's 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.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company leases office space (2,311 sq. ft.) in Coconut Grove,
Florida, pursuant to a lease agreement that expires September 30, 2000.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 10, 1999, certain
information known by the Company with respect to the ownership of shares of
Common Stock as to (i) all persons who are beneficial owners of more than 5% of
the Common Stock of the Company, (ii) each director of the Company, (iii) each
executive officer of the Company and (iv) the directors and registrants of the
Company as a group. Each person's address is c/o the Company's principal offices
at 2701 South Bayshore Drive, Suite #403, Coconut Grove, Florida 33133.
Amount and Nature of the
Name and Address of Beneficial Ownership of Ownership
Beneficial Owner Common Stock Percentage
- ---------------- ------------ ----------
David A. Schwedel 2,853,000(1) 47.11%
Roger A. Baumann 498,000(2) 8.22%
Roger A. Trombino 72,000(3) 1.19%
Dan Gallagher 72,000(4) 1.19%
George Glazer 90,000(5) 1.49%
Leonard Wien 628,000(6) 10.37%
---------- ------
All officers and directors 4,213,000 69.57%
========== ======
- -----------------------
(1) The number of shares includes (i) fully vested options held by David
Schwedel to purchase 690,000 shares of common stock and (ii) warrants
issued to DAS Consulting, Inc., a corporation wholly owned by David
Schwedel, exercisable at any time for 3,000 shares of common stock.
(2) The number of shares includes fully vested options to purchase 198,000
shares of common stock.
(3) This number reflects fully vested options to purchase 72,000 shares of
common stock.
(4) This number reflects fully vested options to purchase 72,000 shares of
common stock.
(5) This number reflects fully vested options to purchase 90,000 shares of
common stock.
(6) These shares are held by the Wien Family Holdings Limited Partnership. Mr.
Wien, a private investor, is the general partner of the partnership and has
both voting and investment power over the partnership. The number reflected
includes warrants exercisable at any time for 3,000 shares of common stock.
Mr. Wien is related to Roger A. Baumann.
Page 13 of 39
<PAGE> 14
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following sets forth certain information with respect to the
directors and officers of the Company.
Name Age Title
- ---- --- -----
David A. Schwedel 33 Chief Executive Officer,
President and Director
Roger A. Baumann 31 Chief Information Officer
Kenbian A. Ng 31 Chief Financial Officer
Roger A. Trombino 59 Director
Dan Gallagher 52 Director
George Glazer 68 Director
All Directors hold office until the Company's Annual Meeting of Shareholders to
be held in the year 2000 or until their successors are elected and qualified.
Executive officers serve at the discretion of the Board of Directors. No
compensation is paid to the Board members for attendance at each Board meeting.
For information on the ownership of shares by directors and officers see,
"Security Ownership of Certain Beneficial Owners and Management."
DAVID A. SCHWEDEL, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR. Mr.
Schwedel has served as a Director and President of the Company since 1992, when
he founded the Company. Mr. Schwedel has over ten years of hands-on experience
in the business development and corporate communications profession.
ROGER A. BAUMANN, CHIEF INFORMATION OFFICER. Mr. Baumann has served as
Chief Information Officer of the Company since January of 1997. For the past six
years, Mr. Baumann has been an independent information technology consultant,
developing business systems for use on mainframe, mini and personal computer
systems. Mr. Baumann joined the Company on a part-time basis in 1994 and became
a full-time consultant to the Company in 1995.
KENBIAN A. NG, CHIEF FINANCIAL OFFICER. Mr. Ng was hired as the Chief
Financial Officer of the Company in March 1999. Prior to joining Affiliated
Networks, Mr. Ng served as the Chief Financial Officer for a publicly traded
company. Mr. Ng was also with Arthur Andersen LLP, an international accounting
firm, for over five years.
ROGER A. TROMBINO, DIRECTOR. Mr. Trombino has served as a Director of
the Company since 1992. Mr. Trombino has over 30 years of diversified experience
with an investment bank, a multi-national Fortune 500 company, a group of
private companies, and a Big Six accounting firm. He served on the Board of
Directors of the Bon Secours Health System and several charitable organizations.
Page 14 of 39
<PAGE> 15
DAN GALLAGHER, DIRECTOR. Mr. Gallagher joined the Board of Directors of
the Company in November, 1997. Mr. Gallagher is currently, and has been for the
last five years, the Director of New Business Development for GTE, where he has
been for over 22 years.
GEORGE GLAZER, DIRECTOR. Mr. Glazer has served as a director of the
Company since February 1998. Mr. Glazer recently retired from Hill & Knowlton,
an international public affairs, public relations firm where he had been Senior
Vice President and Executive Director of worldwide broadcast and satellite
services. Mr. Glazer currently serves as the President of Broadcast Media, Inc.,
headquartered in Boynton Beach, Florida.
ITEM 6. EXECUTIVE COMPENSATION.
The following is the aggregate annual remuneration of the Company's
Chief Executive Officer (the "Named Officer") for the last three fiscal years.*
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1) Compensation
----------------------------------------- ----------------------
Fiscal Number of Options
Name and Principal Position Year Salary Granted
--------------------------------------- ------------------- ------------------ ----------------------
<S> <C> <C> <C>
David A. Schwedel 1998 $75,000 - 0 -
Chief Executive Officer, President 1997 $75,000 450,000
and Director 1996 $65,000 420,000
</TABLE>
* No officer or director is paid more than $100,000 by the Company per year.
(1) The columns for "Bonus" and "Other Annual Compensation" have been omitted
because there is no bonus or compensation required to be reported in such
columns.
OPTION GRANTS TABLE
No options were granted to any Named Officer in 1998.
STOCK OPTION PLANS
1996 INCENTIVE STOCK OPTION PLAN. The Company's 1996 Incentive Stock
Option plan, as amended, allows the Company to issue, in the aggregate, options
for up to 300,000 shares (prior to giving effect to the 3-for-1 stock split) of
the Company's common stock to selected employees. The options may be exercised
at a price that is the greater of one dollar per share, the fair market value of
the common stock on the date of grant, or the book value per share on the date
of grant. Each option is 100% vested as of the date of the grant and expires on
the fifth anniversary of the date of grant unless terminated earlier.
1997 INCENTIVE STOCK OPTION PLAN. The Company's 1997 Incentive Stock
Option Plan, as amended, allows the Company to issue, in the aggregate, options
for up to 660,000 shares (prior to giving effect to the 3-for-1 stock split) of
the Company's common stock to selected employees. The options may be exercised
at a price that is the greater of one dollar per share, the fair market value of
the common stock on the date of grant, or the book value per share on the
Page 15 of 39
<PAGE> 16
date of grant. The options vest over a period of four years with an initial
vesting of 20% on the date of grant with an additional 20% vesting on each
anniversary thereafter. Each option shall expire on the fifth anniversary of the
date of grant unless terminated earlier.
AMENDED AND RESTATED 1997 STOCK OPTION PLAN. The Company's Amended and
Restated 1997 Stock Option Plan allows the Company to issue, in the aggregate,
options for up to 2,000,000 shares (post 3-for-1 stock split) of the Company's
common stock to selected employees, directors or consultants of the Company. The
options may be exercised at a price that is the greater of one dollar per share,
the fair market value of the common stock on the date of grant, or the book
value per share on the date of grant. The options vest over a period of four
years with an initial vesting of 20% on the date of grant with an additional 20%
vesting on each anniversary thereafter. Each option shall expire on the fifth
anniversary of the date of grant unless terminated earlier.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has entered into an Affinity Marketing Agreement with GTE
Intelligent Network Services Incorporated d/b/a GTE Interworking ("GTE"), a
company which provides internet access, web hosting and other internet-related
services. Dan Gallagher, one of the Company's directors, is the Director of New
Business Development for GTE.
Renee Schwedel, the mother of David Schwedel, the Company's President,
served on the Board of Directors of the Company until June 1998.
DAS Consulting, Inc., a corporation wholly owned by David Schwedel, has
entered into a revolving loan agreement with the Company, dated as of January 1,
1998, pursuant to which there are currently $35,750 outstanding. The loans bear
interest at a rate of 2.5% over the prime rate.
ITEM 8. DESCRIPTION OF SECURITIES.
The authorized capital stock of the Company consists of (i) 25,000,000
shares of common stock, par value $.01 (the "Common Stock") of which 4,928,180
are issued and outstanding as of March 10, 1999, and (ii) 1,000,000 shares of
Preferred Stock, par value $.01 ("Preferred Stock); none of which are issued or
outstanding.
COMMON STOCK
Subject to the rights of the holders of any preferred stock which may
be outstanding, each holder of Common Stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor, and, in the event of liquidation, to
share pro rata in any distribution of the Company's assets after payment or
providing for the payment of liabilities and the liquidation preference of any
outstanding preferred stock. Each holder of Common Stock is entitled to one vote
for each share held of record on the applicable record date on all matters
presented to a vote of shareholders, including the election of directors.
Holders of Common Stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities and there are no
conversion rights or
Page 16 of 39
<PAGE> 17
redemption or sinking fund provisions with respect to such stock. All
outstanding shares of Common Stock are fully paid and nonassessable.
The transfer agent and registrar for the Common Stock is Florida
Atlantic Stock Transfer Co., Tamarac, Florida.
PREFERRED STOCK
The Company's Board of Directors may, without further action by the
Company's shareholders, from time to time, direct the issuance of shares of
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of Preferred Stock would reduce the amount of
funds available for the payment of dividends on shares of Common Stock. Holders
of shares of Preferred Stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of shares of Common Stock. Under certain
circumstances, the issuance of shares of Preferred Stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of the Company's securities
or the removal of incumbent management. The Board of Directors of the Company,
without shareholder approval, may issue shares of Preferred Stock with voting
and conversion rights which would adversely affect the holders of shares of
Common Stock. There are currently no shares of Preferred Stock outstanding, and
the Company has no present intention to issue any shares of Preferred Stock.
The State of Florida has enacted legislation that may deter or
frustrate takeovers of Florida corporations. The Florida Control Share Act
generally provides that shares acquired in excess of certain specified
thresholds will not possess any voting rights unless such voting rights are
approved by a majority of a corporation's disinterested shareholders. The
Florida Affiliated Transactions Act generally requires supermajority approval by
disinterested shareholders of certain specified transactions between a public
corporation and holders of more than 10% of the outstanding voting shares of the
corporation (or their affiliates). Florida law and the Company's Articles also
authorize the Company to indemnify the Company's directors, officers, employees
and agents under certain circumstances and presently limit the personal
liability of corporate directors for monetary damages, except where the
directors (i) breach their fiduciary duties and (ii) such breach constitutes or
includes certain violations of criminal law, a transaction from which the
directors derived an improper personal benefit, certain unlawful distributions
or certain other reckless, wanton or willful acts or misconduct. The Company may
also indemnify any person who was or is a party to any proceeding by reason of
the fact that he is or was a director, officer, employee or agent of such
corporation (or is or was serving at the request of such corporation in such a
position for another entity) against liability to be in the best interests of
such corporation and, with respect to criminal proceedings, had no reasonable
cause to believe his conduct was unlawful.
Page 17 of 39
<PAGE> 18
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON STOCK AND OTHER
SHAREHOLDER MATTERS.
The Company's Common Stock is traded on the NASD over-the-counter
bulletin board under the symbol "AFNT" and commenced its trading on February 4,
1998. The following table sets forth the high and low bid quotations for the
Common Stock for the periods indicated. These quotations reflect prices between
dealers, do not include retail mark-ups, mark-downs, commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
1998
- ----
<S> <C> <C>
First Quarter (commencing February 4) $18 (pre 3-for-1 $16.50 (pre 3-
split) for-1 split)
Second Quarter $ 5.28125 $ 5.25
Third Quarter $ 5.00 $ 4.50
Fourth Quarter $14.00 $ 4.00
</TABLE>
As of March 10, 1999, there were approximately 94 holders of record of
the Company's Common Stock, of which 4,928,180 shares were issued and
outstanding. The closing bid price for the Common Stock was $10.4375 per share.
The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain future earnings, if any, to finance the
expansion of its business and does not anticipate that any cash dividends will
be paid in the foreseeable future. The future dividend policy will depend on the
Company's earnings, capital requirements, expansion plans, financial condition
and other relevant factors.
ITEM 2. LEGAL PROCEEDINGS.
There are no pending material legal proceedings to which the Company is
a party or which any of its property is the subject.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1995, the Company raised $300,000 through the sale of
30,000 shares of Common Stock at an average per share price of $10.00 through
individual private placements. The shares were sold without registration under
the Securities Act of 1933, as amended (the "Securities Act"), in reliance on
Rule 504 of Regulation D ("Reg. D") under the Securities Act (which exemption
was available due to the fact that the aggregate offering price did not exceed
$1,000,000) and, with respect sales to non-United States residents, pursuant to
Regulation S under the Securities Act. The proceeds of these sales were used for
operational expenses of the Company. Mr. Schwedel, the President of the Company,
purchased 5,000 of these shares. In June 1996, the Company effectuated a
10-for-1 stock split. During 1997, the Company raised $700,000 through its sale
of 120,060 shares of Common Stock to accredited investors under Reg. D.
Page 18 of 39
<PAGE> 19
In March 1998, the Company effectuated a 3-for-1 stock split. In 1998, the
Company sold 181,000 shares of Common Stock to non-United States residents for
$905,000 pursuant to Regulation S of the Securities Act. Additionally, in 1998
the Company raised $500,000 through the sale of 125,000 shares of Common Stock
pursuant to Reg. D.
During 1997, the Company received two loans from entities owned or
controlled by current shareholders in the amounts of $15,000 and $50,000,
respectively. The maximum amount to be borrowed from these lenders is $100,000.
As partial consideration for these loans, the Company has issued 6,000 warrants
to the above lenders. Each warrant is convertible into one share of the
Company's Common Stock and is exercisable at $1.83 per share (these warrants
were to be exercisable at $5.50 per share prior to the 3-for-1 stock split). The
warrants are valid for a period of five years. The Company has also issued
warrants converting into 27,000 shares of Common Stock to Beloyan Investment
Securities ("BIS"), each with an exercise price of $1.83, in consideration of
BIS having acted as a placement agent for the private placement of a portion of
the 300,000 shares. These warrants were issued without registration under the
Securities Act on reliance upon Reg. D.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has authority under the Florida Business Corporation Act to
indemnify its directors and officers to the extent provided in such statute. The
Company's Articles of Incorporation provide that the Company shall indemnify its
executive officers and directors to the fullest extent permitted by law either
now or hereafter. The Company has also entered into an agreement with each of
its directors and certain of its officers wherein the Company agreed to
indemnify each of them to the fullest extent permitted by law. In general,
Florida law permits a Florida corporation to indemnify its directors, officers,
employees and agents, and persons serving at the corporation's request in such
capacities for another enterprise against liabilities arising from conduct that
such persons reasonably believed to be in, or not opposed to, the best interests
of the corporation and, with respect to any criminal action or proceeding, had
no reasonable cause to believe their conduct was unlawful.
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Florida law. In addition, each
director will continue to be subject to liability for (a) violations of criminal
law, unless the director had reasonable cause to believe his conduct was lawful
or had no reasonable cause to believe his conduct was unlawful, (b) deriving an
improper personal benefit from a transaction, (c) voting for or assenting to an
unlawful distribution, and (d) willful misconduct or a conscious disregard for
the best interests of the Company in a proceeding by or in the right of the
Company to procure a judgment in its favor or in a proceeding by or in the right
of a shareholder.
Page 19 of 39
<PAGE> 20
The statute does not affect a director's responsibilities under any other law,
such as the federal securities laws or state or federal environmental laws.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought
from the Company, nor is the Company aware of any threatened litigation that may
result in claims for indemnification from the Company by any officer or
director. The Company has directors and officers insurance in place, which
insures claims up to $1 million per occurrence.
Page 20 of 39
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Affiliated Networks, Inc. and Subsidiary
Miami, Florida
We have audited the accompanying consolidated balance sheet of Affiliated
Networks, Inc. and Subsidiary as of December 31, 1998 and the related
consolidated statements of income from operating activities, shareholders'
equity, and cash flows for the years ended December 31, 1998 and 1997. Our
responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Affiliated Networks, Inc. and
Subsidiary as of December 31, 1998 and the results of their operations,
changes in their shareholders' equity, and their cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ McClain & Company, L.C.
January 18, 1999
Miami, Florida
Page 21 of 39
<PAGE> 22
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 350,042
Receivables (net) 9,635
-----------
Total current assets 359,677
-----------
NET PROPERTY AND EQUIPMENT 71,270
-----------
OTHER ASSETS
Copyright (net) 4,000
Software development costs (net) 156,610
Deposits 5,039
-----------
Total other assets 165,649
-----------
Total assets $ 596,596
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable $ 116,206
Current portion of capital lease
obligations 11,296
Accounts payable and accrued
expenses 106,307
Customer deposits 76,297
Due to related party 35,750
-----------
Total current liabilities 345,856
-----------
LONG TERM LIABILITIES
Notes payable, net of current portion 23,521
Capital lease obligations, net of current
portion 5,126
-----------
Total long-term liabilities 28,647
-----------
Total liabilities 374,503
-----------
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share,
25,000,000 shares authorized, 4,928,180 shares issued and outstanding 49,282
Additional paid-in capital 2,373,000
Accumulated deficit (2,200,189)
-----------
Total shareholders' equity 222,093
-----------
Total liabilities and shareholders' equity $ 596,596
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
Page 22 of 39
<PAGE> 23
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME FROM OPERATING ACTIVITIES
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
SALES $ 90,227 $ 385,765
OTHER INCOME
Trading account losses (912) (23,213)
----------- -----------
Total income 89,315 362,552
----------- -----------
COSTS AND EXPENSES
Direct costs 51,851 128,473
Selling, general, and
administrative expenses 1,192,517 889,936
----------- -----------
Total costs and expenses 1,244,368 1,018,409
----------- -----------
Net loss $(1,155,053) $ (655,857)
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ (.24) $ (.16)
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
Page 23 of 39
<PAGE> 24
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 39,000 $ 278,000 $ (389,279) $ (72,279)
Issuance of 360,200 shares
of common stock and
contribution of additional
paid-in capital 3,602 696,698 -- 700,300
Net loss -- -- (655,857) (655,857)
----------- ----------- ----------- -----------
Balance, December 31, 1997 42,602 974,698 (1,045,136) (27,836)
Issuance of 668,000 shares
of common stock and
contribution of additional
paid-in capital 6,680 1,398,302 -- 1,404,982
Net loss -- -- (1,155,053) (1,155,053)
----------- ----------- ----------- -----------
Balance, December 31, 1998 $ 49,282 $ 2,373,000 $(2,200,189) $ 222,093
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
Page 24 of 39
<PAGE> 25
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,155,053) $ (655,857)
Adjustments to reconcile net loss to net
cash used in operations
Depreciation 28,587 24,794
Amortization 70,137 68,655
Provision for doubtful accounts 25,329 101,647
Increase in receivables (2,408) (52,623)
(Decrease) increase in accounts payable (22,600) 31,508
(Decrease) increase in customer deposits (27,448) 4,453
Net decrease (increase) in trading securities 34,875 (34,875)
----------- -----------
Net cash used in operating
activities (1,048,581) (512,298)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (36,906) (6,811)
Additions to software development costs (8,158) (203,278)
Net decrease (increase) in due from
shareholder 61,038 (50,820)
----------- -----------
Net cash provided by (used in)
investing activities 15,974 (260,909)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 438,862 83,155
Principal payments on due to related party (403,112) --
Principal payments on notes payable, net (76,112) (41,222)
Principal payments on capital lease
obligations (10,749) (9,306)
Proceeds from stock issuance 1,404,982 700,300
----------- -----------
Net cash provided by financing
activities 1,353,871 732,927
----------- -----------
Increase (decrease) in cash 321,264 (40,280)
CASH, beginning of year 28,778 69,058
----------- -----------
CASH, end of year $ 350,042 $ 28,778
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the years ended December 31, 1998 and 1997, interest paid was
approximately $45,200 and $31,000, respectively
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
Page 25 of 39
<PAGE> 26
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY OPERATIONS AND BUSINESS SEGMENTS
Affiliated Networks, Inc. ("The Company") has two business activities:
electronic commerce ("E-Commerce") and financial information services
("FIS"). Each of these is a business segment with its financial
performance detailed in this report.
The electronic commerce ("E-commerce") division of the Company's
operations (in development stage up to November 1998) focuses on
creating proprietary Internet based wholesale trading exchanges ("the
Exchanges") for the marine, medical and dental industries. The
Exchanges, when fully operational, will allow buyers to solicit quotes
on-line from sellers for specific equipment, parts and supplies. The
Exchanges will display to the buyer the best price available,
including shipping information and delivery dates, which will be
updated on a real-time basis as bids are posted. The Exchanges seek 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 seller's
overstocked and available inventory. Sellers utilizing the Exchanges
will gain access to an expanded wholesale customer base and have
greater opportunity to resell slow-moving inventory. The Company
anticipates that Exchange members may act as sellers and buyers on a
daily basis to take advantage of differences in regional pricing and
supply availability. Certain types of inventory, such as outboard
engines, are seasonal in most parts of the country as weather
precludes recreational boating in winter months. The Company believes
that the Marine Exchange ("MAREX") will facilitate boat dealers'
ability to reduce inventory levels during slower periods and maintain
lower in-stock inventory levels during peak periods because of greater
publishing power.
The Exchanges are designed to create a low price and low risk
environment for both buyers and sellers. Members must satisfy certain
credit standards based on one of three parameters: (1) participating
in a credit protection option; (2) having annual revenues in excess of
$25 million and having been in business for 10 years or more; or (3)
having cash or credit in an established trading account. Buyers using
the Exchange will request quotes for equipment, parts and supplies by
indicating the manufacturer, make or model, quantity and color, and
will set a deadline for posting quotes. Sellers will receive requests
for bids on their terminals through a flashing icon and have the
opportunity to underbid posted quotes on a real time basis up to the
buyer's deadline. The buyer selects the desired quote and
electronically confirms the purchase, thereby notifying the seller of
acceptance of the quote. The seller ships the goods via the selected
common carrier to the buyer, who must accept delivery prior to the
purchase price (net of commission) being released to the seller. Prior
to the E-Commerce division coming on-line, the portion of the
Company's activities related to this division were reflected as a
development stage in these financial statements under the
classification of software development costs.
Page 26 of 39
<PAGE> 27
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPANY OPERATIONS AND BUSINESS SEGMENTS (CONTINUED)
The Financial Information Services ("FIS") division of the Company,
which as of June 1998 operated through Sovereign Financial Information
Services, Inc., a wholly owned subsidiary, is developing a number of
industry specific stock handbooks and periodicals that provide
financial and corporate information on public companies within
selected industries. The Company's publications include research
reports, stock handbooks and global industry guides and are
supplemented with information accessed via the Internet. The Company
intends to generate revenue through the sale of the Company's research
reports, stock handbooks and global industry guides.
PRINCIPLES OF CONSOLIDATION
During June 1998, Sovereign Financial Information Services, Inc. was
formed as a wholly owned subsidiary of Affiliated Networks, Inc.
The accompanying consolidated financial statements include the
accounts of Affiliated Networks, Inc. and Sovereign Financial
Information Services, Inc. All intercompany accounts and transactions
have been eliminated in the consolidated financial statements.
REVENUE RECOGNITION
The Company charges its customers for appearing in its research
reports on a per appearance basis. Revenues are recorded over the life
of the contract on a per appearance basis as specified in the
contract. Monies received prior to publication of the research reports
are recorded as customer deposits and are not recognized as revenue
until distribution occurs. For the years ended December 31, 1998 and
1997, this was the sole source of sales for the Company.
RECENT PRONOUNCEMENTS
Effective for the year ended December 31, 1998, the Company adopted
SFAS No. 131, which requires a new basis of determining reportable
business segments. This approach (contrasted with the prior
requirement which utilized a specific classification system for
determining segments) designates the Company's internal organization
as used by management for making operating decisions as the basis for
determining business segments. On this basis, the Company has two
reportable business segments: Electronic Commerce ("E-Commerce") and
Financial Information Services ("FIS"). Segment results, as well as
selected geographic data, are presented on this new basis in 1998, as
well as retroactively ( see "BUSINESS SEGMENTS").
Page 27 of 39
<PAGE> 28
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS (CONTINUED)
The Company adopted SFAS 130 effective in 1998. It requires disclosure
of nonowner changes in stockholders' equity and is defined as net
income plus direct adjustments to stockholders' equity.
The adoption of both SFAS 131 and 130 will have no effect on the
Company's reported net income.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998. The Company has
complied with the provisions of SOP 98-1 and, as such, the SOP will
have no effect on the manner in which the Company reports its income.
BUSINESS SEGMENTS
The E-Commerce segment of the Company was in the development stage
until November 1998. While in the development stage, the sole activity
of the E-Commerce segment was the development of an on-line
proprietary software. Additions to these capitalized costs totaled
$8,158 and $83,278 in 1998 and 1997, respectively. Prior to November
1998, these capitalized software costs were not amortized, as the
software was not ready for its intended use. Total assets (including
capitalized software) dedicated to the E-Commerce segment were
approximately $428,000 and $83,000 as of December 31, 1998 and 1997,
respectively. Included in the statement of operations for the year
ended December 31, 1998 are approximately $281,000 of advertising and
other general and administrative expenses and $1,500 of amortization
expense as a result of the E-Commerce software being on-line in
November 1998.
The FIS segment of the Company accounts for the remaining activity of
the Company. For the year ended December 31, 1998 and 1997, the FIS
segment incurred operating losses of approximately $873,000 and
$656,000, respectively. Included in these losses were depreciation and
amortization expenses of $97,242 and $93,449, respectively. Total
assets dedicated to the FIS segment were approximately $169,000 and
$365,000 as of December 31, 1998 and 1997, respectively, and included
capital expenditures of $36,906 and $126,811, respectively.
As the E-Commerce segment did not generate any sales during the years
ending December 31, 1998 and 1997, revenues for the Company during
those time periods were solely from the FIS segment and were derived
from customers located in geographic areas as follows:
1998 1997
-------- --------
United States $ -- $ 21,797
Canada 90,227 363,968
-------- --------
$ 90,227 $385,765
======== ========
Page 28 of 39
<PAGE> 29
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STRATEGIC RELATIONSHIPS
MAREX:
The Company has a non-exclusive agreement with GTE Intelligent Network
Services, Inc. d/b/a GTE Internetworking ("GTE") whereby GTE agrees to
sell specified Internet access services to the Company's merchants for
a predetermined fee and, in return, the Company will receive a
one-time referral fee once specified minimum active accounts have been
achieved. The Company is obligated to provide merchants with an
unspecified amount of communication and promotion support that will
help merchants become aware of GTE's services. The term of this
agreement is for one year expiring in August of 1999 and shall
continue for subsequent one year terms except that either party may
terminate the agreement with thirty calendar days written notice.
FIS:
Since the Company's inception, management has continually strived to
develop strategic relationships within the business community, both in
the public and private sectors. It is management's contention that
these informal relationships enable its FIS segment to provide more
valuable and timely industry-specific information.
TRADING SECURITIES
The Company's securities investments that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities. Trading securities are recorded at
fair value on the balance sheet in current assets with the change in
fair value during the period included in earnings.
DEPRECIABLE ASSETS
Property and equipment are stated at cost and depreciated using
straight-line methods over the estimated useful lives of the assets.
SOFTWARE DEVELOPMENT COSTS
The Company has capitalized two internally developed software: IRN and
MAREX.
Prior to the issuance of SOP 98-1, the Company was following the
guidance promulgated by SFAS No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED. As
prescribed by SFAS No. 86, all costs incurred to establish
technological feasibility of a computer software product to be sold,
leased, or otherwise marketed were expensed as incurred.
Once technological feasibility was determined (January 1996 for IRN
and January 1997 for MAREX), the subsequent costs for coding and
testing were capitalized until the software was available for general
release to customers (January 1997 for IRN and November 1998 for
MAREX).
Page 29 of 39
<PAGE> 30
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS (CONTINUED)
Marex amortization commenced as of December 1998, using the
straight-line method over the remaining estimated useful life of five
years, and was approximately $1,500 for the year ended December 31,
1998.
Amortization of Investors Research Network ("IRN"), an on-line
Internet research service used for internal purposes and as a
supplement to the mining research, oil and gas, and high technology
reports, commenced in 1997 using the straight-line method over the
remaining estimated useful life of three years. Amortization for the
years ending December 31, 1998 and 1997, was approximately $66,000 per
year.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicated that the carrying amount
of an asset may not be recoverable.
COPYRIGHTS
The cost of copyrights acquired is being amortized using the
straight-line method over five years. Included in the consolidated
statements of income from operating activities for the years ended
December 31, 1998 and 1997, are $2,000 per year of amortization
expenses relating to these copyrights. As of December 31, 1998
accumulated amortization of copyrights totaled $6,000.
INCOME TAXES
The Company utilizes an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the
financial statement and tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences
are expected to effect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change in deferred tax
assets and liabilities during the period.
CONCENTRATION OF CREDIT RISK
During the years ended December 31, 1998 and 1997, the Company
maintained deposits with financial institutions in excess of the
$100,000 insured by the Federal Deposit Insurance Corporation.
Page 30 of 39
<PAGE> 31
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following assumptions were used to estimate the fair value of each
class of financial instruments for which it is practical to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents
approximate their fair value.
NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND DUE TO RELATED
PARTY
The fair values of the notes payable, capital lease
obligations and due to related party are estimated based
upon current rates offered to the Company for debt of the
same remaining maturities. Carrying amounts of notes
payable, capital lease obligations and due to related party
are reasonable estimates of their fair values.
NOTE 2 - RECEIVABLES
Receivables consist of open trade accounts. Management has applied an
allowance of $126,976 as of December 31, 1998, on these trade accounts
due to a decline in the mining industry. As such, management is
delaying its collection efforts towards these receivables until the
mining industry economy recovers.
NOTE 3 - NET PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998, consist of the
following:
Equipment held under capital leases $ 60,800
Office furniture and equipment 105,751
---------
166,551
Less accumulated depreciation 95,281
---------
Net property and equipment $ 71,270
=========
Page 31 of 39
<PAGE> 32
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 3 - NET PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense charged to operations for the years ended
December 31, 1998 and 1997, was approximately $29,000 and $25,000,
respectively.
NOTE 4 - NOTES PAYABLE
At December 31, 1998, notes payable consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable to bank, interest at 11.7%, payable in monthly
installments including interest of $1,657 through December 1999,
secured by accounts receivable, equipment, and general
intangibles of the Company, personally guaranteed by the
majority shareholder. $ 21,798
Note payable to bank, interest at prime plus 2.5%,
payable in monthly installments of $1,388 plus interest
through November 1999, secured by accounts receivable,
equipment, and general intangibles of the Company,
personally guaranteed by the majority shareholder. 16,667
$50,000 line of credit with bank, interest at prime
plus 3.0% payable monthly, principal due on demand, secured
by accounts receivable, equipment, and general intangibles
of the Company, personally guaranteed by the majority
shareholder. 50,000
$25,000 line of credit with finance company, interest at prime
plus 6.75%, payable in minimum monthly installments of 2% of
outstanding balance plus interest, cancelable at any time,
personally guaranteed by the majority shareholder. 24,955
Note payable to bank, interest at 12.5%, payable in monthly
installments including interest of $1,677 through March
2000, secured by equipment, accounts receivable, and general
intangibles of the Company, personally guaranteed by the
majority shareholder. 26,307
--------
Total 139,727
Less current portion 116,206
--------
$ 23,521
========
</TABLE>
Page 32 of 39
<PAGE> 33
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 4 - NOTES PAYABLE (CONTINUED)
Principal payments on notes payable for the next five years and in the
aggregate are as follows:
1999 $116,206
2000 9,107
2001 3,459
2002 2,629
2003 1,998
Subsequent 6,328
--------
$139,727
========
Interest expense charged to operations on these notes payable was
approximately $21,200 and $26,600 for the years ended December 31,
1998 and 1997, respectively.
NOTE 5 - CAPITAL LEASES
The Company is the lessee of certain equipment under capital leases
expiring in various years through the year 2000. The assets and
liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the
asset and are included in net property and equipment. The assets are
depreciated over the lesser of their estimated useful lives or the
term of the lease. Depreciation of assets under capital leases is
included in depreciation expense for the years ended December 31, 1998
and 1997.
Page 33 of 39
<PAGE> 34
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 5 - CAPITAL LEASES (CONTINUED)
Minimum future lease payments under capital leases for the next two
years and in the aggregate are as follows:
1999 $12,907
2000 5,546
-------
Total minimum lease payments 18,453
Less amount representing interest 2,031
-------
Present value of net minimum lease payment $16,422
=======
Interest rates on capitalized leases vary from 12.0% to 13.0% and are
imputed based on the lower of the Company's incremental borrowing rate
at the inception of each lease or the lessor's implicit rate of return.
Imputed interest expense for the years ended December 31, 1998 and
1997, was approximately $4,300 and $6,200, respectively.
NOTE 6 - CUSTOMER DEPOSITS
Customer deposits primarily represent unearned fee income from
customers subscribing to the Mining, Oil and Gas, and High Technology
Research Reports.
NOTE 7 - INCOME TAXES
The provision for income taxes for the years ended December 31, 1998
and 1997, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current $ -- $ --
Deferred - Federal (716,043) (216,000)
Deferred - State (115,830) (35,000)
Valuation allowance applied to total
provision 831,873 251,000
--------- ---------
$ -- $ --
========= =========
</TABLE>
The Company has recorded a 100% valuation allowance on the deferred tax
assets due to the uncertainty of the realization of the deferred tax
assets.
Page 34 of 39
<PAGE> 35
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 7 - INCOME TAXES
At December 31, 1998, the significant components of the Company's
deferred tax assets are as follows:
Allowance for doubtful accounts $ 50,155
Accrual to cash adjustment (net) 18,168
Net operating loss carryforward 763,550
Valuation allowance (831,873)
---------
$ --
=========
The provision for income taxes differs from the amount computed by
applying the statutory federal and state income tax rates to income
before income taxes. The sources and tax effects of the difference are
as follows:
1998 1997
--------- ---------
Expected tax benefit at 39.5% $ 456,246 $ 259,064
Non-deductible expenses (4,937) (8,064)
Change in valuation allowance (451,309) (251,000)
--------- ---------
$ -- $ --
========= =========
At December 31, 1998, the Company's net operating loss carryforwards
for income tax purposes amounted to approximately $1,900,000 and are
available to offset future taxable income through the year 2013.
NOTE 8 - OPERATING LEASES
The Company leases its office space under an operating lease which
expires on September 30, 2000. Minimum future lease payments under
operating leases for the next two years and in the aggregate are as
follows:
1999 $39,372
2000 29,529
-------
$68,901
=======
During the years ended December 31, 1998 and 1997, rental expense for
all operating leases was approximately $43,000 and $55,000,
respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, certain shareholders paid
$25,000 of professional services and commissions on behalf of the
Company.
Page 35 of 39
<PAGE> 36
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)
A Director of the Company who has fully vested options to purchase
48,000 shares of the Company's common stock is also on an employee of
GTE (See Note 1).
Affiliated Networks Inc.'s Chief Executive Officer, President, Director
and majority shareholder owns another company which makes loans to the
Company pursuant to a revolving loan agreement which specifies interest
at 2.5% over the prime rate, with principal due on demand. During 1998,
this loan balance reached a high of $403,112 and the Company remitted
principal payments to reduce the balance to $35,750 at December 31,
1998. In addition to principal payments, the Company remitted
approximately $19,000 for interest during 1998.
NOTE 10 - SHAREHOLDERS' EQUITY
The Company effected a three-for-one stock split to stockholders of
record as of the close of business on March 24, 1998. Share and per
share amounts presented have been adjusted to reflect the stock split.
STOCK OPTION PLAN
During January 1997, the Company approved a 1996 and 1997 Incentive
Stock Option Plan (ISO). The 1996 and 1997 plans provide options for
900,000 and 1,980,000 shares, respectively, to be purchased for the
greater of $.33, the fair market value at the date of grant or the book
value per share on the date of grant.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for these plans; accordingly, no compensation cost has been
recognized. The Company's net loss would not have been materially
affected had the Company's determined compensation cost been consistent
with the method prescribed by SFAS No. 123, Accounting for Stock Based
Options.
The following is a summary of the activity of the 1996 and 1997 ISO
plan during the years ending December 31, 1998 and 1997:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at January 1, 1997 420,000 $ .37
Granted 1,680,000 $ 1.57
Exercised -- --
----------
Outstanding at December 31, 1997 2,100,000 $ 1.33
========== ========
Weighted average fair value of options
granted during 1997 $ --
==========
</TABLE>
Page 36 of 39
<PAGE> 37
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 10 - SHAREHOLDER'S EQUITY (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at January 1, 1998 2,100,000 $ 1.33
Granted -- --
Exercised -- --
----------
Outstanding at December 31, 1998 2,100,000 $ 1.33
========== ========
Weighted average fair value of options
granted during 1998 $ --
==========
</TABLE>
The following is a summary of the status of the 1996 and 1997 ISO Plan
Options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS VESTED OPTIONS
-------------------------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE REMAINING EXERCISE
PRICE RANGE NUMBER LIFE PRICE NUMBER LIFE PRICE
----------- ------ --------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$1.33-$5.50 2,100,000 4.25 Yrs. $1.33 1,184,700 4.25 Yrs. $1.02
</TABLE>
The Company estimates that based on a vesting schedule of 25% per year,
approximately 95% of such options will eventually vest.
In the event an optionee under the Plans owns stock possessing more
than ten percent (10%) of the total combined voting power of all
classes of stock of the Corporation or, if applicable, of its parent or
subsidiary corporation at the time an option is granted, the purchase
price shall be the great of one dollar ten cents ($1.10) per share or
one hundred ten percent (110%) of the fair market value per share of
the Corporation's common stock on the date of granting the option or
one hundred ten percent (110%) of the book value per share of the
Corporation's common stock on the date of the granting of the Option.
On November 2, 1998, the Company amended and restated the 1997 stock
option plan to increase the number of options to 2,000,000 shares which
are to be purchased for the greater of one dollar per share, the fair
market value at the date of grant, or the book value per share on the
date of grant. As of December 31, 1998, no new options have been issued
under the amended and restated 1997 stock option plan.
Page 37 of 39
<PAGE> 38
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 10 - SHAREHOLDER'S EQUITY (CONTINUED)
PREFERRED STOCK
During 1998, the articles of incorporation of the Company were
amended. Such amendment authorized 1,000,000 shares of preferred
stock of $.01 par value with preferences to be determined by the
Board of Directors upon issuance. As of December 31, 1998, no
preferred stock had been issued.
WARRANTS
During 1997, the Company received two loans from entities owned or
controlled by current shareholders in the amounts of $15,000 and
$50,000, respectively. The maximum amount to be borrowed from these
lenders is $100,000. As partial consideration for these loans, the
lenders were granted stock warrants.
Effective July 28, 1997, the Company has issued 6,000 warrants to the
above lenders. Each warrant is convertible into one share of the
Company's common stock and is exercised at $1.83 per share. The
warrants are valid beginning on the effective date and for a period of
five years from the effective date. The Company has also issued
warrants converting into 27,000 shares of Common Stock to Beloyan
Investment Securities ("BIS"), each with an exercise price of $1.83,
in consideration of BIS having acted as a placement agent for the
private placement of a portion of the 300,000 shares.
NOTE 11 - EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. The number of shares
used in the computation were 4,752,975 and 3,995,719 for the years
ending December 31, 1998 and 1997, respectively. Options and warrants
on common stock for the years ending December 31, 1998 and 1997 were
not included in computing diluted earnings per share because their
effects were antidiultive.
NOTE 12 - UNCERTAINTY
The accompanying 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, has had a working capital
deficit and has minimal remaining equity.
Realization of the major portion of the assets in the accompanying
balance sheet 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 embarking on a private placement of up to $5,000,000.
Management believes these actions will generate future sales and
position the Company to be more competitive. If these actions do not
generate the capital necessary to maintain the Company's operations,
its majority shareholder has expressed his intention of providing the
necessary capital to keep the Company operating through December 31,
1999.
NOTE 13 - RECLASSIFICATION
Certain items in the 1997 financial statements have been reclassified
to conform with the 1998 presentation.
Page 38 of 39
<PAGE> 39
PART III
ITEM 1. INDEX TO EXHIBITS.
EXHIBITS DESCRIPTION OF DOCUMENT
- -------- -----------------------
3.1(a) Form of Amended and Restated Articles of Incorporation
of the Company(1)
3.2(a) Form of Amended and Restated Bylaws of the Company(1)
4.1 Form of Warrant(1)
10.1 1996 Incentive Stock Option Plan, as amended(1)
10.2 1997 Incentive Stock Option Plan, as amended(1)
10.3 Amended and Restated 1997 Stock Option Plan(1)
10.4 Affinity Marketing Agreement between GTE Intelligent
Network Services Incorporated D/B/A GTE
Internetworking and Affiliated Networks Incorporated(2)
10.5 Revolving Note to DAS Consulting, Inc.(2)
10.6 Company's Office Lease, as amended(2)
21 Subsidiaries(3)
(1) Previously filed as an exhibit to the Company's Form 10-SB.
(2) Previously filed as an exhibit to the Company's Amendment No. 1 to
Form 10-SB.
(3) Filed herewith.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act
of 1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
AFFILIATED NETWORKS, INC.
By: /s/ David A. Schwedel
--------------------------------
David A. Schwedel, President
Page 39 of 39
<PAGE> 1
EXHIBIT 21
SUBSIDIARY OF THE SMALL BUSINESS ISSUER
(1) Sovereign Financial Information Services, Inc., a Florida corporation.
This entity does not conduct business under any other name.
