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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________________ TO ______________________
COMMISSION FILE NUMBER: 000-25129
AFFILIATED NETWORKS, INC.
(Name of small business issuer in its charter)
FLORIDA 65-0354269
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(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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its fiscal year ended December 31, 1998 were $90,227.
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of March 10, 1999 was approximately $19,238,000 based on the
$10.44 closing bid price for the Common Stock quoted on the NASD
over-the-counter bulletin board on such date. For purposes of this computation,
all executive officers and directors of the registrant have been deemed to be
affiliates. Such determination should not be deemed to be an admission that such
directors and officers are, in fact, affiliates of the registrant.
The number of shares of Common Stock of the registrant outstanding as of March
10, 1999 was 4,928,180.
Transitional Small Business Disclosure Format: Yes No X
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AFFILIATED NETWORKS, INC.
TABLE OF CONTENTS
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PART I
Item 1. Description of Business....................................................... 1
Item 2. Description of Properties..................................................... 6
Item 3. Legal Proceedings.............................................................. 6
Item 4. Submission of Matters to a Vote of Security Holders............................ 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................................... 6
Item 6. Management's Discussion and Analysis........................................... 7
Item 7. Financial Statements........................................................... 11
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.................................................... 27
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act............................................ 27
Item 10. Executive Compensation......................................................... 28
Item 11. Security Ownership of Certain Beneficial Owners and Management................. 29
Item 12. Certain Relationships and Related Transactions................................. 30
Item 13. Exhibits and Reports on Form 8-K............................................... 30
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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 administrative fee) 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 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
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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.
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. as an
strategic advisor to the Company.
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PRODUCTS AND SERVICES - E-COMMERCE
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 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
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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 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.
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
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
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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.
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.
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The Company filed with the Securities and Exchange Commission a Form 10-SB
which was declared effective on February 2, 1999. The Company has not yet
cleared the comment process as the Securities and Exchange Commission is
currently in the process of reviewing Amendment No. 1 to Form 10-SB. On the
effective date, the Company became subject to the reporting requirements of the
Securities and Exchange Act of 1934.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases office space (2,311 sq. ft.) in Coconut Grove, Florida,
pursuant to a lease agreement that expires September 30, 2000.
ITEM 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company is a party
or which its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER 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.
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HIGH LOW
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1998
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First Quarter (commencing February 4) $18.00 (pre 3- $16.50 (pre 3-
for-1 split) for-1 split)
Second Quarter $ 5.28 $ 5.25
Third Quarter $ 5.00 $ 4.50
Fourth Quarter $14.00 $ 4.00
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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 $10.44 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.
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ITEM 6. 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 $25,329 and
$101,647, 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.
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.
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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.
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 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.
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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, 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 $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 14 in the accompanying audited
financial statements regarding an uncertainty about the ability of the Company
to continue as a going concern.
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.
9
<PAGE> 12
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-KSB, 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) development of the new products in the FIS business; (v)
dependence on key personnel.
10
<PAGE> 13
ITEM 7. FINANCIAL STATEMENTS
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report.. ................................. 12
Consolidated Balance Sheet as of December 31, 1998.............. 13
Consolidated Statements of Operations
For the Years Ended December 31, 1998 and 1997.............. 14
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1998 and 1997.............. 15
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997.............. 16
Notes to Consolidated Financial Statements...................... 17
11
<PAGE> 14
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 operations, 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 audits 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
12
<PAGE> 15
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
ASSETS
CURRENT ASSETS
Cash $ 350,042
Receivables, net 9,635
-------------
Total current assets 359,677
-------------
PROPERTY AND EQUIPMENT, NET 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
=============
The accompanying notes to financial statements are an integral
part of this statement.
13
<PAGE> 16
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 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)
============== =============
LOSS PER COMMON SHARE - BASIC AND DILUTED $ (.24) $ (.16)
============== ============
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
14
<PAGE> 17
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE 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.
15
<PAGE> 18
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 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:
For 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.
16
<PAGE> 19
AFFILIATED NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - ORGANIZATION
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 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 nationwide 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.
The 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.
STRATEGIC RELATIONSHIPS
MAREX:
The Company has a non-exclusive agreement with GTE Intelligent Network Services,
Inc. d/b/a GTE
17
<PAGE> 20
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 and FIS. Segment results, as
well as selected geographic data, are presented on this new basis in 1998, as
well as retroactively ( see "BUSINESS SEGMENTS").
The Company adopted SFAS 130 effective in 1998. It requires disclosure of
non-owner 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.
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.
18
<PAGE> 21
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).
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.
COPYRIGHTS
The cost of copyrights acquired is being amortized using the straight-line
method over five years. Included in the consolidated statements of operations
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.
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.
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.
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.
19
<PAGE> 22
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.
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.
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.
RECLASSIFICATION
Certain items in the 1997 financial statements have been reclassified to conform
with the 1998 presentation.
NOTE 3 - 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 4 - PROPERTY AND EQUIPMENT, NET
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
===========
20
<PAGE> 23
Depreciation expense charged to operations for the years ended December 31, 1998
and 1997, was approximately $29,000 and $25,000, respectively.
NOTE 5 - 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 accounts
receivable, equipment 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>
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
Thereafter 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 6 - 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
21
<PAGE> 24
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.
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 7 - CUSTOMER DEPOSITS
Customer deposits primarily represent unearned fee income from customers
subscribing to the Mining, Oil and Gas, and High Technology Research Reports.
NOTE 8 - INCOME TAXES
The provision for income taxes for the years ended December 31, 1998 and 1997,
are summarized as follows:
1998 1997
------------- -------------
Current $ -- $ --
Deferred - Federal (716,043) (216,000)
Deferred - State (115,830) (35,000)
Valuation allowance applied to
total provision 831,873 251,000
------------- -------------
$ -- $ --
============= =============
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.
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
-------------
Total 831,873
Less valuation allowance 831,873
-------------
$ --
=============
22
<PAGE> 25
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 9 - 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 consolidated 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
============== =============
NOTE 10 - 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.
23
<PAGE> 26
NOTE 11 - 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.
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 12 - 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>
Weighted
Average
Number of Shares Exercise Price
----------------------- ------------------
<S> <C> <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>
24
<PAGE> 27
<TABLE>
<CAPTION>
Weighted
Average
Number of Shares Exercise Price
----------------------- ------------------
<S> <C> <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.
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.
25
<PAGE> 28
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 a private
placement.
NOTE 13 - 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 antidilutive.
NOTE 14 - 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.
26
<PAGE> 29
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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-
27
<PAGE> 30
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.
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.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The Company was not
a reporting Company in the year 1998 and therefore was not subject to the
reporting requirement of Section 16(a) of the Exchange Act.
ITEM 10. 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
28
<PAGE> 31
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.
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 11. 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.
<TABLE>
<CAPTION>
Amount and Nature of the
Name and Address of Beneficial Ownership of Ownership
Beneficial Owner Common Stock Percentage
- ----------------------------------- ------------------------------- -------------------------
<S> <C> <C>
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%
========== ==========
</TABLE>
- -----------------------
(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.
29
<PAGE> 32
ITEM 12. 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 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibits Description of Document
- -------- -----------------------
<S> <C>
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 (1)
10.5 Revolving Note to DAS Consulting, Inc. (1)
10.6 Company's Office Lease, as amended (1)
21 Subsidiary of the Small Business Issuer (2)
27.1 Financial Data Schedule (3)
</TABLE>
(1) Previously filed as an exhibit to the Company's Form 10-SB and Amendment No.
1 to Form 10-SB.
(2) Previously filed as an exhibit to the Company's Form 10-KSB for the year
ended December 31, 1998.
(3) Filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed in the last quarter of the period covered
by this report.
30
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AFFILIATED NETWORKS, INC.
Date: April 5, 1999 By: /s/ DAVID A. SCHWEDEL
------------- -------------------------
David A. Schwedel
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ DAVID A. SCHWEDEL Director, Chairman of the Board, April 5, 1999
- --------------------- President and Chief Executive Officer
David A. Schwedel
/s/ KENBIAN A. NG Chief Financial Officer April 5, 1999
- --------------------- (Principal Financial and Accounting
Kenbian A. Ng Officer)
/s/ DAN GALLAGHER Director April 5, 1999
- ---------------------
Dan Gallagher
/s/ GEORGE GLAZER Director April 5, 1999
- ---------------------
George Glazer
/s/ ROGER A. TROMBINO Director April 5, 1999
- ---------------------
Roger A. Trombino
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 350,042
<SECURITIES> 0
<RECEIVABLES> 136,611
<ALLOWANCES> 126,976
<INVENTORY> 0
<CURRENT-ASSETS> 359,677
<PP&E> 166,551
<DEPRECIATION> 95,281
<TOTAL-ASSETS> 596,596
<CURRENT-LIABILITIES> 345,856
<BONDS> 0
0
0
<COMMON> 2,422,282
<OTHER-SE> (2,200,189)
<TOTAL-LIABILITY-AND-EQUITY> 596,596
<SALES> 90,227
<TOTAL-REVENUES> 89,315
<CGS> 51,851
<TOTAL-COSTS> 51,851
<OTHER-EXPENSES> 1,192,517
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,208
<INCOME-PRETAX> (1,155,053)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,155,053)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,155,053)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
