U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] NINE MONTHS REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the nine month period ended September 30, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from ____________ to ____________
Commission File No. 0-23806
I/NET, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 87-0046720
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
643 Crosstown Parkway
Kalamazoo, Michigan 49008
(Address of Principal Executive Officers)
Issuer's Telephone Number: (616) 344-3017
Indicate by check mark whether the Issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for 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.
(1) Yes X No (2) Yes X No
State the number of shares outstanding of each of the Issue's classes of
common equity, as of the latest practicable date:
September 30, 1996
30,837,652
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. The consolidated financial statements included
herein have been prepared by I/NET, Inc. without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. It is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in I/NET's 1995
annual report on Form 10-KSB.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of September 30, 1996, the results of its operations
for the nine month periods ended September 30, 1996 and 1995, and its cash flows
for the nine month period ended September 30, 1996. All such adjustments are of
a normal and recurring nature.
I/NET, Inc.
Consolidated Statements of Operations
(unaudited)
-------------------------------------
Nine Months Ending
-------------------------------------
September 30 September 30
1996 1995
----------------- -------------------
Revenues $ 596,702 $ 983,894
Cost of Revenues 536,574 627,787
------- -------
Gross Profit $ 60,128 $ 300,107
Selling, General, and Administrative Expenses 631,139 783,470
Special Charge (note 11) _ 1,318,262
--------- ---------
Loss from operations (571,011) (1,801,625)
Interest Expense - Net of interest income of
$12,403 in 1996 and $6,978 in 1995 (84,704) (132,019)
------- --------
Net Loss $ (655,715) $ (1,933,644)
=========== ===============
Net Loss
Per Share $ (.02) $ (0.16)
=========== ===============
Weighted average shares outstanding 29,061,362 12,374,389
========== ==========
See accompanying summary of accounting policies and notes
to consolidated financial statements
<PAGE>
I/NET Inc.
Consolidated Balance Sheet
(unaudited)
September 30
1996
Assets (Note 2)
Current Assets
Cash $ 1,740
Prepaid Expenses 22,250
------
Total Current Assets $ 23,990
Office Furniture and Equipment, Net of
Accumulated Depreciation of $473,434 71,511
------
Total Assets 95,501
======
Liabilities and Stockholders' Equity (Capital Deficit)
Current Liabilities
Current maturities of long-term debt (Note 2) $ 1,003,615
Accounts Payable 359,411
Accruals 281,980
Advances from Stockholders' (Note 1) 119,778
-------
Total Current Liabilities $ 1,764,784
Long-Term Debt, less current maturities (Note 2) 51,213
------
Total Liabilities $ 1,815,997
Commitments and Contingencies (Notes 7 and 10) -
Stockholders' Equity (Capital Deficit)
Common Stock $.001 par value; Authorized 50,000,000 shares;
Issued and outstanding 30,837,652 30,838
Additional Paid in Capital 11,836,874
Deficit (13,588,208)
-----------
Total Stockholders' Equity (Capital Deficit) (1,720,496)
Total Liabilities and Stockholders'
Equity (Capital Deficit) $ 95,501
=================
See accompanying summary of accounting policies and notes to
consolidated financial statements
I/NET Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ending
----------------------------------
September 30 September 30
1996 1995
----------------------------------
Operating Activities
Net Loss $ (655,715) $ (1,933,644)
Depreciation and Amortization 27,339 74,869
Special Charge (note 11) - 1,318,262
Provisions for bad debt - 214,805
Changes in Assets and Liabilities -
Accounts Receivable 52,300 43,236
Inventory - 20,226
Prepaid (22,250) 40,543
Accounts Payable 452 51,402
Accruals 23,856 199,268
------ -------
Cash (Used In) Provided by Operating Activities (574,018) 28,967
-------- ------
<PAGE>
Investing Activities
Proceeds from Note Receivable 30,000 67,600
Developed computer Software - (44,752)
Capital Expenditures (13,708)
Cash Provided by Investing Activities 16,292 22,848
------ --------
Financing Activities
Advances from Stockholder - 8,500
Proceeds from issuance of notes payable - 100,000
Principle Payments on Long-Term Debt (123,362) (173,958)
Cash (Used in) Financing activities (123,362) (65,458)
(Decrease) in Cash and Cash Equivalents (681,088) (13,643)
Cash and Cash Equivalents, Beginning of Period 682,828 17,118
-------- ------
Cash and Cash Equivalents, End of Period $1,740 $ 3,475
====== ========
See accompanying summary of accounting policies and notes to
consolidated financial statements
I/NET, Inc.
Summary of Accounting Policies
DESCRIPTION OF BUSINESS
- -----------------------
The Company is engaged in the business of providing a wide range of contract
research systems planning,development and implementation services, on a fee
basis, to public and private sector clients.The Company also develops Internet
computer software products. Its major customer during 1995 was International
Business Machines(IBM). Its major customer during the first nine months of
1996 is International Marketing Strategies (IMS).
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
- -------------------------
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less to be
cash equivalents.
OFFICE FURNITURE, EQUIPMENT, AND DEPRECIATION
- ---------------------------------------------
Office furniture and equipment are stated at cost. Depreciation is computed
principally by the straight-linemethod for financial reporting purposes over
the estimated useful lives of the assets and by accelerated methods
for tax purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The Company's financial instruments consist of cash, notes payable, accounts
payable and long-term debt. Due to the short-term nature of the items, other
than long-term debt and the variable interest rates on a substantial portion
of the long-term debt, management estimates that the carrying amounts of the
Company's financial instruments approximate their fair values at
September 30, 1996.
<PAGE>
TAXES ON INCOME
- ---------------
Deferred income taxes are recorded to reflect the future tax consequences of
temporary differences between the tax bases of assets and liabilities and
their financial reporting amounts.
ADVERTISING COSTS
- -----------------
The Company expenses the cost of advertising as incurred. Advertising expenses
were approximately $11,000 and $46,000 for the nine months ended September 30,
1996 and 1995 respectively.
LOSS PER SHARE
- --------------
Loss per share amounts have been calculated using the weighted average number of
common shares outstanding, for the respective periods. The antidilutive effect
of the Company's outstanding options and warrants is excluded from the loss per
share calculations.
RECLASSIFICATION
- ----------------
Certain prior year amounts have been reclassified to conform to current year
presentation.
I/NET, Inc.
Notes to Consolidated Financial Statements
1. Advances from Stockholders
Advances from stockholders as of September 30, 1996 consists of:
Non-interest bearing notes payable to stockholders, due on demand. $ 29,278
Stockholders' advances bearing interest at the prime rate plus 2%
(effectively 10.25% at September 30, 1996), due on demand. 90,500
------
$ 119,778
=========
2. Long-Term Debt
Long -Term Debt as of September 30, 1996, consists of:
Unsecured Notes Payable to Vendors (see below). $ 865,929
Note payable to bank with monthly payments of $5,000,
including interest at 1.5% above the bank's prime rate with
final payment due in December 1997. The note is collaterized
by all of the Company's assets
63,899
Unsecured Note, with minimum monthly payments of $1,500
including interest at the prime rate
with the balance due February 15, 1997.
125,000
-------
1,054,828
Less current maturities 1,003,615
---------
Total Long Term Debt $ 51,213
=========
Notes payable to various vendors totaling $865,929 are due in various
installment amounts and at varying interest rates.
Two notes totaling $440,655 are due on demand. These notes bear interest at the
prime rate plus 2%.Two notes totaling $369,667 are due in monthly installments
at the rate of 5% of the previous month's cash receipts (as defined) but at a
minimum of $2,000 bi-monthly for each note.The remaining principal balance of
these notes was due in September, 1996. The Company is in default on the
repayment of these notes and is renegoiating alternative repayment terms with
the noteholders. These notes bear interest at the rates of 8% and 10.25%.
Another vendor note in the amount of $55,607 is due in monthly installments of
5% of the previous month's cash receipts (as defined) but at a minimum rate of
$2,000 bi-monthly and bears interest at the prime rate plus 2%. Final payment,
assuming minimum payments only, is due September 2005.
Aggregate maturities of long-term debt over the next five years assuming
repayment of stockholders' advances
(Note 1) and notes are as follows:
1996 $1,126,000 1998 $6,000 2000 $8,000
1997 $ 28,000 1999 $7,000
<PAGE>
3.STOCK WARRANTS
During prior years, the Company sold and issued approximately 6,000,000 shares
of its common stock for cash, trademark, and extinguishment of debt. In
connection with these issuances, the Company issued warrants to the purchasers
of the common stock to acquire up to 2,039,285 shares of common stock at prices
ranging from $0.25 to $2.40 per share. These warrants are exercisable for three
years and expire in 1997. In connection with these sales, underwriters were
also issued warrants for 1,141,714 shares of common stock at prices ranging from
$0.60 to $1.57 and are exercisable for five years, expiring in 1999. All
warrants were exercisable at September 30,1996.
4.RELATED PARTY TRANSACTION/MAJOR CUSTOMERS
The Company provided $600,000 of services for the nine months ended
September 30, 1995, for a stockholder.
5.TAXES ON INCOME
Income taxes are calculated using the liability method specified by the
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." The Company has deferred tax assets related to its net
operating loss and tax credit carryforwards in addition to other items. In
accordance with the provisions of SFAS No. 109, management has recorded a
valuation allowance equal to the net deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets as of September 30, 1996
as follows:
Deferred tax assets:
Deferred revenue $ 14,000
Depreciation and amortization 13,000
Net operating loss carryforwards 2,828,000
Stock award 888,000
Trademark 100,000
Tax credit carryforwards 49,000
Capital loss carryforwards 26,000
------
Total deferred tax assets 3,918,000
Valuation allowance (3,918,000)
----------
$ -0-
=======
As of September 30, 1996, the Company has a net operating loss carryforward of
approximately $7,800,000 and investment tax credit carryforward of approximately
$49,000 available to reduce future taxable income and taxes,respectively.These
carryforwards expire from 1998 through 2010.
6.EMPLOYEE BENEFIT PLAN
The Company has a profit sharing and defined contribution pension plan covering
substantially all employees.Under the plan, employees may make tax deferred
voluntary contributions which, at the discretion of the Company's Board of
Directors, may be matched within certain limits by the Company. In addition,
the Company may make additional discretionary contributions to the plan as
profit sharing contributions. All contributions to the plan are limited by
applicable Internal Revenue Code regulations. There were no Company
contributions charged against operations for the nine months ended September 30,
1996 and 1995.
<PAGE>
7.OPERATING LEASES
The Company leases its facilities and certain equipment under non-cancelable
operating leases. All current leases expire through September 2001. Rental
expense under these leases was approximately $116,000 for the nine months ended
September 30, 1996 and $102, 000 in 1995. Future minimum annual payments for
the years subsequent to September 30, 1996 are as follows:
1997 $88,000 1998 $86,000 1999 84,000 2000 $80,000 2001 $59,000
8.INCENTIVE STOCK OPTION PLAN
The Company maintains an incentive stock option plan that provides for the
granting of options to officers and other key employees at an exercised price
not less than 100% of the fair market value on the date of the grant.Twenty
percent of the options become exercisable each year following the date they are
granted, and can remain outstanding for five years following the day they become
fully vested. Changes in options outstanding are summarized as follows.
Option Price
Shares Per Share
January 1, 1995 351,913 $ 0.18 - $2.50
Lapsed (212,477) $ 0.18 - $2.50
- ------------------------------ ------------------ ---- -------------------
December, 1995 and
September 30, 1996 139,436 $ 0.18 - $2.50
- ------------------------------ ------------------ ---- -------------------
At September 30, 1996, 582,255 shares of common stock are reserved for the
incentive stock option plan and 110,936 options were exercisable.
9. Supplemental Disclosure of Cash Flow Information
Non-cash investing and financing activities are summarized as follows:
1996 1995
- ---------------------------------------------- ------------------ --------------
Issuance of common stock for
retirement of debt $ - $ 497,000
- ---------------------------------------------- ------------------ --------------
Conversion of accounts payable into
vendor notes payable $ - $ 1,417,000
- ---------------------------------------------- ------------------ --------------
Conversion of accounts payable into
common stock $ - $ 15,000
- ---------------------------------------------- ------------------ --------------
Interest paid for the nine months ended September 30, 1996 and 1995 was $7,000
and $11,000 respectively
10.LITIGATION
The Company is involved in various legal actions arising from the normal cause
of business. Management does not anticipate any material losses as a result of
these proceedings.
<PAGE>
11.SPECIAL CHARGES
During the nine months ended September 30, 1995, it was determined that the
Company would not be able to provide the additional funding necessary to develop
,market, deploy and maintain its previously capitalized computer software
product named Embarc. This failure to obtain financing has resulted in the
write-off of the development costs of the product in the amount of $1,318,262.
12.MANAGEMENT'S DISCUSSION AND ANALYSIS
Calendar Nine Months Ended September 30, 1996 and 1995.
Results of Operations
The Company's revenues for the Nine months ended September 30, 1996 totaled
$484,180 compared to $676,446 for the same period in 1995. The completion of a
contract for IBM in December 1995 was the reason for this decline. The
Company's main source of revenues for the first nine months ended September 30,
1996 is the sale of its WebServer products which were not available for sale
during the nine months ended September 30, 1995. The Company is currently
negotiating a new contract with IBM for 1997 in which it will develop Internet
products for IBM. The Company has taken dramatic costs reduction measures,
including the closing of its Phoenix office as well as reducing the number of
personnel from 45 to 13. Knowing cost cutting alone would not sustain the
Company, I/NET has developed various Internet products for the IBM AS/400.
Its Webserver/400 and Webulator/400 were introduced in September 1996. Commerce
Server/400 was available in August of 1996. This product will provide
the ability to conduct secured, encrypted financial and other transactions over
the Internet and World Wide Web. It has enlisted distributors for these
products and a related suite of products which are currently under development.
The Company is targeting minimums revenues of $1,800,000 over the next 12
months from the sale of these products.
Company cost of revenues for the nine months ended September 30, 1996 totaled
$536,574. For the 1995 nine month period, the Company's costs of revenues were
$627,787. The Company's selling, general, and administrative expenses were
$631,139 for the nine months ended September 30, 1996, compared with $783,470
for the nine months ended September 30, 1995. The decrease in cost of revenue
is attributed to the closing the Phoenix office and the reduction of production
employees during the nine months ended September 30, 1995. The decrease in
selling,general, and administrative personnel, is due to the closing of the
Phoenix office and the reduction of administrative personnel. Net interest
expenses decreased to $ 87,704 for the nine months ended September 30,1996,
from $132,019 nine months ended September 30, 1995 due to the conversion of
notes payable to vendors during February, 1995 into common stock and the
continued timely repayment of its long-term debt.
13.FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1996, the Company had unrestricted cash in the amount of $1,740
was compared with unrestricted cash of $3,475 at September 30, 1995. Operating
activities for the period used $574,018 in 1996, as compared to cash provided of
$28,967 in 1995.
The Company believes that if minimum sales volumes are reached under its
distribution agreements, together with sales of additional products and services
and a renegotiation of its debt into more favorable repayment terms,there should
be sufficient funds for its working capital requirements for the next twelve
months. Management believes that it has developed the products and put together
the marketing strategies and alliances to return the Company to profitability.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following person on behalf of the
registrant and in the capacities and on the dates indicated:
I/NET, Inc.
Date:11/15/96 By: /s/ Stephen J. Markee
Stephen J. Markee, Director, President, CEO and CFO
<PAGE>
PERIOD-TYPE 9-MOS
FISCAL-YEAR - END DEC-31-1996
PERIOD-END SEP-30-1996
CASH 1,740
SECURITIES 0
RECEIVABLES 0
ALLOWANCES 0
INVENTORY 0
CURRENT-ASSETS 23,990
PP&E 544,945
DEPRECIATION 473,434
TOTAL-ASSETS 95,501
CURRENT-LIABILITIES 1,764,784
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 30,838
OTHERSE 11,836,874
TOTAL-LIABILITY-AND -EQUITY 95,501
SALES 596,702
TOTAL REVENUES 596,702
CGS 536,574
OTHER EXPENSES 631,139
LOSS-PROVISION 0
INTEREST-EXPENSE 84,704
INCOME-PRETAX (655,715)
INCOME-TAX 0
INCOME-CONTINUING (655,715)
DISCONTINUED 0
EXTRAORDINARY 0
0
CHANGES 0
NET-INCOME (655,715)
EPS-PRIMARY (.02)
EPS-DILUTED (.02)
