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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
Commission file number 0-26415
INTERNATIONAL INTERNET, INC.
(Name of small business issuer in its charter)
DELAWARE 52-2175532
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6413 CONGRESS AVENUE, SUITE 240, BOCA RATON, FL 33487
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (561) 988-0819
CAPROCK CORPORATION 1504 "R" STREET N.W. WASHINGTON, D.C. 20009
Former name Former address
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.00001 PAR VALUE
(Title of Class)
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 .
--- --
GCheck if 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]
State issuer's revenues for its most recent fiscal year $1,001,587.
As of February 29, 2000, the registrant had outstanding 767,446,187 shares of
its Common Stock, par value $.00001, its only class of voting securities. The
aggregate market value of the shares of Common Stock of the registrant held by
non-affiliates on February 29, 2000, was approximately $125,000,000 based on its
closing price on the OTC: Bulletin Board on that date. (See Item 5).
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DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit index.
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [ X ].
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ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT AND BUSINESS OF ISSUER
On November 26, 1999, International Internet, Inc., a Delaware corporation (the
"Company" or "IINN"), acquired 100% of the issued and outstanding stock of
Caprock Corporation ("Caprock"), a Delaware corporation, pursuant to a Stock
Purchase Agreement. The Board of Directors of IINN, on December 1, 1999, by
unanimous written consent, elected to merge Caprock into IINN pursuant to
Section 253 of Delaware's General Corporate Laws. As a result of the merger,
IINN will be the surviving company and assumes the reporting obligations under
successor issuer status as more fully detailed in Section 12(g)(3) of The
Securities Act of 1934.
IINN is a diversified holding company which develops and operates internet and
direct retail marketing companies and computer service providers on the
internet. The IINN Group includes wholly owned subsidiaries; StogiesOnline.com,
Inc, ("Stogies"), Web Humidor.com Corp. ("Humidor") and American Computer
Systems ("ACS"), and majority owned subsidiaries, TheBroadcastWeb.com, Inc.
("Broadcast") (www.thebroadcastweb.com) and Mr. Cigar, Inc. ("Cigar"). In
addition, Stogiesauction.com (www.stogiesauction.com) is a joint venture between
AuctionAnything.com, Inc. and IINN. IINN also holds minority interests in
Wowstores.com, Inc. (www.wowstores.com) and GoldOnline International, Inc.
(www.goldonline.com).
IINN was incorporated in Delaware on June 21, 1994. IINN formed Stogies in
Delaware on April 21, 1999 and Humidor in Delaware on April 13, 1999. Cigar was
incorporated in Delaware on May 19, 1997. ACS was incorporated in Virginia on
February 7, 1996 and was acquired by IINN effective September 30, 1999.
Broadcast was incorporated in Maine on May 28, 1999 and IINN acquired its 90%
interest on June 14, 1999.
IINN's original business was operated as a developmental stage company in Cigar,
which was in the business of licensing, selling and/or operating cigar vending
machines. The Company opened its StogiesOnline.com Internet site in November
1998. As a result of the success of the StogiesOnline website, the Company
refocused its resources in 1999 into the internet cigar sales market and other
specialty goods. IINN sold the vending equipment and business of Cigar in
December 1999.
STOGIESONLINE.COM
StogiesOnline.com ("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 sold online to retail and wholesale customers. Stogies markets
a wide variety of premium cigars and related tobacco products on a retail basis
throughout the United States via the internet. Management utilizes its web site
located at URL (www.StogiesOnline.com) as its primary advertising vehicle.
Stogies' cigar line consists of over 30 brands. Among Stogies' products are
nationally
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recognized brand names -Arturo Fuente, Ashton, AVO, Baccarat, Bahia, Bauza,
Bering, Cohiba, Don Diego, Dunhill, Garcia Vega, H. Upmann, Lars Tetens,
Macanudo, Montecristo, Opus X, Partagas, Punch, Sosa and Te-amo.
As a direct buyer from manufacturers, Stogies is eligible to participate in
promotions, which enables it to pass substantial savings to its customers.
Stogies purchases overstocked or overproduced items from manufacturers and other
retailers, including factory brand name seconds. Currently, Stogies has entered
into non-exclusive distribution agreements with: Miami Cigar, Inc. who
distributes Leon Jimenes and La Aurora cigars, Havana Tampa, Inc., who is the
distributor for Romeo y Julietta and Vega Fina brands, Diamond Crown Humidors
and Accessories, J.C. Newman Cigar company who distributes Arturo Fuente, La
Unica and Cuesta Rey cigars, Howard House the distributor for Carbonell cigars,
Consolidated Cigar, the manufacturer of fine cigars such as Monticristo, H.
Upmann, Don Diego, Te-amo and, Lane Limited who manufactures Royal Jamaica
cigars, Dunhills, Montecruz and Onyx. Caribe manufactures Baccarrat brand name
cigars.
Currently, Stogies' average order size is approximately $197. Stogies' web site
highlights its sale items and changes its product offerings and featured
specials weekly. The site currently offers over 30 different brands of cigars
from several different countries; however, by dialing 1-888-82-CIGAR, a customer
can order any cigar or tobacco accessory currently carried. In the event that
Stogies does not have a particular product in stock, a customer may place an
order to ship on arrival, or telemarketers may direct the customer to similar
products by utilizing its database. Management utilizes its web site as its
primary advertising vehicle. However, to drive additional traffic to Stogies'
web site, Stogies entered into agreements with Adsmart, a majority-owned
subsidiary of CMGI, Inc. to purchase 333,333 banner impressions and Flycast
Communications Corporation to purchase 20,000,000 banners. The Flycast program
expired on December 31, 1999 and provided for 2,857,143 banners to run per month
or approximately 95,238 banners per day. Flycast is a leading provider of
web-based advertising solutions.
Stogies currently utilizes United Parcel Service for shipping the majority of
orders from its inventory, which is maintained in Boca Raton, Florida.
StogiesOnline expanded its client base to over 3,100 customers in the United
States and Canada. Purchases from repeat customers have been steady, with repeat
buyers accounting for approximately 33% of current orders. During the two years
ended December 31, 1999, Stogies did not have any significant customers, the
loss of which would have an adverse effect on operations.
THEBROADCASTWEBNETWORK.COM, INC.
Broadcast was acquired on June 14, 1999 for $18,000 cash and 300,000 shares of
IINN common stock. 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. Broadcast and
its representative sites - BluesBoyMusic.com (www.bluesboymusic.com),
SoulManMusic.com
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(www.soulmanmusic.com) and JazzManMusic.com (www.jazzmanmusic.com) rely
primarily on the three leading providers of streaming media products, Real
Networks, Destiny Media Player and Microsoft, 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. Users are currently able to electronically download copies
of Real Networks' Real Player, Destiny Media Player and Microsoft's Windows
Media Player software free of charge from a wide variety of sources, including
Broadcast and its sites.
Broadcast is currently developing its sites and expanding its listener base.
Management expects that Broadcast will not have substantial advertising revenues
for approximately one year while it completes building its sites.
AMERICAN COMPUTER SYSTEMS
ACS was acquired effective September 30, 1999 for $150,000 cash and is a wholly
owned subsidiary of IINN. ACS 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. In November 1997, ACS was awarded its
first General Services Administration (GSA) schedule contract for computer
systems and peripherals. This contract has been extended for five additional
years. ACS has concentrated its efforts on providing the Federal Government best
value systems with on-site service and support as required for both Continental
United States (CONUS) and Outside the Continental United States (OCONUS).
American Computer Systems maintains a web site at (www.acspc.com). IINN
determined after several months that the business of ACS did not meet its
business plan requirements and was able to sell 80% of its investment in ACS for
$500,000. The Company received payment in full on April 5, 2000.
MR. CIGAR INC.
IINN, through its majority-owned subsidiary, Cigar, sold, licensed and operated
the "Mr. Cigar" automated vending humidors, which dispensed mass market and
premium cigars. The automated humidors held up to 200 cigars ranging in price
from $2 to $35 keeping them humidified until purchased. IINN completed their
sale of the vending assets of Mr. Cigar in December 1999.
JOINT VENTURES
INTERNATIONAL INTERNET - AUCTION ANYTHING JOINT VENTURE
In April 1999, IINN entered into a joint venture agreement with
AuctionAnything.com, Inc. to launch a cigar auction site, StogiesAuction.com.
Stogies Auction, which can be found at URL's www.StogiesAuction.com or
www.StogieAuctions.com, 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
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topic and bid through an automated, easy to use online service.
StogiesAuction.com is in direct competition with other Internet companies such
as eBay, Inc., Excite Auction, Yahoo Auction and Amazon Auction.
AuctionAnything.com is a network of related distinct internet auction sites
designed around specific "micro-community" themes. The network consists
primarily of a series of Auction Business Solutions such as
(http://www.stogiesauction.com) that are internally hosted and designed to
empower business owners with an e-commerce auction engine. Each Auction Business
Solution (ABS) is a modular, customized system that removes the barriers of
entry for business owners who want to employ their own internet auctions. The
network is supplemented by a person-to-person auction site
(http://Auctions.AuctionAnything.com) that is designed for community trading.
All members of the AuctionAnything.com auction family share a common customer
database and user registration enabling merchants to reach a wider audience and
consumers to find a wider variety of items.
TRADEMARKS
At this time, the Company has no registered trademarks or trade names.
COMPETITION
All direct marketing and retail businesses are highly competitive. With the
internet, the Company competes for consumer expenditures with all other forms of
retail businesses, including department, discount, warehouse and specialty
stores, mail order, catalog and television home shopping companies as well as
other direct sellers and infomercials. The internet home shopping industry is
highly competitive. The Company believes that the internet shopping industry is
still very attractive to consumers, manufacturers and retailers. The industry
offers consumers convenience, entertainment and the opportunity to test market
new products, create brand awareness and access additional channels. The Company
is at a competitive disadvantage in attracting viewers due to the fact that the
Company's internet site is limited to its future advertising budget. The Company
expects increasing competition for viewers from major internet providers and
retailers that may seek to enter internet shopping. The Company believes that
the number of new entrants into the internet shopping industry will also
continue to increase. The Company believes that it is positioned to compete;
however, no assurance can be given that the Company will be able to acquire
consistent advertising at prices favorable to the Company. The Company's
competitors are larger and more diversified than the Company, have greater
financial, marketing, merchandising and distribution resources; therefore, the
Company cannot predict the degree of success, if any, with which it will meet
competition in the future.
TECHNOLOGICAL CHANGE
The internet is characterized by technological change. The Company's success
will depend, in part, on its ability, to enhance its existing services, develop
new services that address the needs
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of its prospective customers and respond to technological advances and practices
on a timely basis. The development of a Web entails significant technical,
financial and business risks. There can be no assurance that the Company will
successfully implement new technologies or adapt its Web site, proprietary
technology and transaction-processing systems to customer requirements or
emerging industry standards. If the Company is unable, for technical, legal,
financial or other reasons, to adapt in a timely manner in response to changing
market conditions, such inability could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
EMPLOYMENT
The Company has three full-time employees in administration and management, six
full-time and two part-time employees in the Stogies operation, two full-time
and two part-time employees in the Broadcast operation and seven full-time
employees in the ACS operation.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently maintains two office spaces. The corporate headquarters
are located at 6413 Congress Avenue, Suite 240, Boca Raton, Florida 33487. The
office is 2,358 square feet, and the monthly rent is $2,697.37. The Florida
phone number is (561) 988-0819. The ACS office is located at 14155 G Sullyfield
Circle, Chantilly, Virginia 20151. The office is 2,672 square feet and the
monthly rent is $2,250. The ACS office phone number is (703) 815-0070.
Broadcast's office is located at 3 Firefly Lane, Bar Harbor, Maine 04609. The
office of Broadcast is approximately 900 square feet and the monthly rent is
$500.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
IINN has been a non-reporting publicly traded company with certain of its
securities exempt from registration under the Securities Act of 1933 pursuant to
Rule 504 of Regulation D and Rule 701 of the General Rules and Regulations of
the Securities and Exchange Commission. IINN's common stock is traded on the OTC
Bulletin Board operated by Nasdaq under the symbol IINN. IINN has not filed a
registration statement with the Securities and Exchange Commission and has not
been a reporting company under the Securities Exchange Act of 1934. The Nasdaq
Stock Market has implemented a change in its rules requiring all companies
trading securities on the OTC Bulletin Board to become reporting companies under
the Securities Exchange Act of 1934.
The Company was required to become a reporting company by the close of business
on January 1, 2000 or no longer be listed on the OTC Bulletin Board. IINN has
effected the merger with Caprock and has become a successor issuer thereto in
order to comply with the reporting company requirements implemented by the
Nasdaq Stock Market.
The following chart shows the quarterly high and low bid prices for the
Company's Common Stock for the last two fiscal years, as reported on the
OTC:Bulletin Board. The prices represent quotations by dealers without
adjustments for retail mark-ups, mark-downs or commissions and may not represent
actual transactions.
<TABLE>
<CAPTION>
OPENING HIGH LOW CLOSING
BID BID BID BID
<S> <C> <C> <C> <C>
1999 Fourth Quarter .053 .505 .045 .230
1999 Third Quarter .137 .140 .050 .053
1999 Second Quarter .033 .215 .120 .137
1999 First Quarter .017 .310 .016 .033
1998 Fourth Quarter .021 .031 .016 .017
1998 Third Quarter .008 .043 .017 .021
1998 Second Quarter .025 .028 .008 .008
1998 First Quarter .001 .050 .001 .025
</TABLE>
HOLDERS
As of December 31, 1999, there were approximately 889 holders of record of the
Company's common stock, an undetermined number of which represent more than one
individual participant in securities positions with the Company.
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DIVIDENDS
The Company has never paid cash dividends on its common stock, and intends to
utilize current resources to expand its operations. Therefore, it is not
anticipated that cash dividends will be paid on the Company's common stock in
the foreseeable future.
INVESTMENT AGREEMENT
In March 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 common stock in the Company at a purchase price of $.375 per share. In
addition, one warrant for every five shares purchased will be issued to AFG.
The warrant 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 in the amount of 3%
of the gross amount funded to the Company. On April 3, 2000, the Company issued
11,000,000 shares of its common stock and 2,200,000 of its warrants, with an
exercise price of $1.50 per share, for $4,125,000 ($4,001,250, net of AFG's
fee).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS 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.
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LIQUIDITY AND CAPITAL RESOURCES
The Company increased its working capital from $73,046 at December 31, 1998 to
$3,124,080 at December 31, 1999. The working capital increase in the amount of
$3,051,034 consists primarily of increases in cash in the amount of $2,620,571
and marketable securities in the amount of $836,294 less increases in current
and deferred income taxes in the amount of $406,283 and less the net liabilities
of discontinued operations in the amount of $142,445.
During the year ended December 31, 1999 stockholders' equity increased
$3,083,346, which includes net income in the amount of $1,579,963, the sale
of common stock for cash in the amount of $384,825, acquisition of assets in
the amount of $78,141 and common stock issued for compensation in the amount of
$1,040,417.
The Company has budgeted capital expenditures in the amount of $100,000,
primarily for Broadcast, for the year 2000 and will utilize cash reserves to
meet its requirements.
The Company executed a line of credit agreement with Merrill Lynch in the
maximum amount of $3,400,000 on December 13, 1999. 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 $17,000 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 maximum line
of credit.
In March 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
common stock in the Company at a purchase price of $.375 per share and one
warrant for every five shares purchased. The warrant 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 in the amount of 3% of the gross amount funded to the
Company. On April 3, 2000, the Company issued 11,000,000 shares of its common
stock and 2,200,000 of its warrants, with an exercise price of $1.50 per share,
for $4,125,000 ($4,001,250, net of AFG's fee).
SALES AND COST OF SALES
During the year ended December 31, 1999, sales increased 41 times from $23,790
to $1,001,587. Stogies became an online distributor and retailer of brand name
premium cigars in November 1998 and accordingly had only nominal Internet sales
until 1999. The Company, through Mr. Cigar, discontinued its sale of cigars
through automated vending humidors in December 1999 and will continue cigar
sales through Stogies' online distributorship.
Stogies sales are expected to maintain the sales level experienced during the
fourth quarter of 1999 ($489,186) for the next year.
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As a result of start-up costs, Stogies cost of sales exceeded sales by $2,620 in
1998. During 1999 the Company realized a gross profit of 21% and expects this
margin to continue into the year 2000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $1,694,653 (266%) to $2,330,971
in 1999 from $636,318 in 1998. The increase consists primarily of the following:
(1) bonuses and other compensation paid with stock to officers, directors,
consultants and employees in the amount of $1,040,417, (2) increased advertising
costs in the amount of $126,085, (3) increased payroll costs in the amount of
$113,466, due primarily to an increase in personnel from the level in 1998, (4)
increased legal and professional costs in the amount of $112,376, (5) increased
insurance costs in the amount of $46,418, and (6) freight cost increases in the
amount of $47,950. The remaining increase in the amount of $207,941 consists of
general increases in most expenses, telephones, rent, travel, printing, and
other general office expenses consistent with the increased business activity.
It is currently anticipated that general and administrative expenses in 2000
should be substantially lower than experienced in 1999 for existing operations,
since approximately 45% of the 1999 amount consisted of bonuses and other
compensation that was paid in stock and which are not expected to continue at
the same level.
OTHER INCOME AND EXPENSES
Other income in 1999 consists of net gains from sales of marketable securities
in the amount of $3,428,741 as compared to a loss in the amount of $7,027
recognized in 1998. The Company received interest and dividend income in the
amount of $72,750 in 1999 as compared to $1,482 in 1998, due primarily to higher
cash balances that arose from the gains recognized from the sale of marketable
securities. The Company also recognized an unrealized gain from its marketable
security investments in the amount of $756,067 in 1999. The Company did not have
an investment in marketable securities at the end of 1998.
INCOME TAXES
The Company's 1999 income tax expense consisted of current taxes in the amount
of $115,125 and deferred income taxes in the amount of $291,158. The deferred
tax benefit that would have been recognized in 1998 was fully reserved due to
the uncertainty, at that time, that the resulting deferred tax asset would be
realized.
DISCONTINUED OPERATIONS
The Company decided in December 1999 to divest itself of the majority of its
ownership in ACS, to allow it to concentrate its efforts in its core Internet
businesses. As a result of this decision, the Company has recorded a loss from
discontinued operations for the three months ended December 31, 1999, in the
amount of $115,421, which is net of the income tax benefit of $84,807.
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The Company anticipates a net gain from the sale of 80% of its investment in
ACS, which amount is expected to exceed the operating loss of ACS through the
date of the sale.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of International Internet, Inc. and
Subsidiaries, together with the report thereon of Goldstein Lewin & Co. dated
March 31, 2000 for the year ended December 31, 1999 is set forth on pages F-1
through F-21 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has dismissed its former principal accountants, Weinberg & Company,
P.A. and engaged Goldstein Lewin and Co. as its principal accountants. The
change was made effective February 14, 2000. From inception, June 7, 1999, of
Caprock Corporation there were no disagreements with the former accountants on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of the former accountants would have caused them to make
reference in connection with their report to the subject matter of the
disagreements. The decision to change accountants was approved by the Board of
Directors of the Company.
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth the names, ages and current positions with the
Company held by the Directors, Executive Officers and Significant Employees,
together with the year such positions were assumed. There is no immediate family
relationship between or among any of the Directors, Executive Officers or
Significant Employees, and the Company is not aware of any arrangement or
understanding between any Director or Executive officer and any other person
pursuant to which he was elected to his current position.
<TABLE>
<CAPTION>
POSITION OR OFFICE DATE FIRST
NAME AGE WITH THE COMPANY ELECTED
- ---- --- ---------------- -------
<S> <C> <C> <C>
Gary Schultheis 34 President, Director 1998
Herbert Tabin 32 Vice President, Director 1998
Joel C. Holt 69 Director 1998
Dr. Irwin Horowitz 62 Director 1998
Robert Wussler 59 Director 1998
</TABLE>
GARY SCHULTHEIS is the founder of International Internet, Inc. and has served as
its President and a Director of the Company since February, 1998. Mr. Schultheis
currently serves as President and CEO of Millennium Holdings Group, Inc., a
corporate consulting firm. Mr. Schultheis attended the State University of New
York at Farmingdale in 1984. From March 1994 to February 1996, Mr. Schultheis
was President of Wall Street Enterprises d/b/a Wall Street Associates, a
financial consulting firm specializing in mergers and acquisitions. In February
1996, Wall Street Enterprises was acquired by Millennium Holdings Group, Inc.
Currently, Wall Street Enterprises d/b/a Wall Street Associates is a
wholly-owned subsidiary of Millennium Holdings Group, Inc.
HERBERT TABIN is a founder of International Internet, Inc. and has served as
Vice President and a Director of the Company since February, 1998. Prior to
starting the Company, Mr. Tabin was a Vice President of Marketing with LBI
Group, Inc., a merchant banking and venture capital group from April 1995 to
December 1996. Mr. Tabin received a Bachelor of Science in Business Economics
from the State University of New York in 1989 and has been involved in financial
consulting and investment counseling since 1989.
JOEL C. HOLT serves as a Director of the Company. Mr. Holt holds a Bachelor of
Science Degree from the Medical College of Virginia in both Physical Therapy and
Biology. Mr. Holt served in various and progressively more responsible sales and
marketing positions for the Proctor and Gamble company for over 30 years,
culminating as Territory Manager for the
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Western District of North Carolina. In 1987, he was instrumental in the
formation of Keystone Laboratories, Inc., where he remains as President.
DR. IRWIN A. HOROWITZ serves as a Director of the Company. Dr. Horowitz received
his podiatry degree from the M.J. Lewis College of Podiatric Medicine in 1959.
Dr. Horowitz has been the Chairman of the Board, Chief Executive Officer and the
President of Diversifax Inc. that is primarily engaged as an international
supplier of in-room facsimile systems to the hospitality industry. For more than
five years, Dr. Horowitz has been Chairman of the Board and President of IMSG
Systems, Inc. and certain affiliated companies that were acquired by Diversifax
in 1993. Dr. Horowitz is also a Director of the Langer Biomechanics Group, Inc.,
a public company primarily engaged in the business of manufacturing and selling
orthotic products.
ROBERT M. WUSSLER serves as a Director of the Company. Mr. Wussler is one of the
founders of Cable News Network (CNN). From 1980 until 1990, he served as Senior
Executive Vice President of Turner Broadcasting. Mr. Wussler is the former
president of the Atlanta Braves professional baseball team and the Atlanta Hawks
professional basketball team. Prior to joining Turner Broadcasting, Mr. Wussler
was president of the Columbia Broadcasting System (CBS).
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the cash compensation of the Company's chief executive
officer and each officer whose total cash compensation exceeded $100,000, for
the three fiscal years ended December 31, 1999. The Company has no long-term
compensation plans.
<TABLE>
<CAPTION>
NAME AND FISCAL OTHER ALL
PRINCIPAL YEAR ANNUAL OTHER
POSITION ENDED SALARY ($) BONUS ($) COMPENSATION COMPENSATION
<S> <C> <C> <C> <C> <C>
Gary Schultheis 12/31/99 $102,500 $103,437 N/A N/A
12/31/98 $102,500 $45,534 N/A N/A
12/31/97 N/A N/A N/A N/A
Herbert Tabin 12/31/99 $102,500 $103,437 N/A N/A
12/31/98 $102,500 $44,784 N/A N/A
12/31/97 N/A N/A N/A N/A
</TABLE>
The amount included in bonus in 1999 was paid in restricted common stock. The
amount included as bonus in 1998 represents compensation accrued in 1997 but not
paid until the funds were available in 1998.
14
<PAGE> 15
On November 11, 1999, the Company established the International Internet, Inc.
Stock Option Plan ("Plan") to grant to officers and other employees,
non-employee directors, consultants and advisors and other persons who may
perform significant services for or on behalf of the Company, a favorable
opportunity to acquire common stock of the Company. The Company has reserved
25,000,000 shares for issuance under the Plan and may grant both incentive stock
options within the meaning of Section 422 of the Code ("Incentive Stock
Options") and stock options that do not qualify for treatment as Incentive Stock
Options ("Nonstatutory Options").
On November 11, 1999, the Board of Directors granted options to the members of
the Board of Directors, employees of the Company and certain consultants for a
total of 9,500,000 shares of the common stock of the Company. As a reward to its
directors, employees and consultants and as a further incentive to remain with
the Company, the Board of Directors gave each director, employee and consultant
a bonus to allow them to exercise their stock options.
On September 30, 1999, the Company granted an option to acquire 2,000,000 shares
of its common stock at an exercise price of $.10 to the vice president, and
former owner, of ACS as a part of his employment agreement.
The option is exercisable for a period of five years.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of Exercise
Securities total options/ or base
Underlying SARs granted price Expiration
options/ to employees ($/share) date
SARs granted in fiscal
(number) year
<S> <C> <C> <C> <C>
Gary Schultheis 1,250,000 17.9% $.065 N/A
Herbert Tabin 1,250,000 17.9% $.065 N/A
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Shares Value Number of Securities Value of
Acquired realized underlying unexercised unexercised
On ($) options/SARs at in-the-money
Exercise FY-end (number) options/SARs
Name (number) Exercisable/ at FY-end ($)
Unexercisable Exercisable/
Unexercisable
<S> <C> <C> <C> <C>
Gary Schultheis 1,250,000 0 None None
Herbert Tabin 1,250,000 0 None None
</TABLE>
15
<PAGE> 16
There were no long-term incentive plan awards during the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table indicates all persons who, as of February 29, 2000, the most
recent practicable date, are known by the Company to own beneficially more than
5% of any class of the Company's voting securities and all Directors of the
Company and all Officers who are not Directors of the Company, as a group. As of
February 29, 2000, there were 767,446,187 shares of the Company's common stock
outstanding.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
TITLE OF BENEFICIAL OF BENEFICIAL % OF
OF CLASS OWNER OWNER CLASS
<S> <C> <C> <C>
Common Gary Schultheis 251,109,000 32.72%
6413 Congress Ave, Suite 240
Boca Raton, FL 33487
Common Herbert Tabin 251,079,000 32.72%
6413 Congress Ave, Suite 240
Boca Raton, FL 33487
Common Joel C. Holt 18,701,666 2.44%
E-11 Woodfield Condos
Asheville, NC 28803
Common Robert Wussler 9,247,866 1.20%
7904 Sandalfoot Dr.
Potomac, MD 20854
Common Dr. Irwin A. Horowitz 9,226,666 1.20%
P.O. Box 859
Tallevast, FL 34270
Common All directors and executive 539,364,198 70.28%
officers as a group (five persons)
</TABLE>
16
<PAGE> 17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS - See Exhibit Index at page 19.
(B) REPORTS ON FORM 8-K - The Company filed the following Form
8-K's:
1. The Company filed Form 8-K on November 26, 1999 to
report the resignation of James M. Cassidy as
director and officer of the Company and the
appointment of Gary Schultheis as director and
President, Secretary and Treasurer of the Company.
2. The Company filed Form 8-K on November 29, 1999 to
report the change in control of the Company pursuant
to a Stock Purchase Agreement dated November 26, 1999
by and between International Internet, Inc. and TPG
Capital Corporation. The Stock Purchase Agreement was
attached as an exhibit.
3. The Company filed Form 8-K on December 4, 1999 to
report the merger of International Internet, Inc.
into Caprock Corporation, the Registrant, with
International Internet, Inc. being the survivor.
Financial statements included the audited financial
statements of International Internet, Inc. for the
year ended December 31, 1998, the unaudited financial
statements of International Internet, Inc. at
September 30, 1999 and for the three and nine months
then ended and a pro forma balance sheet as of
September 30, 1999 and pro forma statements of
operations for the nine months ended September 30,
1999 and the year ended December 31, 1998.
17
<PAGE> 18
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNATIONAL INTERNET, INC.
Date: April 11, 2000 By: /s/ Gary Schultheis
-------------------------------
Gary Schultheis,
President and Principal
Financial and Accounting 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 and on the
dates indicated.
Date: April 11, 2000 By: /s/ Gary Schultheis
-------------------------------
Gary Schultheis,
Director
Date: April 11, 2000 By: /s/ Herbert Tabin
-------------------------------
Herbert Tabin,
Vice President, Director
Date: April 11, 2000 By: /s/ Joel C. Holt
-------------------------------
Joel C. Holt,
Director
Date: April 11, 2000 By: /s/ Robert Wussler
-------------------------------
Robert Wussler,
Director
Date: April 11, 2000 By: /s/ Dr. Irwin A. Horowitz
-------------------------------
Dr. Irwin A. Horowitz,
Director
18
<PAGE> 19
EXHIBITS HAVE BEEN OMITTED FROM THIS COPY. COPIES OF EXHIBITS MAY BE OBTAINED
FROM INTERNATIONAL INTERNET, INC. (THE "COMPANY") UPON REQUEST AND PAYMENT OF
THE COMPANY'S COSTS IN FURNISHING SUCH COPIES. COPIES MAY ALSO BE OBTAINED FROM
THE SECURITIES AND EXCHANGE COMMISSION FOR A SLIGHT CHARGE.
(The foregoing is not applicable to the original(s) hereof.)
EXHIBIT INDEX
<TABLE>
<CAPTION>
Securities and
Exchange
Commission Page
Exhibit No. Type of Exhibit Number
<S> <C> <C>
1 Underwriting agreement N/A
2 Plan of acquisition, reorganization, arrangement,
liquidations, or succession. N/A
4 Instruments defining the rights of holders
including indentures. N/A
9 Voting trust agreement N/A
10 Material contracts N/A
11 Statement re: computation of per share earnings N/A
16 Letter on change in certifying accountant N/A
18 Letter on change in accounting principles N/A
21 Subsidiaries of the registrant Part I, Item 1
22 Published report regarding matters submitted to vote N/A
23 Consent of experts and counsel N/A
24 Power of attorney N/A
27 Financial Data Schedule FDS Exhibit
99 Additional Exhibits N/A
</TABLE>
19
<PAGE> 20
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORTS F-2 - F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-4 - F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Changes in Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8 - F-9
NOTES TO THE FINANCIAL STATEMENTS F-10 - F-21
</TABLE>
F-1
<PAGE> 21
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
International Internet, Inc. and Subsidiaries
Boca Raton, Florida
We have audited the accompanying consolidated balance sheet of International
Internet, Inc. and Subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. We did
not audit the financial statements of American Computer Systems, Inc., a
consolidated subsidiary, which statements reflect total assets and revenues
constituting 9% and 23%, respectively, of consolidated 1999 totals. Those
statements were audited by other auditors whose report has been furnished to us,
and in our opinion, insofar as it relates to the amounts included for American
Computer Systems, Inc., is based solely on the report of other auditors.
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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of International Internet, Inc. and
Subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
GOLDSTEIN LEWIN & CO.
Boca Raton, Florida
March 31, 2000
F-2
<PAGE> 22
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
International Internet, Inc.
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of International Internet, Inc. and
subsidiary for the year ended December 31, 1998. These financial statements are
the responsibility of the management of International Internet, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We have 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 statements are free of material
misstatements. 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 statements of operations, changes in stockholders'
equity and cash flows referred to above present fairly, in all material
respects, the results of operations and cash flows of International Internet,
Inc. and subsidiary for the year ended December 31, 1998 in conformity with
generally accepted accounting principles.
Harmon & Company, CPA, Inc.
Dublin, Ohio
June 10, 1999
F-3
<PAGE> 23
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $2,737,537
Accounts Receivable 34,098
Marketable Securities 836,294
Inventory 97,934
Notes Receivable 26,350
Prepaid Insurance 4,136
Assets of Discontinued Operation 447,665
----------
Total Current Assets 4,184,014
----------
PROPERTY AND EQUIPMENT, Net 97,209
----------
OTHER ASSETS
Goodwill, Net 47,323
Other Assets 10,882
----------
58,205
----------
$4,339,428
==========
</TABLE>
The Accompanying Notes are an
Integral Part of These Financial Statements
F-4
<PAGE> 24
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts Payable $ 131,754
Accrued Liabilities 5,244
Liabilities of Discontinued Operation 590,110
Stockholder Loans 18,000
Income Taxes 30,318
Deferred Income Taxes 284,508
----------
Total Current Liabilities 1,059,934
----------
LONG-TERM LIABILITIES
Deferred Income Taxes 6,650
----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Cumulative Convertible Preferred Stock,
Par Value .0001; Authorized 10,000,000
Shares, Outstanding -0- Shares
Common Stock, Par Value $0.00001;
Authorized 1,000,000,000 Shares, Issued
and Outstanding 767,446,187 Shares 7,674
Additional Paid-in Capital 2,658,741
Retained Earnings 606,429
----------
3,272,844
----------
$4,339,428
==========
</TABLE>
The Accompanying Notes are an
Integral Part of These Financial Statements
F-5
<PAGE> 25
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
SALES $ 1,001,587 $ 23,790
COST OF SALES 790,646 26,410
------------- -------------
Gross Profit (Loss) 210,941 (2,620)
General and Administrative Expenses 2,330,971 636,318
------------- -------------
Loss from Operations (2,120,030) (638,938)
------------- -------------
OTHER INCOME (EXPENSE)
Gains (Loss) from Sale of Marketable Securities 3,428,741 (7,027)
Loss on the Sale of Property and Equipment (35,861)
Investment Income 72,750 1,482
Unrealized Gain on Marketable Securities 756,067
------------- -------------
Total Other Income (Expense) 4,221,697 (5,545)
------------- -------------
Income (Loss) Before Income Taxes 2,101,667 (644,483)
Income Taxes 406,283
------------- -------------
Income (Loss) from Continuing Operations 1,695,384 (644,483)
Loss from Discontinued Operations (115,421)
------------- -------------
Net Income (Loss) $ 1,579,963 $ (644,483)
============= =============
Weighted Average Number of Common Shares Outstanding:
Basic 748,412,398 666,649,550
============= =============
Assumed Diluted 748,916,508 666,649,550
============= =============
Earnings (loss) Per Share:
Basic $ 0.00 $ 0.00
============= =============
Diluted $ 0.00 $ 0.00
============= =============
Discontinued Operations $ 0.00 $ 0.00
============= =============
</TABLE>
The Accompanying Notes are an
Integral Part of These Financial Statements
F-6
<PAGE> 26
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
-------------------- Paid-in Subscriptions Earnings Stockholders'
Shares Amount Capital Receivable (Deficit) Equity
------ ------ ------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 593,598,000 $ 5,936 $ 326,596 $ $ (329,051) $ 3,481
Issuance for:
Cash 103,553,000 1,036 518,614 519,650
Services 6,576,500 66 162,134 162,200
Acquisition of International
Internet, Inc. 32,340,600 323 148,327 148,650
Stock Subscription Receivable 3,633,000 36 74,789 (74,825)
Net Loss (644,483) (644,483)
----------- ------- ----------- --------- ----------- -----------
Balance at December 31, 1998 739,701,100 7,397 1,230,460 (74,825) (973,534) 189,498
Issuance for:
Cash 6,195,087 62 309,938 74,825 384,825
Services 10,150,000 101 422,816 422,917
Acquisitions:
GoldOnline.com 1,000,000 10 33,844 33,854
WebHumidor.com 100,000 1 13,046 13,047
BroadcastWeb.com 300,000 3 31,237 31,240
Caprock Merger 500,000 5 (5)
Stock Bonuses 9,500,000 95 617,405 617,500
Net Income 1,579,963 1,579,963
----------- ------- ----------- --------- ----------- -----------
Balance at December 31, 1999 767,446,187 $ 7,674 $2,658,741 $ $ 606,429 $3,272,844
=========== ======= =========== ========= =========== ===========
</TABLE>
The Accompanying Notes are an
Integral Part of These Financial Statements
F-7
<PAGE> 27
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 1,579,963 $ (644,483)
Adjustments to Reconcile Net Income (loss) to
Net Cash Provided by (Used in) Operating Activities:
Depreciation 42,747 27,749
Amortization 4,655
Loss from Discontinued Operations 115,421
Loss on Sale of Property and Equipment 35,861
Gain on Marketable Investment Securities (3,428,741)
Unrealized Gain on Marketable Investment Securities (756,067)
Common Stock Issued for Services 1,040,417 162,200
Deferred Income Taxes 291,158
Change in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (22,098) (12,000)
Inventory (83,879) 1,084
Other Assets (4,636) 18,437
Increase (Decrease) in:
Accounts Payable 109,942
Accrued Liabilities (42,919) (84,117)
Income Tax Payable 115,125
Purchases of Marketable Investment Securities (30,001)
Proceeds From Sale of Marketable
Investment Securities 3,437,369
----------- -----------
Net Cash Provided by (Used in)
Operating Activities 2,404,317 (531,130)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment (85,788) (77,339)
Purchases of Marketable Investment Securities (25,000)
Net Advances to Discontinued Operations (202,195)
Net Cash Provided by Acquisitions 294,413
Acquisition of Subsidiaries (168,000)
----------- -----------
Net Cash Used in Investing Activities (186,570) (77,339)
----------- -----------
</TABLE>
The Accompanying Notes are an
Integral Part of These Financial Statements
F-8
<PAGE> 28
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Sale of Common Stock $ 384,825 $ 519,650
Advances from Stockholder 18,000
Acquisition of Additional Interests in Subsidiary 145,145
----------- -----------
Net Cash Provided By Financing
Activities 402,825 664,795
----------- -----------
Net Increase in Cash and Cash
Equivalents 2,620,572 56,326
Cash and Cash Equivalents:
Beginning 116,965 60,639
----------- -----------
Ending $ 2,737,537 $ 116,965
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of Subsidiaries
Fair Value of:
Working Capital, Other than Cash $ (357,812)
Fixed Assets, Net of Depreciation (3,828)
Other Assets (54,990)
Cost in Excess of Net Assets of
Company Acquired, Net (89,081)
Liabilities 768,884
Issuance of Common Stock on Acquisition 31,240
-----------
Net Cash Provided By Acquisitions $ 294,413
===========
Sale of Fixed Assets in
Exchange for Promissory Notes $ 26,350
===========
Common Stock Issued for Services $ 1,040,417 $ 162,200
=========== ===========
Common Stock Issued for Domain Name $ 13,047
===========
Common Stock Issued for Investment $ 33,854
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash Payments for:
Interest $ 10 $ 99
=========== ===========
</TABLE>
The Accompanying Notes are an
Integral Part of These Financial Statements
F-9
<PAGE> 29
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
International Internet, Inc. (the "Company" or "IINN"), is a diversified holding
company which develops and operates Internet and direct retail marketing
companies and computer service providers on the Internet. The IINN Group
includes wholly owned subsidiaries; American Computer Systems ("ACS") (Notes 4,
9 and 12), StogiesOnline.com, Inc. (StogiesOnline.com) and WebHumidor.com Corp.
and majority owned subsidiaries, The BroadcastWeb.com, Inc.
(www.thebroadcastweb.com) and Mr. Cigar, Inc. ("Cigar"). In addition,
StogiesAuction.com is a joint venture between AuctionAnything.com, Inc. and
IINN. IINN was incorporated in Delaware on June 21, 1994.
MERGER
On November 26, 1999, International Internet, Inc. acquired 100% of the issued
and outstanding stock of Caprock Corporation, a Delaware corporation
("Registrant") ("Caprock") in exchange for 500,000 IINN common shares. As a
result of IINN's 100% ownership of the Registrant, the Board of Directors of
IINN, on December 1, 1999, with unanimous written consent, elected to merge the
Registrant into IINN pursuant to Section 253 of Delaware's General Corporate
Laws. As a result of the merger, IINN is the surviving company. Caprock was a
dormant company and its assets and liabilities were insignificant.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of International
Internet, Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue from sales of cigars over the Internet is recognized upon shipment (Note
4). Provision is made at the time the related revenue is recognized for
estimated product returns.
RISK AND UNCERTAINTIES
The Company is subject to all of the risks inherent in an early stage company in
the Internet industry. These risks include, but are not limited to, a limited
operating history, limited management resources, dependence upon consumer
acceptance of the Internet, Internet related security risks and the changing
nature of the electronic commerce industry. The Company's operating results may
be materially affected by the foregoing factors.
F-10
<PAGE> 30
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid short-term investments purchased with an original maturity of three
months or less to be cash equivalents.
INVESTMENT SECURITIES
Investments are classified into three categories as follows:
- Held-to-maturity securities reported at amortized cost;
- Trading securities reported at fair value with unrealized
gains and losses included in earnings;
- Securities available-for-sale reported at fair value with
unrealized gains and losses reported in other comprehensive
income.
INVENTORIES
Inventories are stated at the lower of cost or market determined by the
first-in, first-out method. Inventory consists of cigars and related
accessories.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over the assets' estimated useful lives.
GOODWILL
Goodwill represents the excess of the cost of the Company's interest in a
purchased subsidiary over the fair value of a proportionate share of its net
assets at the date of acquisition. Goodwill is being amortized using the
straight-line method over 15 years.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The new statement
requires all derivatives to be recorded on the balance sheet at fair value and
establishes new accounting rules for hedging instruments. The statement is
effective for years beginning after June 15, 2000 (as amended by SFAS 137). The
Company is assessing the impact this statement will have on the financial
statements.
F-11
<PAGE> 31
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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 reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted-average number of shares outstanding. Diluted net income (loss) per
share includes the dilutive effect of stock options.
STOCK BASED COMPENSATION
The Company measures stock based compensation expense for its stock based
employee compensation plan using the intrinsic value method (Note 8).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, accounts payable, and accrued
liabilities approximate fair value because of the short maturity of the
instruments and the provision, if any, for what management believes to be
adequate reserves for potential losses.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount.
CONCENTRATION OF CREDIT RISK
The Company at times has cash in banks in excess of FDIC insurance limits and
places its temporary cash investments with high credit quality financial
institutions.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-12
<PAGE> 32
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999:
<TABLE>
<CAPTION>
Lives
In Years
--------
<S> <C> <C>
Furniture $ 62,691 7
Transportation Equipment 20,029 5
Equipment 5,749 5
Leasehold Improvements 34,930 10
--------
123,399
Less: Accumulated Depreciation 26,190
--------
$ 97,209
========
</TABLE>
NOTE 3: MARKETABLE INVESTMENT SECURITIES
The amortized cost of investment securities as shown in the accompanying balance
sheet and their estimated market value at December 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
TRADING:
US Corporate Equity Securities $21,373 $756,067 $ $777,440
======= ======== ========== ========
</TABLE>
During 1999, IINN sold shares of equity investment securities for proceeds of
$3,437,369, realizing a gain of $3,428,741, based on the average cost method.
AVAILABLE FOR SALE:
At December 31, 1999, IINN held a security interest in GoldOnline International,
Inc. with a cost and approximate fair market value of $58,854.
NOTE 4: ACQUISITIONS AND VENTURES
Effective September 30, 1999, 100% of the outstanding common stock of American
Computer Systems, Inc. ("ACS") a Virginia Corporation, was acquired for
$150,000. ACS provides sales of computer hardware and software to government
agencies.
F-13
<PAGE> 33
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: ACQUISITIONS AND VENTURES (CONTINUED)
On June 14, 1999, 90% of the outstanding common stock of The BroadcastWeb
Network, Inc. ("BW") a Maine corporation, was acquired in exchange for $18,000
and 300,000 shares of the common stock of IINN. The BroadcastWeb Network, Inc.
is an aggregator and broadcaster of streaming media programming of the Web with
the network infrastructure to deliver or "stream" live and on-demand audio
programs over the Internet and Intranets.
The acquisitions were accounted for as purchases and accordingly, the operations
of ACS (Note 10) and BW have been included in the Company's financials since the
date of acquisition. The excess of the purchase price over the fair market value
of the assets acquired of approximately $49,240 for BW is being amortized over
15 years. The excess of the purchase price over the fair market value of the ACS
net assets acquired has been included in the determination of the discontinued
operations (Notes 9 and 12).
Prior to the acquisition of BW, BW did not have significant operations and
therefore pro-forma financial information has not been presented.
ACS has been treated as a discontinued operation (Notes 9 and 12) and as a
result pro-forma information has not been presented.
On February 3, 1999, GoldOnline.com, Inc. was incorporated by the Company in the
State of Delaware for the purpose of acquiring the domain name GoldOnline.com.
The domain name was acquired for $25,000 and 1,000,000 shares of the common
stock of IINN (Note 5).
On April 13, 1999, WebHumidor.com, Corp. was incorporated by the Company in the
State of Delaware for the purpose of acquiring the domain name WebHumidor.com
and is currently inactive. The domain name was acquired for $3,000 and 30,000
shares of WebHumidor.com, Corp. common stock and 100,000 shares of the common
stock of IINN.
On April 21, 1999, StogiesOnline.com, Inc. (formerly Stogies Worldwide, Inc.)
was incorporated by the Company in Delaware for the purpose of becoming an
online distributor and retailer of brand name cigars.
In April of 1999, IINN entered into a joint venture agreement with
AuctionAnything.com, Inc. to launch a cigar auction site, StogiesAuction.com.
The site is to offer 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.
On May 6, 1999, International E-Tail Group, Inc. was incorporated by the Company
under the laws of the State of Nevada and is currently inactive.
On May 6, 1999, International Internet Ventures I, LLC was organized as a
Delaware Limited Liability Company and is currently inactive.
F-14
<PAGE> 34
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: DIVESTITURES
On June 11, 1999, the Company sold 100% of its issued and outstanding stock in
GoldOnline.com, Inc. for 10,000,000 shares of the common stock of GoldOnline
International, Inc. resulting in no gain or loss
NOTE 6: INCOME TAXES
The tax effect of each type of temporary difference that gives rise to a
significant portion of deferred tax liabilities and the total deferred tax
liabilities as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Deferred Tax Liabilities:
<S> <C>
Property and Equipment $ 6,650
Unrealized Investment Gains 284,508
--------
$291,158
========
Deferred tax liabilities are reflected on the balance sheet at December 31, 1999
as follows:
Short-Term Deferred Tax Liability $284,508
Long-Term Deferred Tax Liabilities 6,650
--------
$291,158
========
The net decrease in the valuation allowance was approximately $344,000 for the
year ended December 31, 1999.
The components of income tax expense are as follows for the years ended December
31, 1999:
Current Tax Expense:
Federal $ 98,254
State 16,871
--------
115,125
Deferred Tax Expense: 291,158
--------
Total Income Tax Expense $406,283
========
</TABLE>
F-15
<PAGE> 35
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: INCOME TAXES (CONTINUED)
The provision for income taxes at the Company's effective tax rate differed from
the provision for income taxes at the statutory rate are as follow:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Provision Computed at Statutory Rate $ 714,600 $(219,100)
Reductions (Increases) in Taxes Resulting from:
State Income Taxes, Net of Federal
Income Tax Benefit 76,100
Utilization of Net Operating Loss Carryforward (344,000)
Valuation Allowance 219,100
Other Items, Net (40,417)
--------- ---------
$ 406,283 $
========= =========
</TABLE>
NOTE 7: COMMITMENTS
The Company has entered into two noncancelable leases in Boca Raton, Florida and
Bar Harbor, Maine and a month-to-month lease in Chantilly, Virginia for office
space. The Boca Raton, Florida lease provides for base monthly rentals of $1,769
plus the Company's proportionate share of certain expenses with 5% annual
increases through October 14, 2001 with a three-year option to renew at market
rates. The Bar Harbor, Maine lease provides for monthly rentals of $500 through
December 15, 2000, with a two-year option to renew. The month-to-month lease in
Chantilly, Virginia provides for monthly rentals at $2,250 per month.
Minimum future obligations over the term of the lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000 $28,469
2001 19,498
-------
$47,967
=======
</TABLE>
Rent expense for the years ended December 31, 1999 and 1998 aggregated $40,270
and $20,760, respectively.
F-16
<PAGE> 36
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: CAPITAL STRUCTURE
PREFERRED STOCK:
The Company has 10,000,000 shares of cumulative convertible preferred stock (par
value $.0001) authorized. The Board has the authority to issue the shares in one
or more series and to fix the designation, preferences, powers and other rights,
as it deems appropriate. No shares of preferred stock have been issued.
COMMON STOCK:
The Company has 1,000,000,000 shares of common stock (par value $.00001)
authorized. Common stock has one vote per share for the election of directors
and all other matters submitted to a vote of stockholders. Shares of common
stock do not have cumulative voting, preemptive redemption or conversion rights.
The Company at December 31, 1999 had reserved 2,000,000 shares of common stock
relating to unexpired options.
During the year ended December 31, 1999, the Company issued 6,195,087 shares for
cash at prices ranging from $.04 to $.07 per share.
During the year ended December 31, 1999, the Company issued 10,150,000 shares as
compensation for services rendered by various employees, consultants and
professionals. The Company, in recording the compensation, valued the shares at
$.0625 per share and reflected a discount of $.02 per share because of
restrictions on the sale and transfer of those shares. The excess of the
valuation over the par value has been recorded as an increase in additional paid
in capital.
STOCK OPTION PLAN
In November 1999, the Board of Directors approved the International Internet,
Inc. Stock Option Plan (the "Plan"), which was approved by a majority of the
shareholders at a meeting on November 11, 1999. The Company has reserved
25,000,000 shares of common stock for the grant of qualified incentive options
or non-qualified options to employees and directors of the Company or its
parents or subsidiaries, and to non-employee directors, consultants and advisors
and other persons who may perform significant services for or on behalf of the
Company under the Plan. Prices for incentive stock options must provide for an
exercise price of not less than 100% of the fair market value of the common
stock on the date the options are granted unless the eligible employee owns more
than 10% of the Company's common stock for which the exercise price must be at
least 110% of such fair market value. Non-statutory options must provide for an
exercise price of not less than 85% of the fair market value.
Pursuant to the Plan on November 11, 1999, the Company granted 2,916,670
non-qualified stock options and 6,583,330 incentive stock options to certain
directors, employees and consultants. The stock options were immediately
exercisable and the holders purchased 9,500,000 shares of the Company's common
stock at the exercise price of $.065 per share.
F-17
<PAGE> 37
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: CAPITAL STRUCTURE (CONTINUED)
For the year ended December 31, 1999, the Company recorded stock compensation
expense of $162,500 resulting from the issuance of non-qualified stock options
to non-employees.
A summary of the status of the Company's stock options as of December 31, 1999
and the changes during the year is presented below:
<TABLE>
<CAPTION>
1999
--------------------------
Weighted
Average
Exercise
Stock Options Shares Price
------------- ------ -----
<S> <C> <C>
Outstanding at Beginning of Year 0 $ 0
Granted 11,500,000 .07
Exercised 9,500,000 .065
Forfeited
---------- ------
Outstanding at December 31 2,000,000 $ .10
========== ======
</TABLE>
The following table summarizes information about incentive and stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------- ---------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise at December Contractual Exercise at December Exercise
Price 31, 1999 Life Price 31, 1999 Price
----- -------- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C>
Incentive Stock Options
$.10 2,000,000 5 $ .10 2,000,000 $ .10
</TABLE>
F-18
<PAGE> 38
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: CAPITAL STRUCTURE (CONTINUED)
The Company applied Accountant's Principles Board Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for the incentive stock options granted to employees under
its stock option plan in its statements of operations. Had the Company recorded
a charge for the fair value of options granted consistent with SFAS No. 123, the
pro forma amounts for net income and basic and diluted earnings per share are as
indicated below:
<TABLE>
<CAPTION>
Year Ended
1999
----
<S> <C>
Net Income as Reported $1,579,963
Pro Forma $1,459,963
Basic and Diluted Net Earnings Per Share:
As Reported $ (0.00)
Pro Forma $ (0.00)
</TABLE>
The weighted average fair value of options granted to employees was $0.06 in
1999. The fair value of each option was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate of 6.25%, dividend yield of 0%, an expected
life of five years, and a volatility factor of 167.5%.
On September 30, 1999, as part of an employment agreement, the Company granted
options to purchase 2,000,000 shares of the Companies common stock at an
exercise price of $.10 per share. The options vest on September 30, 2000
and expire on September 30, 2004.
NOTE 9: DISCONTINUED OPERATIONS
In December 1999, the Company reached an agreement to sell 80% of its wholly
owned subsidiary ACS to an ACS officer for $500,000 (Note 12). 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 (Note 4)
have been shown as discontinued operations. Summarized results of the
discontinued business are shown separately as discontinued operations in the
accompanying consolidated financial statements. The assets of discontinued
operations at December 31, 1999 consist of:
F-19
<PAGE> 39
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: DISCONTINUED OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Cash $ 109,108
Accounts Receivable 155,316
Property and Equipment, Net 20,954
Other Assets 162,287
---------
Total Assets 447,665
Liabilities 590,110
---------
Net Assets of Discontinued Operations $(142,445)
=========
Operating results of the discontinued segment including expenses associated with
the divestiture, are a follows:
1999
---------
Net Sales $ 233,637
=========
Loss Before Income Taxes (200,228)
Income Tax Benefit 84,807
---------
Net (Loss) from
Discontinued Operations $(115,421)
=========
Net Earnings Per Common Share:
Basic $ 0.00
========
Diluted $ 0.00
========
</TABLE>
NOTE 10: EARNINGS PER SHARE
Basic earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
The following reconciles amounts reported in the financial statements:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income (Loss) from Continuing Operations $ 1,695,384 $ (644,483)
Loss from Discontinued Operations (115,421)
------------- ------------
Net Income (Loss) $ 1,579,963 $ (644,483)
============ ============
</TABLE>
F-20
<PAGE> 40
INTERNATIONAL INTERNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
Denominator for Basic Earnings Per Share -
Weighted Average Shares 748,412,398 666,649,550
Effect of Dilutive Securities - Stock Options 504,110
------------ ------------
Denominator for Diluted Earnings Per Share -
Weighted Average Shares Adjusted for
Dilutive Securities 748,916,508 666,649,550
============ ============
Basic Earnings Per Common Share:
Earnings (Loss) from Continuing Operations $ 0.00 $ 0.00
Loss from Discontinued Operations 0.00 0.00
------------ ----------
Net Earnings (Loss) $ 0.00 $ 0.00
============ ==========
Earnings Per Common Share - Assuming Dilution:
Earnings (Loss) from Continuing Operations $ 0.00 $ 0.00
Loss from Discontinued Operations 0.00 0.00
------------ ----------
Net Earnings (Loss) $ 0.00 $ 0.00
============ ==========
</TABLE>
NOTE 11: CREDIT ARRANGEMENTS
The Company has a credit facility with a financial institution for $3,400,000
which bears interest at the 30-day Dealer Commercial Paper Rate plus 2.3%. At
December 31, 1999, no amounts have been drawn against this line. This facility
is subject to normal banking terms and conditions and requires compensating
balances not less than 115% of the maximum line of credit and requires an annual
commitment fee of $17,000.
NOTE 12: SUBSEQUENT EVENTS
Effective April 3, the Company sold 80% of its holdings in its wholly owned
subsidiary, ACS, for $500,000. The Company expects to record a pre-tax gain of
approximately $190,000. The Company plans to account for its minority investment
in ACS under the cost method.
On March 15, 2000, the Company issued 11,000,000 shares of common stock for
$.375 per share, along with warrants to purchase 2,200,000 at $1.50 per share.
The net proceeds amounted to $4,001,250.
F-21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,737,537
<SECURITIES> 836,294
<RECEIVABLES> 34,098
<ALLOWANCES> 0
<INVENTORY> 97,934
<CURRENT-ASSETS> 4,184,014
<PP&E> 123,399
<DEPRECIATION> 26,190
<TOTAL-ASSETS> 4,339,428
<CURRENT-LIABILITIES> 1,059,934
<BONDS> 0
0
0
<COMMON> 7,674
<OTHER-SE> 3,272,844
<TOTAL-LIABILITY-AND-EQUITY> 4,339,428
<SALES> 1,001,587
<TOTAL-REVENUES> 1,001,587
<CGS> 790,646
<TOTAL-COSTS> 790,646
<OTHER-EXPENSES> 2,330,971
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,101,667
<INCOME-TAX> 406,283
<INCOME-CONTINUING> 1,695,384
<DISCONTINUED> (115,421)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,579,963
<EPS-BASIC> 0.002
<EPS-DILUTED> 0.002
</TABLE>
