12
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] SIX MONTHS REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the six month period ended June 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
<PAGE>
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Not Applicable.
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
June 30, 1996
30,837,652
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The Financial Statements of the Registrant required to be filed with this 10-QSB
Six Months Report for the period ended June 30, 1996, were prepared by
management, and commence on the following page, together with Related Notes. In
the opinion of management, the Financial Statements fairly represent the
financial condition of the Registrant.
<PAGE>
I/NET, Inc.
Consolidated Statements of Operations
(unaudited)
-------------------------------
Six Months Ending
-------------------------------
June 30 June 30
1996 1995
----------- -------------
Revenues $ 484,180 $ 676,446
Cost of Revenues 365,302 437,719
Gross Profit 118,878 238,727
Selling, General, and Administrative Expenses 409,670 505,551
Loss from operations (290,792) (266,824)
Interest Expense - Net of interest income of
$11,303 in 1996 and $3,778 in 1995 (54,155) (94,403)
Net Loss $ (344,947) $ (361,227)
Net Loss
Per Share $ (0.01) $ (0.03)
Weighted average shares outstanding 24,628,717 12,008,075
See accompanying summary of accounting policies and notes to consolidated
financial statements
<PAGE>
I/NET Inc.
Consolidated Balance Sheet
(unaudited)
June 30
996
------------
Assets (Note 2)
Current Assets
Cash $ 278,342
Prepaid Expenses 44,750
Total Current Assets 323,092
Office Furniture and Equipment, Net of
Accumulated Depreciation of $464,321 80,624
Total Assets $ 403,716
Liabilities and Stockholders' Equity (Capital Deficit)
Current Liabilities
Current maturities of long-term debt (Note 2) $ 1,018,491
Accounts Payable 337,506
Accruals 252,140
Advances from Stockholders' (Note 1) 119,778
Total Current Liabilities 1,727,915
Long-Term Debt, less current maturities (Note 2) 85,528
Total Liabilities $ 1,813,443
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 (13,277,439)
Total Stockholders' Equity (Capital Deficit) (1,409,727)
Total Liabilities and Stockholders' Equity (Capital Deficit) $ 403,716
See accompanying summary of accounting policies and notes to consolidated
financial statements
<PAGE>
I/NET Inc.
Consolidated Statements of Cash Flows
(unaudited)
-----------------------------
Six Months Ending
-----------------------------
June 30 June 30
1996 1995
------------- -------------
Operating Activities
Net Loss $ (344,947) $ (361,227)
Depreciation and Amortization 18,226 51,057
Changes in Assets and Liabilities
Accounts Receivable 52,300 23,096
Inventory - 20,226
Prepaid Expenses and other asset (44,750) 27,003
Accounts Payable (21,452) 18,906
Accruals (5,984) 243,621
Cash (Used In) Provided by Operating Activities (346,607) 22,682
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 (74,171) (169,083)
Cash (Used in) Financing activities (74,171) (60,583)
(Decrease) in Cash and Cash Equivalents (404,486) (15,053)
Cash and Cash Equivalents, Beginning of Period 682,828 17,118
Cash and Cash Equivalents, End of Period $ 278,342 $ 2,065
See accompanying summary of accounting policies and notes to consolidated
financial statements
<PAGE>
I/NET, Inc.
Summary of Accounting Policies
Description of the 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 six 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-line method 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 June 30, 1996.
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 six months ended June 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.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
1. ADVANCES FROM STOCKHOLDERS
Advances from stockholders as of June 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 June 30, 1996),
due on demand. 90,500
------
$ 119,778
2. LONG-TERM DEBT
Long -Term Debt as of June 30, 1996, consists of:
Unsecured Notes Payable to Vendors (see below). $ 891,929
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. 77,090
Unsecured Note payable for a trademark, with minimum
monthly payments of $1,500 including interest at the
prime rate with the balance due February 15, 1997. 135,000
1,104,019
---------
Less current maturities 1,018,491
---------
Total Long Term Debt $ 85,528
==========
Notes payable to various vendors totaling $891,929 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 $386,667 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 with the remaining principal balance due in
September 1996. These notes bear interest at the rates of 8% and 10.25%.
Another vendor note in the amount of $64,607 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 $1,138,000 1998 $ 6,000 2000 $ 8,000
1997 $ 28,000 1999 $ 7,000
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 June 30, 1996.
4. RELATED PARTY TRANSACTION/MAJOR CUSTOMERS
The Company provided $600,000 of services for the six months ended June 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.
<PAGE>
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 June 30, 1996 as follows:
Deferred tax assets:
Deferred revenue $ 14,000
Depreciation and amortization 13,000
Net operating loss carryforwards 2,520,000
Stock award 893,000
Tax credit carryforwards 49,000
Capital loss carryforwards 24,000
------
Total deferred tax assets 3,513,000
---------
Valuation allowance (3,513,000)
----------
$ -0-
===========
As of June 30, 1996, the Company has a net operating loss carryforward of
approximately $7,000,000 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 six months ended June 30, 1996 and 1995.
7. OPERATING LEASES
The Company leases its facilities and certain equipment under non-cancelable
operating leases. All current leases expire by February 28, 1997. Rental expense
under these leases was approximately $83,000 for the six months ended June 30,
1996 and $102, 000 in 1995. Future minimum annual payments for the year
subsequent to June 30, 1996 are $52,000.
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
June 30, 1996 139,436 $0.18 - $2.50
----------------------- ----------- --------------
At June 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:
Interest paid for the six months ended June 30, 1996 and 1995 was $5,000
and $11,000 respectively. During the six months ended June 30, 1995,
$14,723 of accounts payable were converted into common stock.
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.
11. MANAGEMENT'S DISCUSSION AND ANALYSIS
Calendar Six Months Ended June 30, 1996 and 1995.
Results of Operations
The Company's revenues for the six months ended June 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 six months ended June 30, 1996 is the sale of
its Web Server products which were not available for sale during the six months
ended June 30, 1995. The Company is currently negotiating a new contract with
IBM for the remainder of 1996 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 14.
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 products were introduced to the market in August of 1995. Its
Commerce Server/400 will be available in August of 1996. This latter 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 six months ended June 30, 1996 totaled
$365,302. For the 1995 six month period, the Company's costs of revenues were
$437,719. The Company's selling, general, and administrative expenses were
$409,670 for the six months ended June 30, 1996, compared with $505,551 for the
six months ended June 30, 1995. The decrease in cost of revenue is attributed to
the closing the Phoenix office and the reduction of production employees during
the six months ended June 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
$54,155 for the six months ended June 30, 1996, from $94,403 for the six months
ended June 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.
12. FINANCIAL CONDITION AND LIQUIDITY
At June 30, 1996, the Company had unrestricted cash in the amount of $278,342 as
compared with unrestricted cash of $2,065 at June 30, 1995. Operating activities
for the period used $346,607 in 1996, as compared to cash provided of $22,682 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.
<PAGE>
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: August 14, 1996 By: /s/ Stephen J. Markee
-------------------------------
Stephen J. Markee, Director, President,
CEO and CFO
