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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 1999
or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number
Financial Intranet, Inc.
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(Name of Small Business Issuer in Its Charter)
Nevada 88-0357272
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
116 Radio Circle, Mt. Kisco, NY 10549
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (914) 242-4848
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Securities registered pursuant to Section 12(b) of the Act:
None
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(Title or Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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(Title or Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve (12) months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past ninety (90) days. [x] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
The issuer has 43,981,244 Shares of Common Stock outstanding as of
March 31, 2000.
The issuer's revenues for the fiscal year ended December 31,
1999 were $73,672.
The aggregate market value of the outstanding common stock held by
non-affiliates of the issuer on December 31, 1999 (computed by reference to the
last reported sales price of the issuer's common stock on the OTC Bulletin
Board) was $8,219,066.
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PART I
Financial Intranet, Inc. cautions readers that certain important
factors may affect its actual results and could cause those results to differ
significantly from any forward-looking statements made in this Form 10-KSB or
otherwise made by or on behalf of Financial Intranet, Inc. For this purpose, any
statements contained in this Form 10-KSB that are not statements of historical
fact should be considered to be forward-looking statements. Words such as may,
expect, believe, anticipate, intend, could, estimate, or continue or the
negatives of those words, or other comparable terminology, are intended to
identify forward-looking statements. These statements appear in a number of
places in this Form 10-KSB, including in Item 1 and Item 6, and include
statements as to the intent, belief or expectations of Financial Intranet, Inc.
and its management as of the date of this report. Actual results and the
occurrence or timing of certain events could differ materially from those
projected in any of such forward-looking statements due to a number of factors,
including those set forth under "Factors Affecting Our Operating Results,
Business Prospects and Stock Price" and elsewhere in this Form 10-KSB.
Item 1. Business
Overview
Financial Intranet, Inc. is a development stage New York based media
and communications company that delivers telephony, streaming video, hosting and
delivery services to the business and investment communities. Our initial
objectives are to obtain a share of the telephony resale market by offering
value-added services to multi-location businesses and the financial community
and providing them, and mutual funds and other investment managers, with a
cost-efficient method for distributing information about their products and
services.
To accomplish these goals, Financial Intranet and its technology
partners have developed a secure intranet capable of delivering high quality
narrow-band video-on-demand through a distributed delivery technology.
Businesses, broker/dealers and financial advisors who are subscribers of
Financial Intranet can now use the same communications lines for the
transmission of voice, video and text data and receive immediate access to
information about products, such as mutual funds, and services. Our customers
can use our intranet to provide product information to corporate contacts such
as broker/dealers using interactive video teleconferencing, video-on-demand,
digitally stored text and graphics. Mutual funds and investment managers can use
our intranet to distribute their documentation to broker/dealers and
financial advisors. We believe that subscribers can distribute their
documentation via our intranet at lower cost than printing and physically
distributing the same materials. Financial Intranet intends to offer its network
to deliver continuing education courses on series and ethics material to
broker/dealers on an ongoing basis.
Our initial focus is to attract the financial community, and to that
end, we maintain a web site at www.fntn.com for that purpose. The site,
currently undergoing a significant redesign, also offers financial information
to individuals. These individuals provide historical information about their
investment practices that we collect and analyze. If the individuals consent, we
provide this information to broker/dealers who specialize in the sectors in
which the individual expressed an interest. These broker/dealers are subscribers
to our communications services. We will use the generation of leads as a
marketing tool to sell communication services to broker/dealers. Revenues will
be generated both by the resale of telecommunications services bundled with
value-added services to subscribing broker/dealers and from fees from mutual
funds for the use of Financial Intranet's network and access to its subscribers.
We also intend as we expand to international markets, to generate revenue from
advertising as we increase the number of users of our web site both domestically
and internationally.
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Company History
Financial Intranet was incorporated in 1993 as Alexis and Co. in the
State of Nevada. We changed our name to Wee Wees Inc. and subsequently, on
December 17, 1996 to Financial Intranet, Inc. after the purchase of a
controlling interest by Barry Stein. Prior to that date, Financial Intranet had
not conducted any business.
We received our reseller certificate from the Federal Communication
Commission in 1997 to provide international telecommunications services
originating in the United States. Upon the effective date of a tariff in 1997,
we also became authorized to provide domestic interstate telecommunications
services in accordance with its tariffs. Financial Intranet is also authorized
to offer intrastate telephone services in New York, Texas, California, Florida,
New Jersey, Connecticut and Colorado. We offer interstate and intrastate long
distance service at this time. In June 1997, Financial Intranet entered into an
agreement with MCI/WorldCom to resell communications services to end-users.
Financial Intranet entered into our first contracts with Siemens in July 1997 to
provide hardware and assist in developing technology for its intranet. In
October 1997, Financial Intranet began providing communications services to
broker/dealers. In April 1999, we signed an agreement with Global Crossing
(formerly Frontier Communications) to resell communication services to
end-users. Financial Intranet derived its 1999 revenues from the resale of
communications services to approximately 20 broker/dealers.
We launched our web site in July 1998, and began delivering
video-on-demand on it in 1998. We began using data mining software to take the
information gathered on the web site and generate live customer leads for
broker/dealers in 1998. We added chat rooms and messages boards in January 1999,
and are currently in the process of completely redesigning it.
In the first quarter of 2000, we significantly expanded the scope and
reach of our business by purchasing a web site and e-mail magazine, both based
in the People's Republic of China, with an approximate 800,000 users.
Markets
Financial Intranet targets four groups in the investment industry: mutual funds,
other providers of investment products, broker/dealers and financial advisors,
and individual investors.
1. Mutual funds.
Mutual funds need to deliver product information and increase their
exposure to potential investors. Approximately 13,000 mutual funds were
being offered to investors according to a Reuters article entitled
"More Mutual Funds Turning to Outside Management" dated April 23, 1999.
If a broker/dealer is to market a fund's products, that fund must
provide it with sales information, including a current prospectus. The
broker/dealer and its registered representatives must review the
prospectus and the fund's rate of return history and sign a selling
agreement with the fund before they can solicit or offer the product to
the public. Moreover, funds may desire to provide this information in a
compelling manner to attract the interest of broker/dealers and their
registered representatives and distinguish the fund from its
competitors.
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Historically, mutual funds provide information to broker/dealers and
their registered representatives by mass mailings of printed material,
such as prospectuses, sales aids and charts. Funds also utilize
wholesalers to introduce the mutual funds to broker/dealers. Fund
managers have advised us in interviews that reaching a large group of
broker/dealers and their registered representatives and distributing
documentation is expensive and can be a particular burden for smaller
funds without large marketing budgets. Fund managers said they needed a
more effective and economic way to inform a wider range of
broker/dealers to increase the percentage of closed sales to
prospective investors.
We offer an alternative to using mailings and wholesalers. Using our
high-speed secure intranet, a fund can distribute to our subscribers:
o plain text,
o graphics,
o digitally stored documents such as prospectuses, and
o video content.
We believe this method of distribution will appeal to broker/dealers
and their registered representatives who will have immediate access to
fund information without having to leave their trading screen. A broker
can listen to audio or view a video or digitally stored document in a
window while still following real-time trading information. The
advantage to the broker is more information available at his
convenience in his office and more products to sell in a user-friendly
format.
2. We target various providers of investment products. Financial Intranet
offers services to:
o mutual funds,
o insurance companies,
o commodity trading advisors,
o commodity pool operators,
o banks, and
o other investment product creators.
Mutual funds can use a variety of our services.
Our network allows mutual funds to:
o deliver pre-recorded information on their products and
educational video content. We can deliver the service publicly via
the Internet or privately over our intranet using video-on-demand
technology. We also produce content. Additional funding from any
source will enable us to broaden this service by allowing us to
develop more content.
o deliver interactive training and support. We can deliver the
service through point to multi-point live video teleconferencing.
Mutual funds can answer questions about the features of their
products. We offer this feature on a trial basis; the rate at
which we increase its availability depends on the availability of
funds.
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o distribute sales material. Simple text, graphics or digitally
stored documents can be viewed on screen or printed by the
recipient. We are currently digitalizing documents, provided by
our customers for transmission over the network. Based on cash
position, we are planning to more rapidly expand our ability to
digitalize documents for distribution.
We expect that as broker/dealers purchase our communication services and
participate on our intranet, mutual funds and other investment managers
will pay us to distribute information about their products.
3. Broker/dealers and financial advisors
Selling communications services to broker/dealers will be a significant
portion of our business. Telecommunications represent one of the largest
recurring expenses to broker/dealers and financial advisors. We provide
discount, long-distance telephony to subscribers and plan to enter the
local resale market. Our reseller agreement with the Global Crossing
group of companies allow us to utilize those companies' communication
infrastructures while incurring little up-front installation and
maintenance costs. We believe that one appeal of our service is our
ability to utilize any channel in our network for the transmission of
voice, video, text and digitally stored documents as and when needed.
Value-added services at no additional cost are intended to make our
communications services more attractive. Financial Intranet can provide
broker/dealers and financial advisors value-added services in addition to
the technical enhancements to basic communication services. We also can
generate live consumer leads in conjunction with developing a web site
accessible to individuals. Individuals may register by completing a
questionnaire and consenting to specified limited use of the information.
In exchange for registration, the individual may receive a reward and
access to the other features on our web site. We will keep track of the
products in which each visitor to its web site shows an interest. The
information gathered from each investor will be analyzed using our data
mining technology, and the name and profile of a consenting individual
given to one broker/dealer or financial advisor operating in that
person's geographical area or area of interest. The broker/dealer or
financial advisor benefits from the possible sale of products and the
opportunity to develop a relationship with the individual.
In 1999, we reviewed the first 500 questionnaires completed at our web
site. Of the individuals responding:
o 95% claim to do a substantial amount of research regarding
investment opportunities;
o 92% have a brokerage account;
o approximately 50% execute trades through their broker;
o 87% trade at least once a month, the majority trading either
weekly or monthly;
o 67% earn over $50,000 per year; 20% earn over $100,000 per year;
and
o 90% reside in the United States; 8% reside in Europe; 2% reside
elsewhere.
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We believe that many of these individuals are potential customers for
our subscribing broker/dealers and financial advisors based on the
response to the questionnaires. We can also assist broker/dealers by
using the network to provide the various sales application forms
on-line to the registered representatives.
Broker/dealers and financial advisors are currently offered two levels
of access, informational access and interactive access. Interactive
access allows broker/dealers and financial advisors to schedule
videoconferences. Information access provides video-on-demand and news.
Delayed quotes on securities prices are available for no additional
charge on our web site. We also recognize that broker/dealers require
real time quotes and financial data, which are available through our
co-marketing agreement with S&P Comstock for an additional charge. We
also offer links to broker/dealer web sites.
We will be offering broker/dealers and financial advisors training on
mutual funds and other investment products using video-on-demand, plain
text and digitally stored documents that can be viewed or read at the
recipient's location. The information can be updated as needed by the
provider of the product. Our network now has the capability to offer
video-on-demand but its growth is limited by a lack of content, which
we are currently developing for video on demand. The development of
content can be accelerated based on our cash position. Training will
also be available through point to multi-point (e.g. mutual fund to
broker/dealers) through live interactive video teleconferencing. This
live interchange allows broker/dealers to ask questions about the fund
or other product.
Financial Intranet expects that brokerage firms will utilize its
network to help them fulfill their continuing education requirement for
the NASD. We intend to offer broker/dealers the ability to obtain
education and training materials for examinations administered by the
NASD through the presentation of courses via video-on-demand at the
broker/dealer's trading terminal or personal computer. We do not expect
to offer this service unless we obtain additional financing from
another source.
4. Individual investors
Individual investors have access to Financial Intranet's web site.
The web site currently offers:
o free real-time quotes on securities prices,
o "chat rooms,"
o message boards and
o links to EDGAR.
Site redesign is currently in progress and will provide for additional
features upon completion, scheduled for the second quarter of 2000,
including:
o advanced, customizable charting,
o portfolio management,
o video on demand library,
o a searchable mutual fund database,
o a real time searchable news database, and
o links to EDGAR and Zacks.
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The number of "hits" per day on Financial Intranet's web site increased
from approximately 13,000 to 85,000 since we began the chat rooms in
January 1999, and we anticipate that with the introduction of the
redesigned web site, that number may increase.
We will make the names of consenting registrants available to
broker/dealers. During registration, we ask each individual for
permission to forward his/her name to a broker/dealer or financial
advisor. The registrant is also asked to acknowledge that the material
presented at the web site is derived from outside sources and Financial
Intranet is not responsible for its content. Despite such disclaimer,
we may be subject to claims related to the content on our web site.
Third parties who desire to provide us with content must also agree to
indemnify us against claims related to such content.
We do not expect the web site to be a direct source of substantial
income, as individual investors do not pay to access or register at
Financial Intranet's web site. However, we are offering some fee based
services and products such as books and investment newsletters on
stocks and investors and mutual funds which may become an ancillary
source of revenue.
Marketing and sales
We believe that increasing our marketing will best facilitate our
growth because we currently offer most of the services described herein. We also
advertise our products and services on the Internet and attend trade shows. In
addition, with the purchase of the Chinese Internet content provider and e-mail
magazine, we plan on making a significant effort in expanding our reach to
previously untapped markets worldwide.
Products and services
Resale of long distance and local communication services
A key element of Financial Intranet's services to the investment
community is the resale of discount, long distance telephony and other
communication services to broker/dealers and financial advisors. Voice,
video-on-demand services, text, and digitally stored documents share the same
network connection to each customer's office. We have a reseller agreement with
Global Crossing, which expires in April 2001; we can also enter into such
agreements with other carriers who may be more competitive in specific
geographical areas or with respect to specific services. Resale of communication
services has been the principal source of revenue to date and is expected to be
one of our major revenue producing products during the initial years of
operation.
Financial Intranet is permitted to provide interstate and international
long distance service. Financial Intranet is tariffed in New York, Florida,
Connecticut, Texas and California to provide intrastate toll telecommunications
services and in anticipation of entering the local resale business. We are
registered in New Jersey and Colorado where no tariffs are required. We have
tariffs pending in several other states. We are permitted to offer intrastate
toll telecommunications services in four other states without filing a tariff by
either filing a registration or commencing operations. None of these
authorizations include the authority to provide Financial Intranet's
telecommunications services on a local exchange, non-toll basis for which
separate applications and/or tariff filings are required.
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We intend to engage in development of a voice-over Internet protocol.
This feature will enable us to facilitate the transmission of voice and other
communications over the Internet. This technology is available through Siemens.
Video-on-demand training and marketing
Financial Intranet offers video conferencing and video-on-demand
services to provide flexible distance learning opportunities. These services
permit customers to conduct live training or informational sessions via
teleconferencing and to access pre-recorded materials through video-on-demand.
We can provide video-on-demand training and marketing applications.
These applications use stored video content, and are available on demand to
Financial Intranet's customers via its private intranet and to individual
investors at its web site. For broker/dealers, this content will include
materials regarding various investment products. Financial Intranet and mutual
funds are jointly developing materials related to their products. We are also
developing our own content. The content can range from videotapes of
teleconferencing sessions to customized materials with data, video and text.
Content is delivered at different speeds depending on its destination.
Broker/dealers receive video and detailed sales fulfillment material at high
speed and have direct contact with mutual funds. Financial Intranet's video
image occupies one quarter of the screen of the desktop computer and does not
interfere with access to real time financial data. Individuals have access to
more general information and can access stored video and digitally stored
documents, including prospectuses. The digitally stored documents are delivered
at the transmission speed available to them.
Video conferencing
Financial Intranet has begun testing point to point and point to
multi-point video conferencing to facilitate both marketing and training. A
client, such as a mutual fund, can now schedule a point to multi-point live
video conference, with scheduling information accessible to the client on our
private intranet. This intranet can transmit full screen downstream video
(originator to viewer) at 30 frames per second. The upstream video (viewers to
originator) is delivered at 5 frames per second, a sufficient quality for the
originator to be able to identify who is asking a question.
We can provide video conferencing hardware to clients. We currently
lease or purchase the required equipment. Our ability to expand this service is
constrained by our lack of equipment. We lease or purchase additional equipment
on an as needed basis as we secure additional demand for our service. We believe
that purchasing equipment will enable us to have an inventory of equipment and
obtain equipment on better terms than continuing to purchase equipment on an as
needed basis.
We intend to develop a system for delivering continuing education
training to broker/dealers to meet NASD requirements. This system will track the
progress of a broker/dealer's registered representatives and provide courses
appropriate to their requirements and skill levels.
Individual investor web site
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We recruit prospective investors as leads for the broker/dealers,
financial advisors and mutual funds who subscribe to our communications
services. The web site is a mechanism to deliver multimedia information and
education to individual investors while capturing information about those
investors.
Data mining technology
We can track the activities of our broker/dealer subscribers and the
visitors to our web site, and obtain information provided by investors who
register. We have developed a software program to maintain information about
specific materials downloaded by broker/dealers and registered investors and
subsequent actions relating to the information received.
We can use this data to provide customer leads, surveys and reports
based on criteria provided by our broker/dealer and financial advisor customers
through the use of our proprietary data mining system. The Company believes our
ability to convert the data we gathers into practical knowledge gives us an
advantage over our competitors in the communication service resale industry. We
do not, however, attempt to determine the suitability of investors for
particular investments. That qualification remains the responsibility of the
broker/dealer.
Expansion
We have concentrated on the investment industry, as we believe that
this industry will benefit most from our information and communications services
and present the most immediate opportunity for revenue. We hope that as we
become established as a provider of financial services information, we will
capture a larger portion of the long distance resale business.
We plan to expand our intranet services to other industries and
associations, and are examining expansion into pharmaceutical and health
products, real estate, insurance and entertainment industries. We believe these
industries can benefit from our telecommunications products and from
participating in an industry-centered intranet. We intend to focus on industries
that rely on distributors of their products and services or need to train
geographically dispersed sales people.
We also intend to expand from the eastern United States throughout the
United States and Asia and possibly Europe and the Pacific Rim. Our purchase of
the Chinese assets has enabled us to expand into Asia. Overseas expansion may
entail adding data centers or implement collocation agreements to service those
markets and provide us with a redundant data source, but may add a significant
number of new users in new and expanding markets.
We may also expand through the acquisition of companies that provide
complementary services, as evidenced by the recently completed an acquisition of
certain assets of Longyin Network Technology Co., Ltd, an Internet content
provider that should provide our content providers with an initial audience of
over 800,000 users based in China. We are also contemplating additional
acquisitions that may similarly increase the number of users of our intranet;
however, no additional acquisition is imminent at this time. Any acquisition
that requires payment of a cash purchase price will likely require outside
financing. Other issues to be resolved in an acquisition include the
assimilation of the operations, management and products of the acquired
companies. We cannot be sure that we will complete any acquisitions.
Technology and business partners
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Financial Intranet's overall delivery system has three parts:
o the data center in Global Crossing's Global Center Media
Distribution Facility in New York City houses our video library
and video processing software and our data warehouse and data
mining capability.
o the link between Financial Intranet and our customers. This
includes private lines from Global Crossing, MFS and UUNet, an
MCI WorldCom company, and the "last miles" on either end
connecting the leased lines to Financial Intranet and each of its
customers. This link creates a virtual private network.
o the services gateway which resides at each customer's office.
We have contracted with Stockpoint to provide us with stock and
business information, quotes and interactive charting capabilities, and we have
contracted with Info Directions, Inc. to provide us with a state of the art
telecom billing system.
Competition
We do not believe any other company offers the same array of services
as us, although a number of companies compete with us in specific areas.
Telecommunications carriers and resellers.
Financial Intranet's communications resale services compete with:
o other resellers,
o local exchange carriers,
o local phone carriers,
o regional Bell operating companies, and
o long distance carriers.
Some competitors offer a wider range of communications services than
us; some have significantly greater assets. We believe we have an advantage over
other resellers because of our value-added-services.
Mutual fund information services for financial sales professionals.
We believe we have no direct competition providing mutual fund
information to financial services professionals such as broker/dealers and
financial planners. The large brokerage houses have long had internal systems
for the redistribution of mutual fund data to their employees. These systems use
data replication to replace paper distribution of mutual fund sales and
marketing materials to in-house brokers.
Our most direct competitor as an outside electronic redistributor of
fund sales and marketing materials is First Data Investor Services Group,
developer of BROKERCONNECT. We believe we have a significant advantage over
BROKERCONNECT in that we deliver the same electronic text
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redistribution services but add video-on-demand content provided by the fund and
as interactive video training and the prospect of receiving customer leads.
Real time data redistribution
Brokerage firms purchase trading desks equipped with terminals and
real-time data feeds for their registered representatives. Many companies
provide real-time data feeds, including PC Quote, Quotron and S&P Comstock.
Through our co-marketing agreement with S&P Comstock, we believe we can deliver
S&P terminals and data feeds to broker/dealers at a competitive price. We do not
see data feeds as a significant independent revenue source, as they primarily
provide value enhancement to attract brokers to purchase our communication
services.
Government regulation
Communications regulation
Financial Intranet and our underlying carriers who provide the network
facilities and services we resell are regulated at the federal level by the FCC
and, with limited exceptions, at the state level by public service, public
utility or state corporation commissions.
Financial Intranet and all other "non-dominant" carriers
(telecommunications service providers) are authorized to provide interstate
telecommunication services under a general policy decision adopted by the FCC as
opposed to any company specific authorization. We need not periodically renew
our status. In mid-1997, Financial Intranet was granted its certificate of
public convenience and necessity under Section 214 of the Communications Act of
1934. This certificate authorizes us to provide international services, that is,
communications originated by customers in the United States and its possessions
and terminating in foreign countries. Our certificate has no expiration date and
is not subject to periodic renewal requirements.
We filed tariffs with the FCC after obtaining certificates under
Section 214. FCC regulations require that we, like all carriers, file and
maintain separate tariffs for our interstate and international service
offerings. Tariffs contain the terms, conditions and rate for each
telecommunications service offered or provided by us. Tariffs are not approved
by the FCC, but may be reviewed by the FCC on its own motion or as a result of a
complaint by a customer, a non-customer member of the public or a competing
communications company. Tariffs are strictly construed and any ambiguity in the
tariff is construed in favor of the public (customer) and against the carrier.
We have the right to file revisions to its tariff and change any rate, term or
condition at any time, except that any term, condition or rate once filed must
remain, by FCC rule, effective for a minimum of 30 days. The FCC may not
interfere with or reject any filed tariff rate, term or condition without
specific findings that such rate, term or condition is unjust, unreasonable or
unduly discriminatory.
The FCC assumes that all non-dominant carriers' rates are reasonable
and non-discriminatory. Any new or revised rate may be filed on only one day's
prior notice. The FCC does not review specific tariff filings unless someone
protests or it learns of some issue of lawfulness. Should issues be raised
against any tariff filing, the FCC must find that the tariff or tariff provision
is "patently unlawful," that is, contrary on its face to some law, rule,
regulation, policy or pre-existing decision of the courts or FCC. Where patent
unlawfulness is not shown, the FCC may suspend a tariff filing's effectiveness
for no more
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than 120 days, request that a carrier voluntarily "defer" the effective date or
investigate the tariff after the suspension is over.
Financial Intranet is also tariffed in New York, California, Florida,
Connecticut and Texas that allows us to provide intrastate toll communications
services. We are registered in New Jersey and Colorado (no tariffs being
required),, and are legally permitted to offer intrastate toll
telecommunications services in four other states without filing a tariff by
either filing a registration or commencing operations. None of these
authorizations include the authority to provide our telecommunications services
on a local exchange, non-toll basis for which separate applications and/or
tariff filings are required.
Should operations be expanded to countries other than the United
States, we will be required to comply with the laws and regulations applicable
to that country's telecommunications industry. In Western Europe, the
telecommunications industry is also subject to the actions, policies and
regulations of the European Commission. Beginning January 1, 1998, regulation of
telecommunications in Western Europe was formally liberalized to increase
competition in telecommunications. The timing and degree of liberalization
however varies, sometimes widely, country by country, and some countries like
Portugal and Greece have delayed implementation of new regulations.
Since few laws or regulations are directly applicable to access or
commerce on the Internet, our Internet and intranet is not subject to direct
government regulation, other than regulations applicable to businesses
generally. However, a number of legislative and regulatory proposals are under
consideration by federal, state, local and foreign governmental organizations
and, as a result, a number of laws or regulations may be adopted with respect to
Internet user privacy, taxation, infringement, pricing, quality of products and
services and intellectual property ownership. Our involvement with the People's
Republic of China especially may be hindered by unanticipated regulations given
that country's relatively new and limited involvement with the Intranet.
Securities regulation
Financial Intranet's customers are subject to various federal and state
laws and regulations of self-regulatory agencies such as the NASD, regarding the
sale of securities and continuing education. Changes in these laws and
regulations may affect Financial Intranet's business. While ours web site states
that we are not responsible for the information presented, we will make
reasonable efforts to assure that our services are not misused.
We do not intend to engage in activities that would require
registration as a broker\dealer. The leads are provided to our subscribers
without charge, as a value added service for their purchase of communications
services. The subscriber has the responsibility to approve the lead as a client,
have the client complete any new account forms or other documents regarding an
investment and determine the suitability of any investments for the client. We
do not receive commissions from any business that may be generated by the new
client.
Intellectual property
We regard the technology we use as proprietary, but have no existing or
pending patent or copyright protection. We rely on the following to protect our
software and other propriety technology:
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o confidentiality and license agreements with third parties,
o trade secret and trademark laws, and
o common law copyright.
Suppliers
Financial Intranet's principal supplier for the resale of communication
services is Global Crossing. We use third party production companies to produce
video on terms negotiated with respect to each project. Financial Intranet uses
computer hardware and software and related services provided by Fujitsu Siemens
Computers and other outside computer maintenance and management consultants.
Although we believe our supplier relationships are good, we believe that
alternate suppliers of telephony, computer hardware, software and servicing are
available at competitive prices. Regulatory and other changes in the industry
have lowered network costs. We believe we will obtain agreements from suppliers
of communications services that will permit the contained resale of services at
acceptable margins. Financial Intranet could experience a disruption in its
business if it needed to replace the Fujitsu Siemens companies without
sufficient notice.
Disaster recovery system
Implementation of a second data center will facilitate both expansion
overseas and implementation of a more thorough disaster recovery program. Our
current data center already provides some redundancy and protection against a
disruption in our computer systems, and we believe that all but the most severe
problems can be corrected quickly and without much disruption to our business.
For instance, our data center has four clustered servers and video transmissions
can be transferred to another server within hours if an existing server
malfunctions. A defective motherboard can be replaced in one or two days. Our
software is backed up each day. We also purchase telecommunications services
from a reliable major company, Global Crossing and co-locate our servers in
their secure data center. Currently, a total system failure could disrupt
operations for up to three days . We also carry business disruption insurance.
Employees
Financial Intranet has ten full-time employees. Three full-time
employees are officers. None of the employees are represented by a collective
bargaining agreement and management believes it has good relations with its
employees.
Item 2. Properties
Financial Intranet's principal executive offices are located at 116
Radio Circle, Mount Kisco, New York. Such offices are located in approximately
2645 square feet pursuant to a 5 1/2 year lease at an initial annual rent of
$52,116 and escalating to $67,200 by the fifth year terminating on December 31,
2004. We believe that these offices are sufficient for our current operations
and proposed operations through the term of the lease.
Item 3. Legal proceedings
On or about July 23, 1998, H & H Acquisition Corporation, individually
and purportedly on behalf of Financial Intranet, commenced an action in United
States District Court, Southern District of
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New York entitled H & H Acquisition Corp., individually and on behalf of
Financial Intranet, Inc. v. Financial Intranet Holdings, Financial Intranet,
Inc., Ben Stein, Interwest Transfer Co., Steven A. Sanders, Michael Sheppard,
Maura Marx, Henry A. Schwartz, Leonard Gotshalk, Gotshalk Enterprises, Law
Office of Steven A. Sanders, P.C. and Beckman, Millman & Sanders, LLP, 98 Civ.
5269. The action's principal basis appears to be plaintiff's claim that Ben
Stein wrongfully claims ownership of shares of common stock that Stein agreed to
purchase from plaintiff. According to plaintiff, these shares belong to
plaintiff. The plaintiff asserts sixteen causes of action. Only some make
allegations against Financial Intranet, Michael Sheppard and Maura Marx. The
plaintiff alleges:
o Mr. Sheppard and Ms. Marx assisted defendants Stein and Financial
Internet Holdings (a company owned by Stein) in converting stock
which plaintiff allegedly owns. Plaintiff seeks damages allegedly
sustained because of the alleged conversion.
o Mr. Sheppard and Ms. Marx assisted in defrauding plaintiff with
respect to the stock plaintiff claims. Plaintiff seeks damages
allegedly sustained because of the alleged fraud.
o Plaintiff alleges in a derivative claim, purportedly on behalf of
Financial Intranet: that Mr. Sheppard and Ms. Marx permitted
issuance of shares to defendant Gotshalk without proper
consideration and at a price lower than that offered to a company
introduced by Plaintiff; that they refused to allow plaintiff to
purchase additional shares; that Mr. Sheppard and Ms. Marx
permitted Financial Intranet to pay defendant Schwartz monies
which should not have been paid, and authorized issuance of stock
to Schwartz without proper authority; and that Mr. Sheppard and
Ms. Marx caused the issuance of stock to themselves without
proper authority. Plaintiff seeks damages allegedly sustained for
these alleged wrongful acts.
o A derivative claim purportedly on behalf of Financial Intranet
seeking an order directing the holding of a shareholders meeting
and rescission of actions determined to be improper by the Court
or its designee. A shareholders meeting was held in December
1998.
o Financial Intranet and its former transfer agent wrongfully
transferred shares belonging to plaintiff to a third party. The
transfer agent has asserted a claim against us seeking
indemnification for any liabilities incurred by the transfer
agent in this action.
o Plaintiff is entitled to $2,500, plus interest, from us for
alleged breach of contract. Financial Intranet settled this cause
of action.
Plaintiff also seeks an accounting from Mr. Sheppard and Ms. Marx,
among other defendants, for damages Financial Intranet allegedly suffered.
Financial Intranet, Mr. Sheppard and Ms. Marx believe that the claims
against it, Mr. Sheppard and Ms. Marx are without merit and are vigorously
defending the action. Financial Intranet, Mr. Sheppard and Ms. Marx have filed
responses to the claims against them. The responses deny all material
allegations of the complaint and the claim asserted by the transfer agent, and
assert a variety of defenses. Discovery is in its early stages. We cannot make
any assurances about the litigation's outcome. If the plaintiff prevails against
us, we could be adversely affected.
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PART II
Item 5. Market for Common Equity and Related Shareholder Matters
Our common stock is traded on the OTC Bulletin Board under the symbol
FNTN. The following table sets forth the high and low closing bid quotations for
the company's common stock:
Fiscal Year High Low
2000
First Quarter $0.93 $0.14
1999
First Quarter $1.58 $0.56
Second Quarter $1.3125 $0.75
Third Quarter $0.77 $0.37
Fourth Quarter $0.39 $0.11
1998
First Quarter $ .547 $ .219
Second Quarter $ .95 $ .22
Third Quarter $1.99 $ .58
Fourth Quarter $1.00 $ .41
The above quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission. These quotes are not necessarily
representative of actual transactions or of the value of our common stocks, and
are in all likelihood not based upon any recognized criteria of securities
valuation as used in the investment banking community.
As of March 31, 2000 there were approximately 52 record holders of our
company's common stock and an estimated 3,057 beneficial owners.
Dividend Policy
Financial Intranet has not paid and does not anticipate paying any
dividends on its common stock in the foreseeable future. We currently intend to
retain all working capital and earnings, if any, to finance its business
operations and expansion. The payment of any cash dividends will be at the
discretion of the board of directors and will be dependent upon our results of
operations, financial condition, capital requirements, contractual restrictions
and other factors deemed relevant by the board.
Item 6. Management's Discussion and Analysis or Plan of Operations
Overview
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the financial
statements and notes included elsewhere in this prospectus.
Financial Intranet, Inc. is an emerging New York based media and communications
company that delivers services to the business and investment communities. Our
initial objectives are to obtain a share of the telephony resale market by
offering value-added services to multi-location businesses, with an initial
target of broker/dealers and financial advisors. These customers then can
provide mutual funds, CEO's of publicly traded companies and other investment
managers with a cost-efficient method for distributing information about their
products.
Results of operations:
Year ended December 31, 1999 compared with year ended December 31, 1998
Revenue
Our principal source of revenue was income from the resale of telephone and data
communication. Revenue for the year ended December 31, 1999 was $73,672 as
compared with revenue in the prior year of $89,169, a decrease of 17%. We expect
to derive growth in revenues primarily through increased volume of
communications usage sold, streaming video content accessed and advertising
dollars charged for banners on our web site.
Cost of revenue
Financial Intranet's cost of revenue consists primarily of telephone
communications lines and the internet access and hosting expenses required to
support and deliver our intranet's communications services. Cost of revenues for
the year ended December 31, 1999 was $98,546 compared with $163,033 in the prior
year, a decrease of 40%. We expect cost of revenues to increase in direct
relationship to the future revenues anticipated from increases in usage volume.
Sales and marketing expenses
Sales and marketing expenses consist primarily of commissions to our sales force
and promotional, advertising and public relations costs. Sales and marketing
expenses increased 57% from $50,246 in 1998 to $78,744 in 1999. Higher
advertising and promotion costs were partially offset by lower commission
expenses paid to Financial Intranet's sales force, which is still in its
formative stages. We expect sales and marketing expenses to increase due to the
growth of the sales force as well as the increased advertising and promotional
activities.
General and administrative expenses
General and administrative expenses consist primarily of
o employee compensation and related expenses (including payroll taxes and
benefits) for executive, administrative and operations personnel,
o licensing, legal and other professional fees,
o travel and entertainment, and
o facility and office-related costs such as rent, insurance and telephone.
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General and administrative expenses increased 29% to $1,277,504 in 1999 from
$988,509 in 1998 principally due to increased payroll and office costs, as well
as higher legal fees. Included in these costs are $427,989 and $90,626 for 1999
and 1998, respectively, in non-cash expenses for outside consultants resulting
from the issuance of common stock in lieu of cash. Management expects general
and administrative expenses to increase in future periods to support the growth
of the business.
Stock compensation expense
Compensation expense resulting from the issuance of common stock and options to
purchase common stock to three officers of the Company equaled $508,075 in 1999
and $897,808 in 1998.
Interest Expense
Included in interest expense is the value of common stock, warrants and
convertible notes with conversion prices below market. These expenses equaled
$1,415,964 in 1999.
Depreciation and amortization
Depreciation and amortization consists primarily of depreciation of computer
equipment and amortization of software development costs. These costs increased
to $340,608 in 1999 from $129,413 in 1998, when these activities were
effectively placed in service. The 1998 expenses represented a half-year of
depreciation and amortization.
Other income and expense
Other income consists principally of interest from loans, notes receivable and
short-term investments. Interest and other income increased 43% from $4,140 for
the year ended December 31, 1998 to $5,918 for the year ended December 31, 1999.
Income taxes
No provision for federal and state income taxes has been recorded as Financial
Intranet incurred net operating losses in both 1999 and 1998. Financial Intranet
had approximately $3 million of net operating loss carryforward for federal
income tax purposes as of December 31, 1999. The net operating loss will be
available to offset any future taxable income. Given Financial Intranet's
limited operating history, losses incurred to date and the difficulty in
accurately forecasting Financial Intranet's future results, management does not
believe that the realization of the potential future benefits of these
carryforwards meets the criteria for recognition of a deferred tax asset
required by generally accepted accounting principles and, accordingly, a full
100% valuation allowance has been provided.
Liquidity and capital resources
We had balances of $91,368 and $149,225 in cash and cash equivalents at December
31, 1999 and December 31, 1998, respectively.
Financial Intranet had negative working capital of $(198,312) at December 31,
1999. Net cash used in operating activities was $1,469,759 for the year ended
December 31, 1999. Cash used in operating
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activities was primarily attributable to a net loss of $3,692,029 partially
offset by non-cash items such as depreciation and amortization of $340,608,
stock compensation costs of $508,075, consulting services and professional fees
paid by the issuance of common stock of $427,989and interest expense and debt
issuance costs resulting from the issuance of common stock and warrants
aggregating $1,415,964. Net cash used in operating activities for the year ended
December 31, 1998 was $397,795, which was principally due to the net loss of
$2,141,978, partially offset by non-cash items such as depreciation and
amortization of $129,413 and stock compensation costs of $897,808.
Net cash used in investing activities of $64,604 for the year ended December 31,
1999 was primarily attributable to capital expenditures of $68,114 and
capitalized software development costs of $3,510.
Net cash used in investing activities of $874,679 for the year ended December
31, 1998 was primarily attributable to capital expenditures of $833,128 and
capitalized software development costs of $41,551.
Net cash provided by financing activities for the year ended December 31, 1999
was $1,347,278 and consisted primarily of proceeds from the issuance of
promissory notes of $1,220,000.
Net cash provided by financing activities for the year ended December 31, 1998
was $1,419,770 and consisted primarily of proceeds from the issuance of common
stock and convertible promissory notes, less related financing costs and a
$47,250 repayment of a vendor loan
Financial Intranet has satisfied its cash requirements primarily through
revenue, public and private placements of common stock, warrants and debentures
convertible into shares of common stock, as well as the issuance of common stock
in lieu of payment for services. Also, officers have loaned Financial Intranet
funds as needed to provide working capital.
In 1998, we raised $1,500,000 through the sale of convertible debentures, which
debentures were subsequently converted into 7,505,057shares of common stock.
On February 8, 1999, Financial Intranet issued a 7% convertible promissory note
in the principal amount of $600,000. The note was subsequently converted into
1,500,000 shares of common stock.
On July 20, 1999, we issued an 8% convertible promissory note in the principal
amount of $500,000 to one accredited investor with a maturity date of October
20, 1999. The Note has been converted into 4,065,814 shares of the Company's
common stock. We used the proceeds of the promissory note for general working
capital and repayment of past due accounts payable.
On September 27, 1999, we issued an 8% promissory note in the principal amount
of $120,000 with a maturity date of December 26, 1999. The proceeds of the note
were used for general working capital and repayment of past due accounts
payable; the note was repaid in cash.
From time to time, officers have loaned Financial Intranet funds as needed to
provide working capital. Financial Intranet issued three outstanding notes in
favor of Ben B. Stein, a shareholder, consultant and former officer and
director. The original principal amount of the notes was $60,889. Mr. Stein
agreed on March 3, 1999 to apply the outstanding principal amount of the notes
and all accrued interest to the exercise of options in lieu of a cash payment by
Financial Intranet. We have an outstanding note in favor of Michael Sheppard for
$36,115 (plus accrued interest) due on demand. The promissory notes bear
interest at 8% a year.
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We believe that the $1,750,000 cash proceeds from certain sales of Company
common stock in the first quarter of 2000 will be sufficient to meet anticipated
cash requirements through September 2000. Financial Intranet does not expect to
generate positive cash flow from operations in the short term, and unless
Financial Intranet generates significant revenue or obtains financing through
additional sources by the end of 2000, there is substantial doubt about its
ability to continue as a going concern. Revenue for the year ended December 31,
1999 was adversely affected by the change in telecommunications carriers, which
change has been completed. There can be no assurance that any required
additional capital will be available at such time as required by Financial
Intranet.
We anticipate that we can continue, in the ordinary course of business and with
additional financing transactions, whether such financings are from additional
offerings or other sources, to provide the services that we currently offer to
existing and additional customers through September 30, 2000. Further, the
proceeds of the transactions from the first quarter of 2000 will enable us to
accelerate our intended expansion, both in the Far East through our acquisition
of the assets of Longyin Network Technology, and domestically, with the
introduction of our redesigned web site and growth of our sales force.
Year 2000 Issues
We have not experienced any effects of the Year 2000, although if
encountered, the impact on operations and financial reporting may range from
minor errors to significant systems' failures that could affect our ability to
conduct normal business operations. We believe that by modifying or replacing
systems, and by monitoring the Year 2000 readiness of key external parties, we
have mitigating the Year 2000 risks. However, we cannot assure our stockholders
that the uncertainties surrounding the Year 2000 issue will not materially and
adversely affect us at a later date.
FACTORS AFFECTING OUR OPERATING RESULTS, BUSINESS PROSPECTS AND STOCK PRICE
This report on Form 10-KSB contains forward-looking statements that
involve risks and uncertainties. The factors described below, among others,
could cause our actual results to differ materially from those anticipated.
Investors can have difficulty evaluating our prospects because we commenced
business in the fall of 1998 and have a limited operating history for
investors to analyze.
We began building our infrastructure and our research and development for
our intranet in February 1997 and offer a limited relevant operating
history. You should consider our prospects in light of the risks, expenses
and difficulties frequently encountered by new businesses in connection
with the marketing and sale of new products and services.
Our projected losses raise substantial doubt about our ability to continue
operations unless we obtain financing or generate adequate revenues.
Unless we generate sufficient revenues or obtain financing through this
offering or another means, our operations in the development stage raise
substantial doubt about our ability to continue as a going concern. We had
net losses of $817,430 for the year ended December 31, 1997, $2,141,978
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for the year ended December 31, 1998 and $3,692,029 for the year ended
December 31, 1999. We have had limited revenues since inception. We had no
revenues from inception through December 31, 1997. We had revenues of
$89,169 in 1998 and $73,672 for the year ended December 31, 1999. We expect
to incur up-front operating costs to expand our marketing efforts, which
may result in further losses. We will not be profitable until we establish
a broader customer base for our services and derive substantial revenues
from the sale of communications and intranet services and advertising
rerenue generated from the recent acquisition of the assets of Longyin
Network Technology.
Because our business depends on a limited number of products, the lack of
success for any one of them would reduce the value of our securities.
Our business may be adversely affected if we receive lower than
anticipated revenues from either of our two principal sources:
1. communications services with value added features for broker/dealers
and financial advisors, and
2. marketing services for mutual funds and other financial product
companies.
Telecommunications companies and others with greater resources and name
recognition could make it very difficult to compete.
Telecommunications companies and other distributors of financial
information are our most significant competitors. Many competitors have
greater financial, technical, marketing, sales and customer support and
other resources. Many competitors have reputations for successfully
developing, licensing and selling their products and technologies.
Competitors may be able to undertake more extensive marketing campaigns and
adopt more aggressive pricing policies than we. They may be able to add
value-added services, similar to ours. In that case, we may face
significant price competition and reduced profit margins. We may not be
able to compete successfully with larger companies.
Technological changes have lowered the cost of operating in our industry, which
has increased competition and could reduce anticipated profit margins.
Technological changes have lowered the cost of operating communications and
computer systems and purchasing software. These changes reduce our cost of
providing services but also facilitate increased competition by reducing
competitors' costs in providing similar services. Such competition could
increase price competition and reduce anticipated profit margins.
Our lack of patent or copyright protection may increase the difficulty of
protecting our rights to our technology.
We regard the technology we use as proprietary, but have no existing or
pending patent or copyright protection. Our success depends in part on our
ability to protect our technology and other intellectual property by
relying on one or more of the following:
1. confidentiality agreements with employees and third parties
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2. license agreements with consultants, vendors and customers
3. trade secret laws
4. trademark laws
5. common law copyright
We have signed agreements with third parties that have access to our
technology. Despite such protections, a third party could copy or otherwise
obtain and use our products or technology, or develop similar technology
independently. We may be forced to litigate to protect our interests.
Litigation of this type is frequently expensive. We may not have the
financial resources to pursue such litigation. We cannot be assured of
success without patent and copyright protection.
Because success in offering our intranet and other communications services
depends on constantly changing technologies, our success in developing and using
the proprietary data mining software depends on our ability to protect our
proprietary technology from adverse claims.
While we consider our technology unique, others utilize similar
technologies. These companies may claim that we have breached their
copyrights, patents or proprietary rights. We may be forced to litigate
these disputes. This litigation would be expensive with no assurance of
success. To our knowledge, we do not infringe on any other proprietary
technologies and we have received no claims alleging infringement from
others.
We currently have no assured sources for additional financing, and our success
may depend on our ability to obtain further financing.
We anticipate that our working capital and income from operations will
satisfy our financial requirements for at least 6 months. We base this
expectation on our current operating plan. The plan may change because of
events within and outside of our control. In the event of a change, we may
require additional financing sooner than anticipated. Opportunities
including an acquisition may arise which may require additional financing.
We may not be able to obtain funding on a timely basis, on favorable terms,
or at all. We do not have a credit facility or any committed source of
financing. Our business, financial condition and results of operations will
suffer if we are unable to obtain the financing we need or to generate
sufficient funds from operations. Although we anticipate that we will
continue to offer our existing services to additional customers, we may
curtail our planned expansion and may be unable to fund ongoing operations.
Because we rely heavily on sophisticated computer equipment and have no
secondary systems, any disruption to our computer system could adversely affect
our business.
Substantially all of our communications hardware and computer hardware
operations are located at our offices in Mt. Kisco, New York and New York
City. Although the New York City location will be protected, our system is
vulnerable to damage from:
o fire,
o flood,
o power loss,
o telecommunications failures, and
o break-ins and similar events.
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We do not have any secondary systems, although we intend to establish such
a system depending on the availability of cash. We believe that a total
system failure would not result in interruption of our business for more
than two weeks. We have a disaster recovery plan and carry business
interruption insurance. However, any significant failure in our services
could cause significant harm to our customer relations.
Our potential issuance of shares upon the exercise of options or conversion of
promissory notes could reduce the market price of our stock.
The purchase of our stock by certain of these investors or their potential
of purchases at below market price may reduce the market price of our
stock. We have issued stock options, warrants and convertible notes to
persons who invested in us or provided goods, services or credit. These
people have the right to purchase up to 4,048,805 shares at various prices
below $1.00.
The price of our stock may decrease as a result of sales of stock that are not
currently freely tradable.
As of March 31, 2000, 1,086,758 shares of common stock held by present
shareholders have not been registered under the Securities Act of 1933. The
stock can be sold under Rule 144. Sales of substantial amounts of stock
under Rule 144 could adversely affect the market price of the shares and
make it more difficult for us to sell our stock in the future.
The risk of doing business in the People's Republic of China.
We have purchased an Internet content provider in the People's Republic of
China, which although presenting a good opportunity to immediately expand
our user base and offer additional opportunities to expand worldwide in an
uncharted new marketplace, still presents possible unforeseen risks of
doing business in a new, foreign and government run society. There is no
assurance that laws that may be enacted if and when they join the World
Trade Organization may prove to be oppressive to foreign-owned companies.
Our operations in China face significant competition from companies with
greater resources and experience. In addition, our ability to remit capital
from China may be subject to foreign exchange controls and the uncertainty
of converting funds into United States dollars.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Registrant
The following is a list of our executive officers and directors and a
brief summary of their business experience and certain other information are set
forth below:
Name Age Title
Michael Sheppard 50 President, Chief Operating Officer and
Director
Maura Marx 36 Executive Vice President, Secretary
Corey Rinker 41 Vice President, Chief Financial Officer
Joseph Engelberger 74 Director
Steven Weller 44 Director
The biographies of our executive officers and directors are as follows:
Michael Sheppard--President, Chief Operating Officer and Director
Mr. Sheppard joined Financial Intranet as a consultant in February 1997 and
became President, Chief Operating Officer and Director in April 1997. Mr.
Sheppard has been involved in setting up the corporate infrastructure of several
early stage development companies and undertaking their day-to-day operations as
chief executive and chief operating officer. From January 1996 through January
1997, Mr. Sheppard was Chief Operating Officer of Freelinq Communications,
formerly Televideo Corporation, based in New York City. Freelinq offers real
time video-on-demand via ATM/XDSL technology with high-speed Internet
transmission and advertiser supported free theatrical films delivered through
twisted pair telephone lines. From 1995 to 1996 he was chief operating officer
for Lee Communications Ltd., which is a laser development and transmission
company. From 1993 to 1995, he was Chief Executive Officer for MLS Lighting Ltd.
In 1980 he founded Belden Communications and served as its President and Chief
Executive Officer until it was acquired in 1985. It was engaged in the sale and
distribution of proprietary products used in the motion picture and television
markets, and was merged in 1985 into Lee America Ltd., which was bought by Lee
Lighting Ltd., a United Kingdom company, in 1986.
Joseph F. Engelberger - Director
Mr. Engelberger became a Director of Financial Intranet in August 1998. Joseph
Engelberger founded Helpmate Robotics, Inc. Since 1984, he has been Chairman and
Chief Executive Officer of Helpmate Robotics, Inc. He received B.S. and M.S.
degrees from Columbia University in 1946 and 1949, respectively, and he has
authored numerous articles in the instrumentation and robotics fields.
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His honors include the Progress Award of the Society of Manufacturing Engineers,
the Leonardo da Vinci Award of the American Society of Mechanical Engineers and
the 1982 American Machinist Award. The University of Liverpool bestowed the
first McKechnie Award on him in 1983. In 1984, he was elected to the National
Academy of Engineering. He was the recipient of the Egleston Medal for
distinguished engineering achievement from Columbia University. The University
of Bridgeport, Spring Garden College, Briarwood College, Trinity College and
Carnegie-Mellon University granted him honorary doctorates. In January 1997, he
received the Beckman Award for pioneering and original research in the general
field of automation. Mr. Engelberger serves on the Board of directors of EDO
Corporation (NYSE:EDO).
Steven Weller - Director
Mr. Weller became a director of Financial Intranet in November 1998. Since 1989,
Mr. Weller has been the Vice President of Siemens Information and Communication
Products LLC. He is the Vice President of Sales for the Computer Systems
division. He is responsible for all sales and technical support personnel. He
was previously the Vice President of Sales for the North American Key Accounts.
Maura Marx--Executive Vice President, Secretary
Ms. Marx became Secretary in December 1998 and became Executive Vice President
in February 1999. She had been the Senior Vice President and Assistant Secretary
since September 1997. From 1994 until 1996, she was employed as a salesperson in
the Sales and Leasing Department of the Friedman Realty Group, a major New York
commercial real estate firm. Her responsibilities centered on selling, servicing
and expanding the firm's client base of foreign banking institutions. Ms. Marx
was head of the Sales & Marketing Department for Warner Bros. Film Gesmbh based
in Vienna Austria from 1992 until 1994. She was responsible for tactical and
budget planning, and for distribution and promotion of Warner films and Warner
retail goods throughout Austria. From 1990 until 1992, she served as Assistant
Director of European Development for the Guggenheim Museum Salzburg Advisory
Board (GMSAB).
Corey Rinker--Vice President, Chief Financial Officer
Mr. Rinker became Vice President and Chief Financial Officer in August 1999.
From 1996 until 1999, he was employed as vice president-finance and general
counsel for The Intellisource Group, Inc., a Safeguard Scientifics (NYSE:SFE)
partnership company. His responsibilities included all financial, merger and
acquisition and legal activities for that firm's $200 million outsourcing
practice. Mr. Rinker previously was a senior consulting manager with Kenneth
Leventhal & Co. in Washington, DC, and senior financial consultant with Deloitte
& Touche in their Financial Services Center in New York. He is a certified
public accountant and licensed attorney in New York and Georgia.
Consultants
Ben B. Stein--Director of Brokerage Sales
Mr. Stein founded Financial Intranet in December 1996. Since November 1998, he
has been a consultant to Financial Intranet as Director of Brokerage Sales. He
is responsible for selling our products and services to the brokerage community.
From December 1996 through November 1998, he was a member of the board of
directors and Secretary of Financial Intranet. Mr. Stein has over 25 years
experience in the securities industry during which time he has held Series 3,
Series 4, Series 7, Series 8, Series 24,
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Series 27 and Series 63 Licenses issued by the NASD. From July 1998 through
October 1998, he was a registered representative with the Empire Financial
Group. From 1993 to 1996, Mr. Stein was Chief Executive Officer of Stein Shore
Securities, Inc., a full-service broker/dealer with three branch offices. From
1991 through 1993, Mr. Stein operated as Senior Vice President of Marsh Block &
Company, a securities firm specializing in investment banking. Mr. Stein
received a Bachelor of Science degree in Business Administration from Roosevelt
University in Chicago, Illinois in 1961. He became a Certified Public Accountant
in 1968.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires certain officers, directors, and beneficial owners of more than ten
percent of our common stock to file reports of ownership and changes in their
ownership of our equity securities with the Securities and Exchange Commission.
Based solely on a review of the reports and representations furnished to us
during the last fiscal year, we believe that each of these persons is in
compliance with all applicable filing requirements.
Item 10. Executive Compensation
Summary Compensation Table. The following table sets forth the
aggregate cash compensation paid for services rendered to our company during
each of our company's last three fiscal years by all individuals who served as
our company's Chief Executive Officer during the last fiscal year and our
company's most highly compensated executive officers who served as such during
the last fiscal year.
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation
-------------------
Restricted
Name and principal position Year Salary Bonus Other(2) Stock Awards Stock Options
- --------------------------- ---- ------ ----- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ben B. Stein(1) 1999 $ 0 $ 0 $719,099 $ 0 0
Consultant 1998 150,000 0 0 0 1,242,955
1997 150,000 60 10,500 54,000 2,397,307
Michael Sheppard 1999 143,739 0 154,369 0 0
Chief Executive Officer 1998 150,000 0 0 0 720,914
Maura Marx 1999 97,098 0 156,306 0 0
Executive Vice President 1998 100,000 0 0 0 447,464
1997 48,750 0 0 18,000 903,031
</TABLE>
(1) On February 27, 1997, Mr. Stein received 1,500,000 shares of common
stock in lieu of cash compensation for 1997 and an additional
1,500,000 shares of common stock as an inducement to execution of the
consulting agreement.
25
<PAGE>
(2) These amounts reflect the fair market value of shares granted for payment
in lieu of cash for services rendered.
Executive compensation
Employees
Michael Sheppard receives a salary of $150,000 per year under his employment
agreement dated September 12, 1997. The employment agreement expires on December
31, 2002. Mr. Sheppard received an incentive bonus of 750,000 shares of common
stock upon execution of a consulting agreement on February 27, 1997. Mr.
Sheppard received an option under the employment agreement to purchase 2,231,352
shares of common stock at a price of $0.19 per share. The option expires upon
the earlier to occur of December 31, 2002 or 90 days after the termination of
Mr. Sheppard's employment without cause or immediately after termination with
cause. The option is personal to Mr. Sheppard and is not assignable. Mr.
Sheppard has not purchased any shares of common stock under his option. In
January 1999, he was granted an additional 205,825 shares of stock for
replacement shares for those shares he sold in 1998 to fund the Company.
Ms. Marx receives a salary of $140,000 per year under her employment agreement
dated September 12, 1997. The employment agreement expires on December 31, 2002.
Ms. Marx received an incentive bonus of 500,000 shares of common stock upon
execution of the employment agreement. She received an option under her
employment agreement to purchase 1,279,379 shares of common stock at a price of
$0.19 per share. The option expires upon the earlier to occur of December 31,
2002 or 90 days after the termination of Ms. Marx's employment without cause or
immediately after termination with cause. The option is personal to Ms. Marx and
is not assignable. Ms. Marx has not purchased any shares of common stock under
her option. In January 1999, she was granted an additional 208,409 shares of
stock for replacement shares for those shares she sold in 1998 to fund the
Company
Mr. Rinker receives a salary of $135,000 per year under his employment agreement
dated in November 1999. The employment agreement expires on December 31, 2002.
He received an option under his employment agreement to purchase 1,750,000
shares of common stock at a price of $0.10 per share. One-third of the options
vest each year commencing August 2000. The option expires upon the earlier to
occur of December 31, 2002 or 90 days after the termination of Mr. Rinker's
employment without cause or immediately after termination with cause. The option
is personal to Mr. Rinker and is not assignable. Mr. Rinker has not purchased
any shares of common stock under his option.
By agreement with the Company, Mr. Sheppard, Ms. Marx and Mr. Rinker have agreed
not to exercise any options that they may be entitled to under any agreement
with the Company until such time as the shareholders of Financial Intranet
increase the amount of authorized shares under the Company's Articles of
Incorporation.
Consultants
Mr. Stein ceased his employment and became a consultant in November 1998. Mr.
Stein's consulting fee is based solely on commissions earned from
telecommunications services sold to clients he introduces to us. The consulting
agreement expires on December 31, 2002. Financial
26
<PAGE>
Intranet accrued Mr. Stein's consulting fee for 1998 in the aggregate amount of
$150,000 and paid $40,500 of such accrued amount in 1999.
The employment and consulting agreements provided Mr. Stein with options to
purchase shares of common stock at a price of $.19 per share. Under his
consulting agreement dated March 3, 1999, Mr. Stein agreed to reduce his options
from 3,640,262 to 2,500,000 and agreed to apply the $109,500 balance of his
accrued salary and the principal of $56,889 plus interest owed under two
promissory notes to purchase 879,685 shares of common stock. He now owns options
to purchase 1,670,315 shares. The options expire upon the earlier to occur of
December 31, 2002 or immediately if Mr. Stein's consulting agreement are
terminated with cause. The options are personal to Mr. Stein and are not
assignable.
Stock option plans
Financial Intranet has established the 1998 Stock Option Plan which provides for
the granting of options which are intended to qualify either as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code or as
options which are not intended to meet the requirements of such section. The
total number of shares of Common stock reserved for issuance under the plan is
1,500,000. Options to purchase shares may be granted under the plan to persons
who, in the case of incentive stock options, are key employees (including
officers) or, in the case of non-statutory stock options, are key employees
(including officers) or non-employee directors or non-employee consultants.
The plan is administered by the compensation committee of the board of
directors, which has some discretionary authority to determine the number of
shares to be issued under incentive stock options and nonstatutory stock options
and the recipients, and when and at what exercise price the options will be
granted. On November 13, 1998, Financial Intranet appointed Steven S. Weller,
Michael Sheppard and Joseph F. Engelberger to constitute the compensation
committee to administer the plan.
The exercise price of all incentive stock options granted under the plan must be
at least equal to the fair market value of such shares on the date of the grant
or, in the case of incentive stock options granted to the holder of more than
10% of Financial Intranet's common stock, at least 110% of the fair market value
of such shares on the date of the grant. The maximum exercise period for which
incentive stock options may be granted is ten years from the date of grant (five
years in the case of an individual owning more than 10% of Financial Intranet's
common stock). The aggregate fair market value (determined at the date of the
option grant) of shares with respect to which incentive stock options are
exercisable for the first time by the holder of the option during any calendar
year shall not exceed $100,000.
The exercise price of all non-statutory stock options granted under the plan
must be at least equal to the 85% of the fair market value of such shares on the
date of the grant
As of today, no options have been granted under the plan, and none may be until
such time as the shareholders of Financial Intranet increase the amount of
authorized shares under the Company's Articles of Incorporation.
Option/SAR Grant Table
27
<PAGE>
The table below sets forth the following information with respect to
options granted to the named executive officers during fiscal year 1999 and the
potential realizable value of such option grants (1) the number of shares of
common stock underlying options granted during the year, (2) the percentage that
such options represent of all options granted to employees during the year, (3)
the exercise price, and (4) the expiration date.
OPTION GRANTS IN LAST FISCAL YEAR--INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Percent of Total
Number of Options Granted
Securities to Employees In
Underlying Fiscal Year Ended Exercise or Base Expiration
Name Options Granted December 31, 1999 Price Per ($/Share) Date
- ---- --------------- ----------------- ------------------- ----------
<S> <C> <C> <C> <C>
Ben B. Stein.............................. None N/A N/A N/A
Michael Sheppard.......................... None N/A N/A N/A
Maura Marx................................ None N/A N/A N/A
</TABLE>
Option Exercises and Values for 1999
The table below sets forth the following information with respect to
option exercises during fiscal 1999 by each of the named executive officers and
the status of their options at December 31, 1999 (1) the number of shares of
common stock acquired upon exercise of options during fiscal 1999, (2) the
aggregate dollar value realized upon the exercise of such options, (3) the total
number of exercisable and non exercisable stock options held at December 31,
1999, and (4) the aggregate dollar value of in-the-money exercisable options at
December 31, 1999.
AGGREGATED
OPTION VALUES ON December 31, 1999
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 12/31/99 at 12/31/99(1)
----------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ben B. Stein 1,620,315 0 91,007 0
Michael Sheppard 2,231,352 0 55,784 0
Maura Marx 1,350,495 0 33,762 0
Corey Rinker 0 1,750,000 0 0
</TABLE>
1. Values are calculated by subtracting the exercise price from the fair market
value of the underlying common stock. For purposes of this table, fair market
value is deemed to be $0.215, the average of the high and low bids for our
common stock price on the OTC Bulletin Board on December 31, 1999.
28
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following tabulation shows the security ownership as of March 31,
2000 of (i) each person known to us to be the beneficial owner of more than 5%
of our outstanding common stock; (ii) each of our directors and executive
officers and (iii) all of our directors and executive officers as a group. As of
March 31, 2000, we had 43,981,244 shares of common stock issued and outstanding.
Name & Address Number of Shares Owned Percent of Class
----------------
Ben B. Stein (1) 4,147,402 8.8%
c/o Financial Intranet
116 Radio Circle
Mt. Kisco, NY 10549
Michael Sheppard (2) 2,732,177
c/o Financial Intranet 5.9%
116 Radio Circle
Mt. Kisco, NY 10549
Maura Marx (3) 1,817,346 4.0%
c/o Financial Intranet
116 Radio Circle
Mt. Kisco, NY 10549
Joseph Engelberger (4) 10,000 *
c/o Financial Intranet
116 Radio Circle
Mt. Kisco, NY 10549
Steven Weller (5) 10,000 *
c/o Financial Intranet
116 Radio Circle
Mt. Kisco, NY 10549
Corey Rinker (6) None 0
c/o Financial Intranet
116 Radio Circle
Mt. Kisco, NY 10549
All Officers and Directors
as a Group (5 Persons) 8,716,925 17.1%
* Represents an amount less than one (1%) percent.
(1) Includes 1,000,000 shares owned by Financial Intranet
Holdings Inc., a company wholly owned by Mr. Stein and shares
and options to purchase 1,620,315 shares at an exercise price
of $ .19 per
29
<PAGE>
share. Does not include 183,000 shares owned by Mr. Stein's
children, 80,000 shares owned by his wife of 300,000 shares
owned by Mr. Stein's mother and sister, all of which Mr.
Stein disclaims any beneficial interest.
(2) Includes options to purchase 2,231,352 shares at an exercise
price of $ .19 per share
(3) Includes options to purchase 1,350,491 shares at an exercise
price of $ .19 per share.
(4) Includes options to purchase 10,000 shares at an exercise
price of $ .725 per share.
(5) Includes options to purchase 10,000 shares at an exercise
price of $ .60 per share.
(6) Does not include options to purchase 1,750,000 shares at an
exercise price of $ .10 per share, which options vest over
three years commencing August 2000..
Item 12. Certain Relationships and Related Transactions
On February 8, 1999, Financial Intranet issued a 7% convertible promissory note
in the principal amount of $600,000. The principal amount of $240,000 was
payable on demand on March 10, 1999 and the principal amount of $360,000 was
payable on demand on May 9, 1999. The promissory note was convertible into
common stock at a conversion price equal to the lesser of:
75% of the average of the five lowest closing bid prices of common
stock during the 30 trading days ending on the trading day immediately
preceding the conversion date, or
$.40 per share.
Mr. Ben Stein personally guaranteed Financial Intranet's obligations under the
convertible promissory note in the principal amount of $600,000 issued in
February 1999 and pledged 1,500,000 restricted shares of common stock as
collateral security for such obligations. The lender received 600,000 of the
pledged shares in March 1999 in satisfaction of payment of the principal amount
of $240,000 and 900,000 of the pledged shares in May 1999 in satisfaction of
payment of the principal amount of $360,000 based on a conversion price of $.40
per share. Financial Intranet issued 1,500,000 shares of common stock to Mr.
Stein in May 1999 to replace the pledged shares.
On March 3, 1999, Mr. Stein applied $167,140 owed to him by Financial Intranet
in lieu of cash payment to purchase 879,685 shares of common stock under options
with an exercise price of $.19 per share. The $167,140 owed to Mr. Stein
consisted of $109,500 in accrued compensation from 1998 and two promissory notes
in the principal amount of $56,889 and all accrued interest.
Messrs. Stein and Sheppard and Ms. Marx personally guaranteed Financial
Intranet's obligations under the convertible promissory note in the principal
amount of $500,000 issued in July 1999. Mr. Stein pledged 924,517 restricted
shares of common stock, Mr. Sheppard pledged 96,151 restricted shares of common
stock and Ms. Marx pledged 101,844 restricted shares of common stock as
collateral security for such obligations. The pledged stock was released upon
conversion of the principal amount of the note and all accrued interest in
January 2000.
30
<PAGE>
Messrs. Stein and Sheppard and Ms. Marx were granted 197,402, 205,825 and
208,409 shares of stock, respectively, in January 1999 for services rendered.
31
<PAGE>
PART IV
Item 13. Exhibits, Lists and Reports on Form 8-K
(a)(1) Financial Statements Page
Number
Reports of Independent Certified Public Accountants F-1
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-7
Notes to Financial Statements F-9
Schedules other than those listed above are omitted for the reason that they are
not required, are not applicable, or the required information is shown on the
financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal year ended December
31,1999
(c) Exhibits
Exhibit
Number Description
Note that all Exhibits listed below have been previously filed with Registrants
Registration Statement, with the exception of Exhibit 10.19 which has been
previously filed with Registrants 8K filed April 11, 2000.
3.1 -- Registrant's Restated Articles of Incorporation dated December 22, 1998
3.2 -- Registrant's By-laws
4.1 -- Form of Common Stock Certificate
4.2 -- 1998 Stock Option Plan
5.1 -- Opinion of McLaughlin & Stern, LLP
10.1 -- Letterregarding purchase of Wee Wees, Inc. dated October 9, 1996.
10.2 -- Employment Agreement dated as of September 12, 1997 between Registrant
and Michael Sheppard.
10.3 -- Employment Agreement dated as of September 12, 1997 between Registrant
and Ben B. Stein.
10.4 -- Employment Agreement dated as of September 12, 1997 between
Registrant and Maura Marx.
10.5 -- Amendment to Employment Agreement
dated as of December 15, 1998 between Registrant and Michael Sheppard.
10.6 -- Amendment to Employment Agreement dated as of December 15, 1998 between
Registrant and Maura Marx.
10.7 -- Consulting Agreement dated as of February 27, 1997 between
Registrant and Michael Sheppard.
10.8 -- Promissory Note issued by Registrant to investor on December 31,
1998 in connection with private placement.
10.9 -- Warrant issued by Registrant to investor on December 31, 1998 in
32
<PAGE>
connection with private placement.
10.10 -- Subscription agreement between Registrant and investor in private
placement on December 31, 1998.
10.11 -- Subscription agreement between Registrant and investor in private
placement on February 8, 1999.
10.12 -- Warrant issued by Registrant to investor on February 8, 1999 in
connection with private placement.
10.13 -- Form of Warrant certificate issuable by Registrant to investor upon
subsequent installments due under private placement.
10.14 -- Guaranty executed by Ben B. Stein on February 8, 1999 in connection
with private placement.
10.15 -- Stock Pledge Agreement executed by Ben B. Stein on February 8, 1999 in
connection with private placement.
10.16 -- Service Agreement between the Registrant and Siemens dated December 30,
1998.
10.17 -- Warrant issued by Registrant to Cardinal Capital Management on December
31, 1998 in connection with private placement.
10.18 -- Warrant issued by Registrant to Josephberg Grosz & Co. on December 31,
1998 in connection with private placement.
10.19 - Asset Purchase Agreement by and between Registrant and Longyin Network
Technology Co., Ltd.
33
<PAGE>
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.
Dated: April 13, 2000
Financial Intranet, Inc.
By: /s/ Michael Sheppard
--------------------
Michael Sheppard
Chairman of the Board of Directors,
President and Chief Operating Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities on
the dates indicated.
<TABLE>
<CAPTION>
Name Position Date
<S> <C> <C>
By: /s/ Michael Sheppard Chairman of the Board of Directors, April 13, 2000
President and Chief Operating Officer
By: /s/ Maura Marx Executive Vice President and Secretary April 13, 2000
By: /s/ Corey Rinker Vice President and Chief Financial Officer April 13, 2000
By: /s/ Steven Weller Director April 13, 2000
By: /s/ Joseph Engelberger Director April 13, 2000
</TABLE>
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Financial Intranet, Inc.
Mt. Kisco, New York
We have audited the accompanying balance sheet of Financial Intranet, Inc. (a
development stage company) as of December 31, 1999, and the related statements
of operations, changes in stockholders' equity and cash flows for the year then
ended and the amounts for such year included in the period from December 17,
1996 (inception) through December 31, 1999. These financial statements are the
responsibility of the Company's management. 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 provides a reasonable basis for our opinion.
In our opinion the financial statements enumerated above present fairly, in all
material respects, the financial position of Financial Intranet, Inc. as of
December 31, 1999 and the results of its operations and its cash flows for the
year then ended and the amounts for such year included in the period from
December 17, 1996 (inception) through December 31, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company is in the development stage and has
experienced significant losses since its inception. In addition, the Company has
a negative working capital at December 31, 1999 and the continuation of the
business is also dependent upon the Company obtaining additional financing.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans with regard to these matters are also
described in Note A. The accompanying financial statements do not include any
adjustments that may result should the Company be unable to continue as a going
concern.
/s/ Richard A. Eisner & Company, LLP
New York, New York
March 3, 2000
With respect to Note A[2] and Note J
March 27, 2000
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Financial Intranet, Inc.
(a Development Stage Company)
We have audited the accompanying balance sheet of Financial Intranet, Inc. (a
development stage company) as of December 31, 1998, and the related statements
of operations, changes in stockholders' equity, and cash flows for the year then
ended and for the period from December 17, 1996 (inception) to December 31,
1998. These financial statements are the responsibility of the Company's
management. 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 provides 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 Financial Intranet, Inc. (a
Development Stage Company) as of December 31, 1998, and the results of its
operations, changes in stockholders' equity and its cash flows for the year then
ended and the amounts for the period from December 17, 1996 (inception) through
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A(2) to the
financial statements, the Company is in the development stage and has
experienced significant losses since its inception. In addition, the Company has
a negative working capital at December 31, 1998 and the continuation of the
business is also dependent upon the Company's private placement and public
offering being successful. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also described in Note A(2). The accompanying financial
statements do not include any adjustments that may result should the Company be
unable to continue as a going concern.
/s/ REMINICK, AARONS & COMPANY, LLP
New York, New York
March 5, 1999
F-2
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 91,368 $ 149,225
Accounts receivable 66,793 44,070
Due from officers 5,074
Prepaid expenses 9,274 4,378
----------- -----------
Total current assets 167,435 202,747
Property and equipment, net 692,414 961,195
Deferred offering costs 79,991
Deferred debt issuance costs 394,747 55,000
Capitalized software development costs, net 30,378 88,058
Other assets 33,259 26,157
----------- -----------
$ 1,318,233 $ 1,413,148
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 234,340 $ 621,457
Accrued interest 50,401 150,110
Accrued payroll and payroll taxes 28,434
Loan payable - officer/stockholder 39,371 98,618
Deferred rent 13,201
----------- -----------
Total current liabilities 365,747 870,185
Notes payable 588,125 500,000
----------- -----------
Total liabilities 953,872 1,370,185
----------- -----------
Commitments and contingency
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized,
29,831,195 and 20,561,048 shares issued and outstanding
December 31, 1999 and 1998, respectively 29,831 20,561
Additional paid-in capital 7,509,473 4,079,186
Accumulated deficit during the development stage (6,685,935) (2,993,906)
Less: deferred compensation cost (489,008) (1,062,878)
----------- -----------
Total stockholders' equity 364,361 42,963
----------- -----------
$ 1,318,233 $ 1,413,148
=========== ===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
Period From
December 17,
1996
(Inception)
Year Ended December 31, Through
---------------------------- December 31,
1999 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $ 73,672 $ 89,169 $ 162,841
----------- ----------- -----------
Operating costs and expenses:
Cost of revenue 98,546 163,033 261,579
Selling, general and administrative expenses 1,356,248 1,038,755 3,233,509
Depreciation and amortization 340,608 129,413 470,021
Stock compensation expense 508,075 897,808 1,419,155
----------- ----------- -----------
2,303,477 2,229,009 5,384,264
----------- ----------- -----------
Loss from operations (2,229,805) (2,139,840) (5,221,423)
----------- ----------- -----------
Other income (expense):
Interest income 5,918 4,140 12,533
Interest expense (1,466,596) (6,278) (1,475,499)
Other (1,546) (1,546)
----------- ----------- -----------
(1,462,224) (2,138) (1,464,512)
----------- ----------- -----------
Net loss $(3,692,029) $(2,141,978) $(6,685,935)
=========== =========== ===========
Basic and diluted net loss per share $(0.15) $(0.12)
------ ------
Number of shares used in calculating basic and diluted
net loss per share 23,821,346 18,328,984
========== ==========
</TABLE>
See notes to financial statements
F-4
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Statements of Changes in Stockholders' Equity (Deficit)
For the Period From December 17, 1996 (Inception) to December 31, 1999
<TABLE>
<CAPTION>
Additional
Paid-in Subscriptions
Shares Amount Capital Receivable
------------ --------- ------------ -------------
<S> <C> <C> <C> <C>
Balance - December 17, 1996 (inception) 3,700,000 $ 3,700 $ 20,900
December 17, 1996 - issuance of stock in lieu
of services by director of former company
(Wee-Wees, Inc.) 40,000 40 (40)
December 20, 1996 - issuance of stock in lieu
of $10,000 in consulting fees 240,000 240 9,760
Net loss
------------ --------- ------------
Balance - December 31, 1996 3,980,000 3,980 30,620
February 29, 1997 - issuance of stock in lieu
of compensation to key executives 4,250,000 4,250 148,500
May 1997 through December 31, 1997 - private
placement 6,904,228 6,904 877,823 $ (75,000)
August 4, 1997 - issuance of stock in lieu of
$6,500 in promotional fees 100,000 100 6,400
September 1997 - issuance of stock to employees
and increase in additional paid-in capital
resulting from stock options granted 40,000 40 243,594
November 15, 1997 - issuance of stock per
nondilution provisions of consulting agreement 315,000 315 (315)
Net loss
------------ --------- ------------ -----------
Balance - December 31, 1997 15,589,228 15,589 1,306,622 (75,000)
January 1998 - issuance of stock subscribed in
1997 400,000 400 29,600 75,000
January - July 1998 - issuance of stock per
nondilution provisions of consulting agreement 346,742 347 (347)
May - December 1998 - issuance of stock in lieu
of services 309,249 309 96,317
June and July 1998 - promissory notes converted 1,070,800 1,071 463,930
June and October 1998 - private placement 1,237,666 1,238 443,262
June 11, 1998 - issuance of stock in lieu of
fees on June 1998 private placement 38,393 38 (38)
July 17, 1998 - issuance of stock to release
security interest in certain equipment 500,000 500 314,500
October 15, 1998 - issuance of stock in lieu of
fees on 1997 private placement 68,970 69 (69)
October 15, 1998 - issuance of stock resulting
from exercise of warrants 1,000,000 1,000 159,000
Increase in additional paid-in capital
resulting from stock options and warrants
granted 1,266,409
Net loss
------------ --------- ------------ -----------
Balance - December 31, 1998 (carried forward) 20,561,048 20,561 4,079,186 0
<CAPTION>
Accumulated
Deficit
Deferred During the
Stock Development
Compensation Stage Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance - December 17, 1996 (inception) $ (24,738) $ (138)
December 17, 1996 - issuance of stock in lieu
of services by director of former company
(Wee-Wees, Inc.) 0
December 20, 1996 - issuance of stock in lieu
of $10,000 in consulting fees 10,000
Net loss (9,760) (9,760)
------------ ------------
Balance - December 31, 1996 (34,498) 102
February 29, 1997 - issuance of stock in lieu
of compensation to key executives 152,750
May 1997 through December 31, 1997 - private
placement 809,727
August 4, 1997 - issuance of stock in lieu of
$6,500 in promotional fees 6,500
September 1997 - issuance of stock to employees
and increase in additional paid-in capital
resulting from stock options granted $ (230,322) 13,312
November 15, 1997 - issuance of stock per
nondilution provisions of consulting agreement 0
Net loss (817,430) (817,430)
----------- ------------ ------------
Balance - December 31, 1997 (230,322) (851,928) 164,961
January 1998 - issuance of stock subscribed in
1997 105,000
January - July 1998 - issuance of stock per
nondilution provisions of consulting agreement 0
May - December 1998 - issuance of stock in lieu
of services 96,626
June and July 1998 - promissory notes converted 465,001
June and October 1998 - private placement 444,500
June 11, 1998 - issuance of stock in lieu of
fees on June 1998 private placement 0
July 17, 1998 - issuance of stock to release
security interest in certain equipment 315,000
October 15, 1998 - issuance of stock in lieu of
fees on 1997 private placement 0
October 15, 1998 - issuance of stock resulting
from exercise of warrants 160,000
Increase in additional paid-in capital
resulting from stock options and warrants
granted (832,556) 433,853
Net loss (2,141,978) (2,141,978)
----------- ------------ ------------
Balance - December 31, 1998 (carried forward) (1,062,878) (2,993,906) 42,963
</TABLE>
F-5
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Statements of Changes in Stockholders' Equity (Deficit)
For the Period From December 17, 1996 (Inception) to December 31, 1999
(continued)
<TABLE>
<CAPTION>
Additional
Paid-in Subscriptions
Shares Amount Capital Receivable
------------ --------- ------------ -------------
<S> <C> <C> <C> <C>
Balance - December 31, 1998 (brought forward) 20,561,048 $ 20,561 $ 4,079,186 $ 0
January 1, 1999 - warrants issued in connection with
private placement of debt 148,242
January 1, 1999 - issuance of warrants and beneficial
conversion feature on debt financing 500,000
January 7, 1999 - issuance of stock in lieu of fees on
December 1998 private placement 25,000 25 14,725
January 21, 1999 - issuance of stock to principals in
consideration for employment services 611,636 611 458,115
January 25, 1999 - issuance of stock resulting from
exercise of warrants 5,812 6 (6)
February 8, 1999 - warrants issued in connection with
private placement of debt 197,794
February 8, 1999 - issuance of warrants and beneficial
conversion feature on debt financing 600,000
February 28, 1999 - warrants issued in connection with
private placement of debt 43,720
March 3, 1999 - issuance of stock to Founder for
exercise of options 879,685 880 166,260
March 3, 1999 - issuance of stock in lieu of fees on
February 1999 private placement 30,000 30 33,870
March 10, 1999 - issuance of stock upon conversion of
notes 600,000 600 239,400
April 27, 1999 - warrants issued for consulting services 148,103
April 28, 1999 - issuance of stock in lieu of legal fees 11,111 11 9,989
May 9, 1999 - issuance of stock upon conversion of notes 900,000 900 359,100
July 20, 1999 - beneficial conversion feature of debt
financing 166,667
July 20, 1999 - warrants issued in connection with
private placement of debt 64,148
October 5, 1999 - issuance of stock as result of debt
conversion 182,315 182 50,684
October 8, 1999 - issuance of stock pursuant to public
offering 2,545,455 2,545 298,926
October 20, 1999 - issuance of stock in lieu of fees in
connection with private placement of debt and public
offering 70,910 71 21,984
November 5, 1999 - issuance of stock in lieu of legal
fees 145,455 146 21,877
November 23, 1999 - issuance of stock upon conversion of
notes 1,250,000 1,250 120,625
December 27, 1999 - issuance of stock in lieu of legal
fees 150,000 150 33,768
December 31, 1999 - issuance of stock upon conversion of
notes 1,862,768 1,863 246,817
Amortization of compensatory stock options
Cancellation of debt by shareholder 10,000
Cancellation of stock options (524,521)
Net loss
------------ --------- ------------ -----------
Balance - December 31, 1999 29,831,195 $ 29,831 $ 7,509,473 $ 0
============ ========= ============ =========
<CAPTION>
Accumulated
Deficit
Deferred During the
Stock Development
Compensation Stage Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance - December 31, 1998 (brought forward) $ (1,062,878) $ (2,993,906) $ 42,963
January 1, 1999 - warrants issued in connection with
private placement of debt 148,242
January 1, 1999 - issuance of warrants and beneficial
conversion feature on debt financing 500,000
January 7, 1999 - issuance of stock in lieu of fees on
December 1998 private placement 14,750
January 21, 1999 - issuance of stock to principals in
consideration for employment services 458,726
January 25, 1999 - issuance of stock resulting from
exercise of warrants 0
February 8, 1999 - warrants issued in connection with
private placement of debt 197,794
February 8, 1999 - issuance of warrants and beneficial
conversion feature on debt financing 600,000
February 28, 1999 - warrants issued in connection with
private placement of debt 43,720
March 3, 1999 - issuance of stock to Founder for
exercise of options 167,140
March 3, 1999 - issuance of stock in lieu of fees on
February 1999 private placement 33,900
March 10, 1999 - issuance of stock upon conversion of
notes 240,000
April 27, 1999 - warrants issued for consulting services 148,103
April 28, 1999 - issuance of stock in lieu of legal fees 10,000
May 9, 1999 - issuance of stock upon conversion of notes 360,000
July 20, 1999 - beneficial conversion feature of debt
financing 166,667
July 20, 1999 - warrants issued in connection with
private placement of debt 64,148
October 5, 1999 - issuance of stock as result of debt
conversion 50,866
October 8, 1999 - issuance of stock pursuant to public
offering 301,471
October 20, 1999 - issuance of stock in lieu of fees in
connection with private placement of debt and public
offering 22,055
November 5, 1999 - issuance of stock in lieu of legal
fees 22,023
November 23, 1999 - issuance of stock upon conversion of
notes 121,875
December 27, 1999 - issuance of stock in lieu of legal
fees 33,918
December 31, 1999 - issuance of stock upon conversion of
notes 248,680
Amortization of compensatory stock options 154,254 154,254
Cancellation of debt by shareholder 10,000
Cancellation of stock options 419,616 (104,905)
Net loss (3,692,029) (3,692,029)
------------ ------------ ------------
Balance - December 31, 1999 $ (489,008) $ (6,685,935) $ 364,361
============ ============ ============
</TABLE>
F-6
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period From
December 17,
1996
(Inception)
Through
Year Ended December 31, December 31,
1999 1998 1999
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,692,029) $ (2,141,978) $ (6,685,935)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 340,608 129,413 470,021
Reserve for bad debts 41,200 41,200
Consulting services and professional fees paid by issuance
of common stock 427,989 90,626 712,403
Compensation expense resulting from common stock and
stock options granted 508,075 897,808 1,419,155
Interest expense and debt issuance costs resulting from the
issuance of common stock and warrants 1,415,964 1,415,964
Changes in operating assets and liabilities:
Accounts receivable (22,723) (44,070) (66,793)
Prepaid expenses (4,896) 315 (9,274)
Other assets (7,102) (2,384) (33,259)
Accounts payable and accrued liabilities (387,117) 481,165 291,208
Accrued interest (99,709) 150,110 50,401
Accrued payroll and payroll taxes 28,434 (28,434)
Deferred rent 13,201 13,201
Accrued interest converted into common stock 9,546 9,546
------------- ------------- -------------
Net cash used in operating activities (1,469,759) (397,795) (2,400,596)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment 68,114 (833,128) (1,000,726)
Capitalized software development costs (3,510) (41,551) (113,336)
Notes receivable advances (41,200)
------------- ------------- -------------
Net cash provided by (used in) investing activities 64,604 (874,679) (1,155,262)
------------- ------------- -------------
Cash flows from financing activities:
Repayments of loan (47,250)
Proceeds from issuance of promissory notes 1,220,000 1,500,000 2,720,000
Payment of financing fees (156,000) (226,523)
Proceeds from issuance of common stock 181,471 37,500 1,099,221
Deferred offering costs (55,991) (55,991)
Collection of stock subscriptions receivable 70,000 70,000
Proceeds from issuance of warrants 1,046 1,046
Loans from officer 5,074 15,336
Advances from (payment to) officers (59,247) 55,129 39,371
Cash acquired at inception 102
------------- ------------- -------------
Net cash provided by financing activities 1,347,298 1,419,770 3,647,226
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (57,857) 147,296 91,368
Cash and cash equivalents - beginning 149,225 1,929 151,256
------------- ------------- -------------
Cash and cash equivalents - ending $ 91,368 $ 149,225 $ 242,624
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,438 $ 4,167 $ 9,230
</TABLE>
F-7
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Statements of Cash Flows
(continued)
Supplemental disclosure of cash flow information: (continued)
Noncash investing and financing activities:
The following noncash transactions occurred during the year ended December
31, 1997:
4,250,000 shares of the Company's common stock were issued to three (3)
key executives in lieu of $152,750 for executive compensation and
consulting fees
100,000 shares of the Company's common stock were issued to outside
consultants in lieu of $6,500 in promotional fees
315,000 shares of the Company's common stock valued at $315 were issued
at par value to outside consultants in accordance with the
anti-dilution provisions of the consulting agreement entered into by
the Company in December 1996
Additional paid-in capital was increased by $243,594 and deferred
compensation of $230,322 was recorded resulting from stock options
granted
The following noncash transactions occurred during the year ended December
31, 1998:
309,249 shares of the Company's common stock were issued to outside
consultants in lieu of 90,626 in services and $16,000 in deferred
offering costs, which represented the fair market value of services
rendered
1,000,000 shares of the Company's common stock in exchange for $10,000
were issued to an independent consultant (as discussed in Note F) for
providing various marketing, sales, general, and public relations
consulting services over a 24 month period. This amount represented
the excess of the market price of the Company's common stock at date
of grant over the exercise price
346,742 shares of the Company's common stock at par value were issued to
outside consultants in accordance with the anti-dilution provisions
of the consulting agreement entered into by the Company which
terminated in July 1998
500,000 shares valued at $315,000 were issued to an outside facilitator
as a settlement to release its security interest in certain of the
Company's equipment. This amount represented the fair market value of
the common stock issued at the date of settlement
The following noncash transactions occurred during the year ended December
31, 1999:
12,500 shares of the Company's common stock were issued at par value
each to two financial advisors as part of their fees for structuring
a December 1998 private placement
611,636 shares of the Company's common stock were issued to three
principals of the Company in consideration for employment services
valued at $458,726
5,812 shares of the Company's common stock were issued to a financial
advisor for exercise of warrants
15,000 shares of the Company's common stock were issued to each of two
financial advisors as part of their fees for structuring a February
1999 private placement
879,685 shares of the Company's common stock were issued to Barry Stein
for aggregate consideration of $167,140 in payroll and officers loans
owed by the Company, upon exercise of options
600,000 shares of the Company's common stock were issued to an investor
as a result of a debt conversion
Additional paid-in capital was decreased by $524,521 and stock
compensation costs were credited for $104,905 as a result of an
amended contract for the founder wherein the Company cancelled stock
options to purchase 1,140,262 shares of common stock previously
granted in 1998 at an exercise price of $.19 per share
A credit in the amount of $81,081 was received from a vendor as an
adjustment to the purchase price of certain computer equipment and
the balance due to the vendor
11,111 shares of the Company's common stock valued at $10,000 were
issued in payment of legal fees
900,000 shares of the Company's common stock were issued to an investor
as a result of a debt conversion
182,315 shares of the Company's common stock were issued to an investor
as a result of a debt conversion
70,910 shares of the Company's common stock were issued to a financial
advisor for services in structuring a private placement of debt and
public offering of securities
145,455 shares of the Company's common stock valued at $22,023 were
issued in payment of legal fees.
1,250,000 shares of the Company's common stock were issued to an
investor as a result of a debt conversion
150,000 shares of the Company's common stock valued at $33,918 were
issued in payment of legal fees.
1,862,768 shares of the Company's common stock were issued to an
investor as a result of a debt conversion
See notes to financial statements
F-8
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note A - Summary of Significant Accounting Policies
[1] Description of business:
Financial Intranet, Inc. (the "Company"), formerly Wee Wees, Inc. (which
was formerly Alexis & Co.) is a Nevada corporation incorporated on
December 16, 1993. The founder of the Company acquired all of the
outstanding shares of Wee Wees, Inc. and commenced the Company's current
business on December 17, 1996. The Company provides a secure on-demand
proprietary network (intranet) for broker-dealers and their registered
representatives. The network is designed to provide updated training and
data information concerning, among other things, those mutual funds
planning to participate in the Company's network. In addition, the
Company has developed an Internet presence accessible to the general
public, to highlight the Company's clients. It is the Company's plan to
connect over 500 U.S. broker-dealer locations and subsequently provide
local access ports in various cities around the world. The Company has
not yet generated significant revenue from its planned operations and is
therefore considered to be a development stage company. The Company's
revenues through December 31, 1999 have been from the resale of telephone
usage.
[2] Basis of presentation:
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. At December 31, 1999 and 1998,
the Company has negative working capital of $324,437 and $667,438,
respectively. As the Company is still in the development stage and has
experienced significant losses since its inception, there is substantial
doubt that it will be able to continue as a going concern without
additional funding. In March 2000, the Company raised an additional
$1,750,000 in equity financing and management intends to continue to seek
additional financing to fund its operations although there can be no
assurances that any such financing will be available. The financial
statements do not include any adjustments that might be necessary should
the Company be unable to continue as a going concern.
[3] Cash and cash equivalents:
The Company considers all highly liquid investments with maturity of
three months or less when purchased to be cash equivalents.
[4] Property and equipment:
Property and equipment are stated at cost. Depreciation is calculated on
a straight-line basis over the estimated lives of the assets, which range
from three to five years.
[5] Debt issuance costs:
Debt issuance costs are amortized over the life of the debt.
[6] Capitalized software development costs:
Capitalized software development costs represent the costs of developing
and enhancing an Internet presence on the Company's web site. These costs
are being capitalized and amortized on a straight-line basis over their
estimated life of two years in accordance with Statement of Position
98-1, "Accounting for the Cost of Computer Software Developed or Obtained
for Internal Use." Amortization of capitalized software development costs
was $61,190 and $21,768 for the years ended December 31, 1999 and 1998,
respectively.
F-9
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note A - Summary of Significant Accounting Policies (continued)
[7] Revenue recognition:
Revenue is recognized at the time telephone communications usage is
incurred.
[8] Advertising:
Advertising and marketing costs are expensed as incurred.
[9] Income taxes:
The Company accounts for income taxes in accordance with the asset and
liability method of accounting prescribed by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under the
asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
[10] Earnings (loss) per share:
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") requires
the presentation of basic and diluted earnings per share ("EPS"). Basic
earnings (loss) per share is computed by dividing net earnings (loss)
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted earnings (loss) per share
is computed by dividing that net earnings (loss) by the weighted-average
number of common shares and dilutive common stock equivalents outstanding
during the period. Common stock equivalents have been excluded from the
weighted-average shares for 1999 and 1998 because their inclusion would
be anti-dilutive.
[11] Stock-based compensation:
The Company has elected to continue to account for its employee
stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and to disclose the pro forma
effect on net loss per share had the fair value of options been expensed.
Under the provisions of APB No. 25, compensation cost for stock options
is measured as the excess, if any, of the market value of the Company's
common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
[12] Effect of recently issued accounting standards:
The Company does not expect the adoption of recently issued accounting
standards to have a material effect on its financial statements or
results of operations.
F-10
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note A - Summary of Significant Accounting Policies (continued)
[13] Use of 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 disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Note B - Property and Equipment
Property and equipment consists of the following:
December 31,
------------------------
1999 1998
----------- -----------
Computer equipment $ 1,000,726 $ 1,068,840
Accumulated depreciation 308,312 107,645
----------- -----------
$ 692,414 $ 961,195
=========== ===========
Note C - Commitments
[1] Operating leases:
The Company subleases its office space pursuant to an operating lease
expiring in 2004. Rent expense charged to operations was $34,816 and
$38,291 for the years ended December 31, 1999 and 1998, respectively.
Minimum required future rental payments under the operating lease at
December 31, 1999 are as follows:
2000 $ 58,999
2001 58,999
2002 58,999
2003 58,999
2004 58,999
----------
$ 294,995
==========
[2] Employment agreements:
On September 12, 1997, the Company entered into employment agreements
with two key executives, and on August 23, 1999, the Company entered into
an employment agreement with a third. The first two agreements were
amended in December 1998. The agreements are for a five-year period
commencing on September 12, 1997 and a three year period commencing on
August 23, 1999, respectively, and may be extended by the Company for an
additional three-year period upon written notice six months prior to the
third anniversary of the original term. Included in compensation for two
of the executives was an option to purchase, at any time while the
executive is employed by the Company, additional shares (in addition to
any shares previously issued, if any) of the Company's common stock. The
purchase price for such shares is equal to eighty percent of the average
per share bid price over five working days prior to the signed
F-11
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note C - Commitments (continued)
[2] Employment agreements: (continued)
employment agreement. The exercise price for options issued after
December 31, 1999 is the market price per share of common stock on the
date the Company issues any additional shares of common stock. The
options permitted each executive to purchase up to a certain percentage
(see below) of the Company's issued and outstanding shares of common
stock less: (i) shares previously issued according to consulting
agreements, if any; (ii) less any shares previously issued as a result of
the exercise of this option; and (iii) less any shares issued in lieu of
cash expenses advanced by the executive or accepted as previously earned
consulting fees paid to the executive in lieu of cash. All options
granted under the employment agreements expire on December 31, 2002,
except for earlier dates relative to termination. The value of the
options is being charged to compensation expense over the terms of the
employment agreements.
The number of the Company's issued and outstanding common stock for the
purpose of calculating the total number of shares which may be purchased
by the executive in exercising the option shall be: i) the number of
shares issued on the later of the exercise date or any date prior to
December 31, 1998, providing that ii) the total number of shares issued
as utilized in the calculation of the shares available for purchase under
the option shall not exceed the number of shares issued and outstanding
at December 31, 1998 as recorded on the Company's stock ledger and as
reported by the Company's transfer agent. These options are
nontransferable and expire on the last date of the original employment
term or any extension thereof (see Note F). The executives and the
related provisions of their employment agreement are detailed below:
Base Stock Option
Executive Salary Percentage
---------------------------------------- ------------- --------------
President and Chief Operating Officer $ 150,000 14.50%
Executive Vice-President $ 140,000 9%
Chief Financial Officer $ 135,000
The Chief Financial Officer was issued options to purchase 1,750,000
shares of common stock at $.10 per share in connection with his
employment agreement.
[3] Founder consulting agreement:
On March 3, 1999, the Company entered into a consulting agreement with
the Company's Founder (the "Founder") whereby he will be retained as a
consultant to act as Director of Brokerage Sales on a commission only
basis through December 31, 2002. The terms of this consulting agreement
include commissions payable as a percentage of sales and reimbursement of
certain expenses as defined in the agreement. In addition, under the
terms of this agreement, the Founder agreed to reduce the number of
unexercised options held by him to purchase shares of the Company's
common stock from 3,640,262 to 2,500,000 shares at an exercise price of
$.19 per share and exercised options with respect to 879,685 of these
shares as of March 3, 1999 in exchange for settlement of $167,140 in
accrued salary and loans owed to him by the Company reducing the number
of outstanding options held by the Founder to 1,620,315.
[4] Major customers:
A substantial portion of the Company's revenue and accounts receivable
are derived from three customers that, individually, constituted
approximately 37.4%, 21.5% and 15.2% of total revenue and accounts
receivable in 1999 and 38.3%, 22.0% and 15.6% of revenue in 1998.
F-12
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note D - Private Placements
The Company had a private placement offering in June 1997 whereby 6,904,228
shares of common stock were issued. The Company had two outstanding subscription
agreements from investors totaling $75,000 at December 31, 1997, pursuant to
which the Company subsequently issued 400,000 shares of common stock in January
1998.
On May 20, 1998, the Company entered into subscription agreements to issue a
total of $500,000 in convertible debentures, due November 20, 1998. The
debentures paid 6% interest annually, in cash or in freely trading common stock
of the Company, at the Company's option until the principal amount was paid in
full or has been converted. The debentures were subject to automatic conversion
at the end of six months from the date of issuance based on a formula as defined
under the agreements. The holder of the debenture had the right, at their
option, to convert the debenture into shares of the Company's common stock at
any time before the close of business on the maturity date. The debentures were
converted into 1,070,800 shares in June and July 1998.
On June 4, 1998, the Company entered into a Placement Agent Agreement with
Corporate Capital Management LLC ("CCM"). The agreement appointed CCM exclusive
placement agent of the Company during the offering period as defined in the
agreement for the purpose of assisting the Company in the sale of $500,000 (the
"Funds") in principal amount of its convertible 12% promissory note due December
1, 1998 (the "Note"). The agreement provided for a cash fee in an amount equal
to 10% of the gross proceeds from the sale of the Note plus warrants to purchase
50,000 shares of the Company's common stock. The warrants were exercisable at a
price equal to 110% of the bid price for the common stock on the date of closing
of the sale of the Note. In conjunction with the agreement to retain CCM as
placement agent, on June 4, 1998, the Company entered into a subscription
agreement for the Note. The Note was convertible, at the holder's option, at any
time, into shares of common stock of the Company. The number of shares of common
stock into which the Note could be converted was the lesser of (i) 72.5% of the
lowest closing bid price quoted on the over-the-counter Bulletin Board market of
the common stock for the five-day trading period ending on the day prior to the
conversion date or (ii) the lowest closing bid price quoted on the Bulletin
Board of the common stock for the five-day trading period ending on the day
prior to the closing of the sale of the Note. The note was converted to
1,352,718 shares of the Company's common stock in June 1998 and 115,052 shares
were subsequently cancelled in October 1998.
On December 31, 1998, the Company entered into a subscription agreement for a
private placement and received $500,000 in exchange for the issuance of a 7%
convertible promissory note in the principal amount of $500,000, and warrants to
purchase 1,250,000 shares of the Company's common stock, at an exercise price of
$.60 per share. The value of the warrants, $500,000, is being charged to
interest expense over the life of the note. The Company paid, on the closing
date, fees of $55,000 in connection with the private placement. In addition, the
two placement agents, as part of their fees, received 25,000 shares of common
stock, warrants to purchase 160,000 shares of common stock at an exercise price
of $.64 per share and warrants to purchase 125,000 shares of common stock at an
exercise price of $.40 per share. The 25,000 shares were not issued until
January 1999. The value of the placement agent shares and warrants $163,000, was
accounted for as debt issuance costs and amortized over the term of the debt. In
addition, the promissory note was converted at a conversion price equal to 75%
of the market value of the Company's common stock. The value attributable to
this beneficial conversion feature and the value of the warrants to purchase
1,250,000 shares of common stock, which aggregate value was limited to the
proceeds of the private placement of $500,000, was charged to interest expense
in 1999.
In November 1999, $121,875 principal amount of the note was converted into
1,250,000 shares of common stock.
F-13
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note D - Private Placements (continued)
As of December 31, 1999, the Note had a remaining balance outstanding of
$378,125, which was converted by the Holder into 3,946,591 shares of common
stock in the first quarter of 2000.
On February 8, 1999, the Company received $600,000 in exchange for $600,000 7%
convertible promissory notes and warrants to purchase 1,500,000 shares of common
stock at $.40 per share. $240,000 principal amount of the note was converted to
600,000 shares of common stock on March 10, 1999 and $360,000 was converted to
900,000 shares of common stock on May 14, 1999. The note was convertible at the
lower of 75% of the market value of the Company's common stock, as defined in
the agreement, or $.40 per share. The amount attributable to this beneficial
conversion feature and the value of the warrant to purchase 1,500,000 shares of
common stock, which aggregate value was limited to the proceeds of the private
placement, $600,000, was charged to interest expense in 1999.
The two placement agents, as part of their fee for the February 8, 1999 private
placement, each received, on the initial closing date, 15,000 shares of common
stock and initial warrants to purchase 75,000 shares of common stock at an
exercise price equal to $0.40 per share and otherwise on terms set forth in the
common stock purchase warrant and warrants to purchase 40,000 shares of common
stock at $.60 per share were issued to an attorney in connection with the
private placement. The value of these shares and warrants $275,000, was
accounted for as debt issuance costs and amortized over the term of the debt.
On July 20, 1999, the Company issued an 8% convertible promissory note in the
principal amount of $500,000 with a maturity date of October 20, 1999, and
warrants, exercisable under certain conditions, to purchase up to 200,000 shares
of common stock at an exercise price of $.50 per share through October 20, 2004.
The conversion price was the lesser of (i) 75% of the average of the five lowest
closing bid prices of the common stock during the five trading days immediately
preceding the conversion date, or (ii) $.50 per share. The value attributable to
this beneficial conversion feature, $166,667, was charged to interest expense in
1999. The promissory note was convertible into common stock at any time after
the maturity date at the conversion price. $290,000 was converted into 1,980,067
shares of common stock in 1999 and the remaining $210,000 was converted into
1,944,444 shares in January 2000. In addition, all accrued interest was
converted into 76,267 shares of common stock.
The agent for this transaction, as part of its fee, received 20,000 shares of
common stock and warrants to purchase 100,000 shares of common stock at an
exercise price of $.50 per share of common stock. The value of these shares and
warrants, $77,548, was accounted for as debt issuance costs and amortized over
the term of the debt.
On September 27, 1999, the Company issued an 8% promissory note in the principal
amount of $120,000 with a maturity date of December 26, 1999. There were no
warrants or convertible features associated with this promissory note, and the
note was fully paid in October 1999 from the proceeds of the Company's public
offering (see below).
F-14
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note E - Public Offering
In October 1999, the Company's Registration Statement (Form SB-2), initially
filed in February 1999, covering the primary offering of common stock by the
Company and the offering of common stock by certain selling securityholders
became effective. The Company registered under the primary prospectus 10,909,091
shares of common stock, par value $.001 per share, for sale. The selling
securityholders registered under an alternate prospectus 7,310,000 shares of
common stock underlying the warrants, common stock underlying the convertible
promissory notes, shares of common stock previously issued and shares of common
stock which were issued upon conversion of certain promissory notes. The shares
were offered to the public at an offering price of $.275 per share. As of
December 31, 1999, $700,000 was received from the sale of 2,545,455 shares
pursuant to this offering. In the first quarter of 2000, an additional
$1,750,000 was raised through the sale of 6,363,636 shares pursuant to this
Registration Statement (see Note A).
Note F - Common Stock Warrants and Options
[1] The following common stock warrants are outstanding at December 31, 1999:
Number of Exercise
Shares Term Price
------------- --------------------- -------------
1997 warrants 15,963 3 years $.18 - $.32
200,000 5 years $7.25
1998 warrants 20,000 3 years $.60 - $.725
1,901,667 5 years $.40 - $1.20
1999 warrants 150,000 1 year - 1 1/2 years $.20
2,035,455 5 years $.275 - $.60
----------
Total 4,323,085
==========
F-15
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note F - Common Stock Warrants and Options (continued)
[2] Summary information with respect to stock options granted is as follows:
Exercise Options Options
Price Granted Exercisable
----------- ----------- ------------
Balance, January 1, 1997 - -
Activity:
Options granted $.19 4,810,776 4,810,776
----------- -----------
Balance, January 1, 1998 $.19 4,810,776 4,810,776
Activity:
Options granted $.19 2,411,333 2,411,333
----------- -----------
Balance, January 1, 1999 $.19 7,222,109 7,222,109
Activity:
Options granted $.10 1,750,000
Options exercised $.19 (879,685) (879,685)
Options cancelled $.19 (1,140,262) (1,140,262)
----------- -----------
Balance, December 31, 1999 $.10 - $.19 6,952,162 5,202,162
=========== ===========
The Company applies APB 25 in accounting for its stock option plans.
Accordingly, stock compensation cost has been recorded based on the intrinsic
value of the options only. Had compensation cost for the Company's stock options
been recognized based on the fair value on the grant date under the methodology
prescribed by SFAS 123, the Company's net loss and net loss per share for the
years ended December 31, 1999 and 1998 would have been impacted as indicated in
the following table:
1999 1998
-------------- --------------
Net loss as reported $ (3,692,029) $ (2,141,978)
Pro forma net loss $ (3,697,029) $ (2,067,668)
Net loss per share as reported $(0.15) $(0.12)
Pro forma net loss per share $(0.16) $(0.11)
The above pro forma amount for purposes of SFAS 123 reflect the portion of the
estimated fair value of awards earned in 1999 and 1998. For purposes of pro
forma disclosure, the estimated fair value of options is amortized over the
vesting period of the stock options granted. The effects on pro forma disclosure
of applying SFAS 123 are not likely to be representative of the effect on pro
forma disclosures of future years.
F-16
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note F - Common Stock Warrants and Options (continued)
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
1999 1998
--------- ---------
Expected life of option (in years) 3 5
Risk-free interest rate 5.68% 6.23%
Expected volatility 186.0% 161.5%
Expected dividend yield 0% 0%
The weighted average fair value of options granted during 1999 and 1998 is as
follows:
1999 1998
---------- ----------
Fair value of each option granted $0.11 $0.24
Total number of options granted 1,750,000 2,411,333
Total fair value of options granted $ 199,583 $ 578,720
1998 Stock Option Plan
In December 1998, the Company established the 1998 Stock Option Plan ("1998
Plan") which provides for the granting of options which are intended to qualify
either as incentive stock options ("Incentive Stock Options") within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended, or as options
which are not intended to meet the requirements of such section ("Non-statutory
Stock Options"). The total number of shares of common stock reserved for
issuance under the 1998 Plan is 1,500,000. Options to purchase shares may be
granted under the 1998 Plan to persons who, in the case of Incentive Stock
Options, are key employees (including officers) of the Company or, in the case
of Non-statutory Stock Options, are key employees (including officers) or
nonemployee directors of, or nonemployee consultants to, the Company.
The exercise price of all Incentive Stock Options granted under the 1998 Plan
must be at least equal to the fair market value of such shares on the date of
the grant or, in the case of Incentive Stock Options granted to the holder of
more than 10% of the Company's common stock, at least 110% of the fair market
value of such shares on the date of the grant. The maximum exercise period for
which Incentive Stock Options may be granted is ten years from the date of grant
(five years in the case of an individual owning more than 10% of the Company's
common stock). The aggregate fair market value (determined at the date of the
option grant) of shares with respect to which Incentive Stock Options are
exercisable for the first time by the holder of the option during any calendar
year shall not exceed $100,000.
The exercise price of all Non-statutory Stock Options granted under the 1998
Plan must be at least equal to 85% of the fair market value of such shares on
the date of the grant.
No options have been granted pursuant to the 1998 Plan.
F-17
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note G - Income Taxes
The Company has net operating loss carryforwards available for income tax
reporting purposes of approximately $3,000,000, in the aggregate, expiring
through 2019, which gives rise to a deferred income tax asset of approximately
$1,200,000 at December 31, 1999. In accordance with Section 382 of the Internal
Revenue Code utilization of the net operating loss carryfowards may be limited
based on ownership changes which have occurred or may occur.
The Company has recorded a 100% valuation allowance on the net deferred tax
asset since the ability of the Company to utilize the deferred tax asset is
uncertain. The difference between the statutory tax rate of 34% and the
effective rate of 0% reflected in the accompanying financial statements is due
to the increase in the valuation allowance and due to the nondeductibility of
certain interest charges primarily related to the beneficial conversion features
of convertible notes.
Note H - Related Party Transactions
Due to Officers:
At December 31, 1998 and 1999, the Company had unsecured notes payable in the
amount of $97,004 and $36,115, respectively to an officer/stockholder, due on
demand. The promissory notes bear an interest rate of 8% per annum. At December
31, 1998, interest of $1,614 was accrued on this note, and at December 31, 1999,
interest of $3,256 was accrued.
Note I - Contingency
On July 23, 1998, H & H Acquisition Corp., individually and on behalf of the
Company, commenced an action in federal court in the Southern District of New
York against the Company, the founder and certain officers, among others. The
complaint is an action to recover shares of common stock of the Company and
unspecified damages. Management believes that the claims against the Company and
certain officers are without merit and is vigorously defending the action. The
litigation is in the early stages of discovery and no assurances can be made
about the ultimate outcome. However, the Company could be adversely affected if
the plaintiff prevails.
In February 1998, a collateral pledge agreement was executed between the Company
and two outside parties to arrange for the Company to receive $350,000 to
purchase certain network computer and telecommunications equipment. Pursuant to
that collateral pledge agreement, the Company granted a first priority security
interest to one of the parties (the "facilitator") in order to secure the
obligations of the other party (the "borrower") under said agreement. The
Company did not receive the contemplated funds, and had to make other
arrangements to fund its purchase of the equipment. In July 1998, in order to
obtain a release of the security interest in the equipment, the Company issued
500,000 shares of its common stock to the facilitator. The charge to operations
with respect to the issuance of the 500,000 shares of common stock was $315,000
for the year ended December 31, 1998.
F-18
<PAGE>
FINANCIAL INTRANET, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Note J - Subsequent Events
On January 14, 2000, a holder of a convertible note elected to convert the
balance of the convertible debenture, $210,000, plus accrued interest into
2,020,731 shares of common stock.
On January 19, February 3 and February 23, 2000, a holder of a convertible note
elected to convert the balance of the convertible debenture, a total of
$378,125, into an aggregate 3,946,591 shares of common stock.
In January and February 2000, the Company issued unsecured 8% promissory notes
in the principal amounts of $150,000 and $200,000 respectively, payable on
demand.
On March 12, 2000, the Company sold, pursuant to its Registration Statement,
909,091 shares of common stock to an investor for $250,000.
On March 16, 2000, three of the officers of the Company agreed to defer
exercising their stock options for 5,331,846 shares of common stock until such
time as the Company has sufficient authorized shares to permit such exercise.
On March 27, 2000, the Company sold, pursuant to its Registration Statement,
5,454,545 shares of its common stock to two investors for an aggregate
$1,500,000.
On March 27, 2000, the Company purchased certain assets of Longyin Network
Technology Co., Ltd., a Chinese Internet content provider. The purchase
price was $400,000 plus 1,350,000 shares of common stock (valued at $.93 per
share) which was allocated to the assets acquired based on their fair values.
The acquired assets include two Internet web sites, an e-mail magazine, and
consulting agreements with four individuals.
F-19
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 91,368
<SECURITIES> 0
<RECEIVABLES> 66,793
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 167,435
<PP&E> 1,000,726
<DEPRECIATION> 308,312
<TOTAL-ASSETS> 1,318,233
<CURRENT-LIABILITIES> 365,747
<BONDS> 588,125
0
0
<COMMON> 29,831
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,318,233
<SALES> 73,672
<TOTAL-REVENUES> 73,672
<CGS> 98,546
<TOTAL-COSTS> 98,546
<OTHER-EXPENSES> 2,204,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,466,596
<INCOME-PRETAX> (3,692,029)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,692,029)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,692,029)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
