<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For Quarter Ended: SEPTEMBER 30, 2000
Commission File Number: 0-26415
INTERNATIONAL INTERNET, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3876100
(State of Incorporation) (IRS Employer ID No)
6413 CONGRESS AVENUE, SUITE 240, BOCA RATON, FL 33487
(Address of principal executive office)
(561) 988-0819
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
The number of shares outstanding of registrant's common stock, par value $.00001
per share, as of September 30, 2000 was 778,446,187.
Transitional Small Business Disclosure Format (Check one): Yes No X .
<PAGE> 2
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
No.
---
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated:
Balance Sheet - September 30, 2000 and December 31, 1999 3
Statement of Operations- 4
Three and Nine Months Ended September 30, 2000 and 1999
Statement of Stockholders' Equity - 5
Nine Months Ended September 30, 2000
Statements of Cash Flows - 6-7
Nine Months Ended September 30, 2000 and 1999
Notes to Financial Statements - 8-13
Nine Months Ended September 30, 2000 and 1999
Item 2. Managements Discussion and Analysis of Financial Condition 14-16
and Results of Operations
Part II. Other Information 17
</TABLE>
2
<PAGE> 3
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,759,087 $ 2,737,537
Accounts receivable 79,696 34,098
Marketable equity securities 8,922,910 836,294
Inventory 700,420 97,934
Notes receivable 14,945 26,350
Prepaid income taxes 120,605 --
Prepaid expenses 60,704 4,136
Assets of discontinued operation -- 447,665
----------- -----------
Total current assets 13,658,367 4,184,014
Property and equipment, net 721,262 97,209
Marketable equity securities 12,720,000 --
Investments in partially-owned equity affiliates 60,762 --
Goodwill, less accumulated amortization of $4,383 and $1,917 44,856 47,323
Other assets 16,587 10,882
----------- -----------
$27,221,834 $ 4,339,428
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 31,081 $ --
Accounts payable 234,769 131,754
Accrued expenses 8,861 5,244
Liabilities of discontinued operation -- 590,110
Stockholder loans 16,748 18,000
Income taxes payable -- 30,318
Deferred income taxes 3,045,308 284,508
----------- -----------
Total current liabilities 3,336,767 1,059,934
----------- -----------
Deferred income taxes 4,535,150 6,650
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value. Authorized 1,000,000,000 shares; issued and 7,784 7,674
outstanding 778,446,187 shares and 767,446,187 shares, respectively
Paid-in capital 6,659,881 2,658,741
Retained earnings 87,656 606,429
Accumulated other comprehensive income 12,594,596 --
----------- -----------
Total stockholders' equity 19,349,917 3,272,844
----------- -----------
$27,221,834 $ 4,339,428
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
SALES AND REVENUES $ 571,233 $ 291,045 $ 1,692,318 $ 512,405
COST OF SALES 495,816 198,144 1,374,033 410,605
------------- ------------- ------------- -------------
GROSS PROFIT 75,417 92,901 318,285 101,800
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Selling, general and administrative expense (642,551) (760,937) (1,509,413) (1,101,179)
Interest expense (54,500) -- (141,018) --
Sale of marketable equity securities -- 225,613 647,776 3,428,772
Interest and other income 114,993 34,460 273,006 53,218
Equity in net loss of affiliated company (1,664) -- (15,530) --
Unrealized gain (loss) on marketable securities (599,230) (1,877,148) (448,072) 1,552,330
------------- ------------- ------------- -------------
Total other income (expense) (1,182,952) (2,378,012) (1,193,251) 3,933,141
------------- ------------- ------------- -------------
EARNINGS (LOSS) BEFORE INCOME TAXES (1,107,535) (2,285,111) (874,966) 4,034,941
INCOME TAX EXPENSE (BENEFIT) (416,100) (858,968) (327,100) 1,135,941
------------- ------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (691,435) (1,426,143) (547,866) 2,899,000
INCOME FROM DISCONTINUED OPERATIONS -- -- 29,093 --
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (691,435) $ (1,426,143) $ (518,773) $ 2,899,000
============= ============= ============= =============
NET EARNINGS PER SHARE
BASIC AND DILUTED $ (0.001) $ (0.002) $ (0.001) $ 0.004
============= ============= ============= =============
DISCONTINUED OPERATIONS $ -- $ -- $ 0.000 $ --
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 778,446,187 755,508,233 774,672,464 744,455,591
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Common Stock Paid-in Retained Other Compre-
Shares Par Value Capital Earnings hensive Income Total
------ --------- ------- -------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 767,446,187 $ 7,674 $2,658,741 $ 606,429 $ 3,272,844
Sale of common stock for cash 11,000,000 110 4,001,140 4,001,250
Comprehensive income:
Net loss (518,773) (518,773)
Other comprehensive income,
net of tax:
Unrealized gain on available-
for-sale securities 12,594,596 12,594,596
----------- ------- ---------- --------- ----------- -----------
BALANCE, September 30, 2000 778,446,187 $ 7,784 $6,659,881 $ 87,656 $12,594,596 $19,349,917
=========== ======= ========== ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (518,773) $ 2,899,000
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 74,218 28,852
Gain from discontinued operations (29,093) --
Equity in loss of affiliated company 15,530 --
Gain on marketable investment securities (647,776) (3,428,772)
Unrealized gain (loss) on marketable investment securities 448,072 (1,552,330)
Proceeds from sale of marketable investment securities 678,566 3,437,400
Purchase of marketable investment securities (23,333) (20,000)
Deferred income taxes (309,500) 590,527
Common stock issued for services -- 425,964
Change in assets and liabilities:
Accounts receivable (45,597) 6,558
Inventory (602,486) (120,001)
Other assets (93,522) --
Notes receivable 11,405 --
Accounts payable (89,216) 20,841
Accrued expenses 3,617 --
Income taxes payable (30,318) 545,414
----------- -----------
Net cash provided by (used in) operating activities (1,158,206) 2,833,453
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (693,752) (67,399)
Purchase of marketable investment securities (1,068,750) (25,000)
Acquisition of ACS, net of cash acquired 100,594
Acquisition of subsidiary -- (18,000)
Proceeds from sale of 80% of ACS 500,000 --
Net advances to discontinued operation (497,412) --
----------- -----------
Net cash used in investing activities (1,759,914) (9,805)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock for cash 4,001,250 384,825
Loan proceeds 3,651,222 --
Loan repayment (3,711,551) --
Due to shareholders (1,252) --
----------- -----------
Net cash provided by financing activities 3,939,669 384,825
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,021,549 3,208,473
CASH AND CASH EQUIVALENTS, beginning of period 2,737,538 116,965
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,759,087 $ 3,325,438
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Continued
6
<PAGE> 7
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest $141,018 $ --
Income taxes $150,923 $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Insurance financing $ 91,410 $ --
Common stock issued for subsidiary $ -- $ 31,240
Common stock issued for assets $ -- $ 37,604
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
A ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
International Internet, Inc. (the "Company" or "IINN"), is a
diversified holding company that develops and operates Internet and
direct retail marketing companies and computer service providers on the
Internet. The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, StogiesOnline.com, Inc.
("Stogies") (www.stogiesonline.com), and its majority owned
subsidiaries, TheBroadcastWeb.com, Inc. ("Broadcast")
(www.thebroadcastweb.com) and Mr. Cigar, Inc. ("Cigar").
IINN, through its Venture group, owns an equity interest in several
Internet companies, some of which are classified as trading securities
and some of which are classified as available-for-sale securities.
Stogies became an online distributor and retailer of brand name premium
cigars within the United States on November 18, 1998. Stogies' products
consist of premium cigars, factory brand name seconds and mass market
cigars, which are distributed online to retail and wholesale customers.
Broadcast is an aggregator and broadcaster of streaming media
programming on the Web with the network infrastructure to deliver or
"stream" live and on-demand audio programs over the Internet. Broadcast
and its representative sites (BluesBoyMusic.com, SoulManMusic.com and
JazzManMusic.com) rely primarily on providers of streaming media
products to license encoders to it in order to broadcast its content
and to distribute player software in order to create a broad base of
users.
American Computer Systems, Inc. ("ACS") was acquired effective
September 30, 1999 and is a full service provider of computer systems
and services to the federal government. ACS focuses on all phases of
hardware implementation, including system engineering, product design,
software integration and networking communications. IINN completed the
sale of 80% of their interest in ACS for $500,000 as of March 31, 2000.
In April 1999, IINN entered into a joint venture agreement with
AuctionAnything.com, Inc. to launch a cigar auction site,
StogiesAuction.com (www.stogiesauction.com), which offers its members
the ability to bid on popular cigars, rare cigars and other hard to
find cigar related items. The site offers a company-to-person trading
platform as well as a public, person-to-person trading platform,
offering sellers a vehicle for listing their own items for sale. Buyers
are able to browse for items arranged by topic and bid through an
online service. StogiesAuction.com is in direct competition with other
Internet companies, such as eBay, Inc., Excite Auction, Yahoo Auction
and Amazon Auction.
The financial statements included in this report have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission for interim reporting and include all adjustments
(consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation. These
financial statements have not been audited.
8
<PAGE> 9
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations for interim reporting. The Company believes that
the disclosures contained herein are adequate to make the information
presented not misleading. However, these financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31,
1999, which is included in the Company's Form 10-KSB for the year ended
December 31, 1999. The financial data for the interim periods presented
may not necessarily reflect the results to be anticipated for the
complete year. Certain reclassifications of the amounts presented for
the comparative period have been made to conform to the current
presentation.
B. MARKETABLE INVESTMENT SECURITIES
FAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities," requires that all applicable investments be classified as
trading securities, available-for-sale securities or held-to-maturity
securities. The Company has classified certain of its investments as
trading securities, which are reported at fair value, which is defined
to be the last closing price for the listed securities. The unrealized
gains and losses, which the Company recognizes from its trading
securities, are included in earnings. The Company also has investments
classified as available-for-sale, which are also required to be
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity
(net of the effect of income taxes). Fair value is also defined to be
the last closing price for the listed security. Due to the size of
certain of the Company's investments and their limited trading volume,
there can be no assurance that the Company will realize the value which
is required to be used by FAS No. 115.
The following summarize the Company's investments:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
<S> <C> <C>
TRADING SECURITIES
Cost $ 13,915 $ 21,373
Unrealized gain 307,995 756,067
----------- -----------
321,910 777,440
----------- -----------
AVAILABLE-FOR-SALE SECURITIES
Cost 1,127,604 58,854
Unrealized gain 20,193,396 --
----------- -----------
21,321,000 58,854
----------- -----------
Total FAS No. 115 value $21,642,910 $ 836,294
=========== ===========
</TABLE>
Gains (losses) from trading securities that were included in earnings
for the nine months ended September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Realized $ 647,776 $3,428,772
Unrealized $ (448,072) $1,552,330
</TABLE>
9
<PAGE> 10
Unrealized gains from available-for-sale securities included as a
component of equity for the nine months ended September 30, 2000 and
1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Unrealized gain $ 20,193,396 $ -----
Deferred income taxes (7,598,800) -----
------------ -----------
$ 12,594,596 $ -----
============ ==========
</TABLE>
The Company's investment in available-for-sale securities includes
10,200,000 shares (10,000,000 shares not registered) of Goldonline
International, Inc. ("GDOL") with a cost of $158,854 and a closing
value on September 30, 2000 of $20,400,000 ($2.00 per share). The
Company's investment represents 10.7% of the outstanding stock of GDOL
and accordingly the Company is subject to certain restrictions on the
number of shares it can sell. There can be no assurance that the
Company will realize the calculated carrying value for the securities.
C. NOTES PAYABLE AND COMPENSATING BALANCES
The Company has a credit facility with Merrill Lynch for $3,400,000
that bears interest at the 30-day Dealer Commercial Paper Rate plus
2.3%. At September 30, 2000, the Company had repaid all advances on the
line. This facility is subject to normal banking terms and conditions
and requires compensating balances not less than 115% of the line of
credit drawn.
The Company financed certain insurance premiums in the amount of
$91,410 during the nine months ended September 30, 2000 and made
payments aggregating $60,329, leaving a balance at September 30, 2000
of $31,081.
D. INCOME TAXES
Income tax expense (benefit) for continuing operations for the nine
months ended September 30, 2000 and 1999 consists of:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Current tax expense:
Federal $ -- $ 465,696
State -- 79,718
---------- ----------
-- 545,414
Deferred tax expense (benefit) (327,100) 590,527
---------- ----------
Total income tax expense (benefit) $ (327,100) $1,135,941
========== ==========
</TABLE>
10
<PAGE> 11
Actual income tax expense (benefit) applicable to earnings (loss), from
continuing operations, before income taxes is reconciled with the
"normally expected" federal income tax expense (benefit) as follows for
the nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
"Normally expected" income tax expense $ (297,488) $ 1,371,880
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal income (31,762) 109,579
tax benefit
Change in valuation allowance -- (346,971)
Nondeductible meals and other 2,150 1,453
----------- -----------
$ (327,100) $ 1,135,941
=========== ===========
</TABLE>
The deferred income tax liabilities at September 30, 2000 are comprised
of the following:
<TABLE>
<CAPTION>
CURRENT NONCURRENT
<S> <C> <C>
Unrealized gain on trading securities $ 115,908 $ --
Unrealized gain on available-for-sale securities 3,065,400 4,533,400
Net operating loss (136,000) --
Equity in net loss of affiliated company -- (5,800)
Asset basis -- 7,550
----------- -----------
Net deferred income tax liabilities $ 3,045,308 $ 4,535,150
=========== ===========
</TABLE>
E. COMMON STOCK
On March 15, 2000, the Company entered into an agreement with Avenel
Financial Group ("AFG") to structure and fund an investment in the
Company in an amount of up to $11,250,000. The Company plans to issue
and sell to investors restricted shares of the Company's common stock
at a purchase price of $.375 per share. For each five shares of common
stock purchased, the investor will also receive a warrant which shall
entitle the owner to purchase one share of common stock at an exercise
price of $1.50 per share. AFG will be paid a fee of 3% of the gross
amount funded to the Company.
On April 3, 2000, the Company issued, in a private sale, 11,000,000
shares of its unregistered common stock and 2,200,000 of its warrants,
with an exercise price of $1.50 per share for net proceeds of
$4,001,250.
F. STOCK OPTIONS AND WARRANTS
On September 30, 1999, as part of an employment agreement, the Company
granted an option to purchase 2,000,000 shares of its common stock at
an exercise price of $.10 per share. The option was scheduled to vest
and become exercisable on September 30, 2000 and expire on September
30, 2004. The stock option expired in April 2000, when the employee
resigned.
The Company has 2,200,000 warrants to purchase its common stock, with
an exercise price of $1.50 per share, outstanding at September 30,
2000.
11
<PAGE> 12
G. DIVESTITURES
In December 1999, the Company decided to sell its wholly owned
subsidiary ACS. In March 2000, the Company completed the agreement for
sale of 80% of its interest in ACS to an ACS officer for $500,000. The
Company received the full payment on April 5, 2000.
The ACS segment is accounted for as a discontinued operation, and
accordingly, amounts in the financial statements and related notes
since the acquisition of ACS effective September 30, 1999, have been
shown as discontinued operations. The assets of discontinued operations
at March 31, 2000 consisted of:
<TABLE>
<S> <C>
Cash $ 106,481
Accounts receivable 86,864
Property and equipment, net 26,825
Other assets 162,287
---------
Total assets 382,457
Liabilities 729,957
---------
Net assets of discontinued operations $(347,500)
=========
</TABLE>
Operating results of the discontinued segment during the three months
ended March 31, 2000, including expenses associated with the
divestiture, are as follows:
<TABLE>
<S> <C>
Net sales $ 43,830
=========
Loss from operations before income taxes $(148,141)
Income tax benefit 55,800
---------
Net loss from discontinued operations (92,341)
---------
Gain on sale 194,834
Income taxes (73,400)
---------
Net gain on sale 121,434
---------
Net earnings from discontinued operations $ 29,093
=========
Net earnings per common share:
Basic $ 0.00
=========
Diluted $ 0.00
=========
</TABLE>
12
<PAGE> 13
H. SEGMENT INFORMATION
For the nine months ended September 30, 2000, the Company operates in
the following segments, none of which have intersegment revenues:
<TABLE>
<CAPTION>
Ventures Stogies Broadcast Corporate Consolidated
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ 1,691,699 $ 619 $ -- $ 1,692,318
Operating loss (226,096) (443,875) (163,661) (357,496) (1,191,128)
Other income 184,174 -- (52) 132,040 316,162
Loss from
continuing
operations (26,122) (275,975) (103,113) (142,656) (547,866)
Discontinued
Operations 29,093
------------
Net earnings $ (518,773)
============
Assets $ 21,766,032 $ 1,417,582 $ 143,157 $ 3,895,063 $ 27,221,834
============ ============ ============ ============ ============
</TABLE>
The Venture segment owns an equity interest in several companies,
mainly with Internet operations, and derives its revenues from the net
gains and losses recognized when the investments are sold. In addition,
the Venture segment recognizes income or loss from the unrealized gains
or losses associated with their trading securities.
The Stogies segment is an online distributor and retailer of brand name
premium cigars within the United States, from which it derives all of
its revenues.
The Broadcast segment is an aggregator and broadcaster of streaming
media programming on the Web with the network infrastructure to deliver
or "stream" live and on-demand audio programs over the Internet.
Broadcast will derive its revenues from advertising sales.
Corporate assets consist of the majority of the cash and certain notes
receivable. Interest expense will be allocated to the other segments to
the extent it exceeds interest income.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From time to time, the Company may publish forward-looking statements
relative to such matters as anticipated financial performance, business
prospects, technological developments and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. All statements other than statements of
historical fact included in this section or elsewhere in this report
are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Exchange Act of 1934. Important factors that could cause actual
results to differ materially from those discussed in such
forward-looking statements include: 1. General economic factors
including, but not limited to, changes in interest rates, trends in
disposable income; 2. Information and technological advances; 3. Cost
of products sold; 4. Competition; and 5. Success of marketing,
advertising and promotional campaigns.
The Company's continuing operations consist of two Internet based
businesses. Stogies is an online distributor and retailer of brand name
premium cigars within the United States and Canada. Broadcast is an
aggregator and broadcaster of streaming media programming on the Web
with the network infrastructure to deliver or "stream" live and
on-demand audio programs over the Internet and Intranets.
Stogies became operational in November 1998 and it accounts for
substantially all of the sales revenue. Broadcast is still completing
development of their infrastructure and expanding their base of
listeners, and does not expect to commence advertising revenues, other
than nominal amounts, until the end of the year 2000.
A. LIQUIDITY AND CAPITAL RESOURCES
The Company increased its working capital from $3,124,080 at December
31, 1999 to $10,321,600 at September 30, 2000. The major components of
the increase in the amount of $7,197,520 includes increases in cash in
the amount of $1,021,550, increases in marketable equity securities in
the amount of $8,086,616 and less an increase in deferred taxes payable
in the amount of $2,760,800. The Company increased inventory to
$700,420 at September 30, 2000 from $97,934 at December 31, 1999. The
increase is due to higher sales levels experienced during the 2000 year
as compared to the 1999 year and is also due to the seasonal
requirements of the holiday sales season.
The Company had $1,158,206 in cash flow used in operations during the
nine months ended September 30, 2000 as compared to $2,833,453 in cash
provided by operations in the year earlier period. The year earlier
period included proceeds from the sale of marketable securities in the
amount of $3,437,400 as compared to the current period amount of
$678,566.
On March 15, 2000, the Company entered into an agreement with Avenel
Financial Group ("AFG") to structure and fund an investment in the
Company in an amount of up to $11,250,000. The Company will issue and
sell to investors restricted shares of the Company's common stock at a
purchase price of $.375 per share. For each five shares of common stock
purchased, the investor will also receive a warrant that shall entitle
the owner to purchase one share of common stock at an exercise price of
$1.50 per share. AFG will be paid a fee of 3% of the gross amount
funded to the Company.
14
<PAGE> 15
On April 3, 2000, the Company issued, in a private sale, 11,000,000
shares of its unregistered common stock and 2,200,000 of its warrants,
with an exercise price of $1.50 per share for net proceeds of
$4,001,250.
The Company had originally budgeted capital expenditures in the amount
of $150,000, primarily for Broadcast, for the year 2000 with plans to
utilize cash reserves to meet its requirements. As of September 30,
2000 the Company had completed acquisition of $693,752 in capital
expenditures for cash, of which $95,797 was for Broadcast's operations
and $597,955 was for Stogies operations.
The majority of the funds expended for Stogies were for a complete
front office/back office system using Great Plains eEnterprise and
eCommerce together with the necessary equipment to operate the system.
The system is designed to support high sales volumes with low
transaction costs and will allow Stogies to reach customers around the
globe and around the clock. The eEnterprise system delivers tools for
building sales, reducing costs, and making the company more efficient
by streamlining their workflow systems, minimizing manual processes,
paperwork and reducing administrative overhead. Customers will benefit
by having direct access to up-to-the minute information about
inventory, pricing and "hot deals," as well as order and shipping
information.
The Company has a line of credit agreement with Merrill Lynch in the
maximum amount of $3,400,000. The agreement requires annual renewal,
expires initially on January 31, 2001 and includes variable interest at
a per annum rate equal to the sum of 2.3% plus the 30-day Dealer
Commercial Paper Rate. The annual fee is $34,000 and the collateral
consists of a first security interest upon the Company's Merrill Lynch
securities account containing securities having an aggregate value of
not less than 115% of the line of credit drawn. At September 30, 2000,
the Company had repaid all advances from the line of credit.
B. RESULTS OF OPERATIONS
SALES AND COST OF SALES - During the three and nine months ended
September 30, 2000, sales increased to $571,233 and $1,692,318 from the
year earlier amounts of $291,045 and $512,405, respectively. The 1999
quarters were the first full quarters for the operations of Stogies,
the Company's online distributor and retailer of brand name premium
cigars. Sales increased 78% during the three month period ended
September 30, 2000 and 230% during the nine month period ended
September 30, 2000, as compared to the year earlier periods.
Broadcast entered into an advertising agency agreement with Music
Vision of New York in April 2000, to sell advertising on its network of
music sites and expects revenues to commence by the end of the year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Selling, general and
administrative expenses increased $408,234 (37%) to $1,509,413 in the
nine month period ended September 30, 2000 as compared to the same year
earlier period. Components of the increase include payroll in the
amount of $234,087, legal and professional - $113,772, advertising -
$65,122, freight - $44,868, insurance - $52,935, credit card processing
fees - $33,371, depreciation - $34,403, other net costs - $98,712 and
Broadcast's costs in the amount of $147,631 and less director's fees in
the amount of $416,667 incurred in the 1999 period. The increase is
consistent with the higher operational level of Stogies and the new
costs associated with Broadcast.
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INTEREST EXPENSE - The Company incurred interest expense in the amount
of $141,018, primarily on their credit facility with Merrill Lynch
during the nine-month period ended September 30, 2000. The Company did
not have any debt during the prior year period.
MARKETABLE INVESTMENT SECURITIES - The Company sold trading equity
securities during the nine months ended September 30, 2000 and realized
profits in the amount of $647,776 as compared to profits of $3,428,772
during the prior year period.
The Company recognized unrealized losses in the amount of $448,072
during the nine-month period ended September 30, 2000 and recognized
unrealized gains in the amount of $1,552,330 during the year earlier
period.
OTHER INCOME - The Company had income of $273,006 and $53,218 from
interest and dividends in the nine-month periods ended September 30,
2000 and 1999, respectively. The higher year 2000 income is primarily
the result of the higher cash balances available during the period.
INCOME TAXES - The Company's effective tax rate during the nine months
ended September 30, 2000 was approximately 37% as compared to 28% in
the year earlier period. During the 1999 period, the Company recognized
the tax benefit of net operating losses and other carryforwards that
had previously been reserved.
DISCONTINUED OPERATIONS - The Company sold 80% of their investment in
ACS as of the end of March 2000. The net earnings from discontinued
operation consisted of a loss of $92,341 from operations (net of tax
benefit in the amount of $55,800) and a gain on the sale in the amount
of $121,434 (net of taxes in the amount of $73,400).
OTHER COMPREHENSIVE INCOME - Unrealized gains from available-for-sale
securities included as a component of equity for the nine months ended
September 30, 2000 were $12,594,596 ($20,193,396 gain less deferred
taxes of $7,598,800). The Company did not recognize any unrealized
gains from available-for-sale securities during the nine months ended
September 30, 1999.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Not applicable
(b) Reports on Form 8-K - None during the current
quarter.
SIGNATURE
Pursuant to the requirements 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.
INTERNATIONAL INTERNET, INC.
Date: November 13, 2000 By: /s/ Gary Schultheis
------------------------------------
Gary Schultheis, President and
Principal Accounting Officer
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