U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the three month period ended March 31, 1997
[ ] 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 wasrequired 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>
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
March 31, 1997
30,837,652
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 1996 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 March 31, 1997, the results of its
operations for the three month periods ended March 31, 1997 and 1996, and its
cash flows for the three month period ended March 31, 1997. All such adjustments
are of a normal and recurring nature .
<PAGE>
I/NET, Inc.
Consolidated Statements of Operations
(unaudited)
Three Months Ending
-------------------
March 31 March 31
1997 1996
---- ----
Revenues $ 269,648 $ 205,789
Cost of Revenues 130,950 176,570
------- -------
Gross Profit $ 138,848 $ 29,219
Selling, General, and Adminstrative Expenses 186,052 205,943
Loss from operations $ (47,204) $ (176,774)
Interest Expense - Net of interest income
of $270 n 1997 and $8,929 in 1996 (26,725) (24,071)
Loss before Extraordinary Item $ (73,929) $ (200,845)
Extraordinary item:
Gain on extinguishment of debt (notes 3 and 6) 97,946 -
Net Earnings (Loss) $ 24,017 $ (200,845)
============ =============
Net Earnings (Loss)per share
Earnings (loss) before extraordinary item $ - $ (0.01)
Extraordinary item $ - $ -
Net Earnings (Loss) per share $ - $ (0.01)
============ ============
Weighted average shares outstanding 30,837,652 21,485,547
<PAGE>
I/NET Inc.
Consolidated Balance Sheet
(unaudited)
March 31
1997
---------------------
Assets (Note 2 and 3)
Current Assets
Cash $ 3,510
Accounts Receiveable - Trade 79,717
Total Current Assets $ 83,227
Office Furniture and Equipment, Net of
Accumulated Depreciation of $490,053 54,892
Total Assets $ 238,119
Liabilities and Stockholders' Equity (Capital Deficit)
Current Liabilities
Current maturities of long-term debt (Note 3) $ 756,472
Accounts Payable 238,996
Accruals:
Commissions (Note 1) 250,000
Other 192,407
Advances from Stockholders' (Note 2) 169,778
-------
Total Current Liabilities $ 1,607,653
Long-Term Debt, less current maturities (Note 3) 803,281
-------
Total Liabilities $ 2,410,934
Commitments and Contingencies (Notes 8 and 11)
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 (14,040,527)
-----------
Total Stockholders' Equity (Capital Deficit) (2,172,815)
----------
Total Liabilities and Stockholders' Equity (Capital Deficit) $ 238,119
============
See accompanying summary of accounting policies and notes to
consolidated financial statements
<PAGE>
I/NET Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ending
--------------------------------
March 31 March 31
1997 1996
---- ----
Operating Activities
Net Earnings (Loss) $ 24,017 $ (200,845)
Depreciation and Amortization 7,500 9,113
Changes in Assets and Liabilities
Accounts Receivable (150,735) 45,087
Accounts Payable 96,391 (25,623)
Accruals 60,451 (34,324)
------ -------
Cash (Used In) Operating Activities $ (83,278) $ (206,592)
Investing Activities
Proceeds from Note Receivable - 15,000
Capital Expenditures - (13,708)
-------
Cash Provided by Investing Activities $ - $ 1,292
Financing Activities
Advances from Stockholder 50,000 -
Proceeds from issuance of notes payable 50,000 8,500
Principle Payments on Long-Term Debt (33,724) (47,298)
------- -------
Cash Provided By (Used In)
Financing activitivities $ 66,271 $ (47,298)
------ -------
(Decrease) in Cash and Cash Equivalents $ (17,007) $ (252,598)
Cash and Cash Equivalents, Beginning of Period 20,517 682,828
------ -------
Cash and Cash Equivalents, End of Period $3,510 $ 430,230
====== ===============
See accompanying summary of accounting policies and notes to
consolidated financial statements I/NET, Inc.
<PAGE>
Summary of Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company,
I/NET, Inc., (a Delaware Corporation) and its wholly owned subsidiary INET, Inc.
(a Michigan Corporation). Only the subsidiary remains an active Company and
therefore the consolidated financial statements presented within are those of
the subsidiary.
Description of the Business
The Company is engaged in the business of providing website consulting services
and development on a contract basis to private sector clients. In addition, the
company, during 1996 further developed and began to market Internet computer
software products. It's major customers are International Marketing Strategies
(IMS) and International Business Machines (IBM). (See Note 5)
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.
<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.
Developed Computer Software
Software development costs are accounted for in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for
the Cost of Computer Software To Be Sold, Leased or Otherwise Marketed" Software
development costs and certain product enhancements, when significant, are
capitalized subsequent to the establishment of technological feasibility for the
product and prior to the product's general release to customers. Costs incurred
prior to technological feasibility or subsequent to the product's general
release to customers, as well as selling, general, and administrative costs
associated with the products, are expensed as incurred.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, receivables, 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 March 31,
1997.
Revenue Recognition
Revenues from the sale of the Company's Internet products are recognized when
the product has been accepted by the customer. The Company records revenue for
its long-term contracts on the percentage-of-completion basis. Under this
method, revenues are determined by comparing costs incurred to date to the
estimated total costs for the contract. The proportionate amounts of contract
revenue are then recorded based on this percentage of completion of costs.
Earnings (Loss) Per Share
Earnings (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 earnings (loss) per share calculations as they are not
material to the calculation..
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
1. Commissions
During 1996, the Company agreed to release a distributor from it's
exclusive contract to distribute certain I/NET products. In exchange for
this release, I/NET agreed to pay a commission to the distributor of 7.5%
of sales of certain I/NET products sold through September 30, 1999 but at a
minimum amount of $250,000 and a maximum amount of $500,000. A commission
payable amount of $250,00 has been recorded as of March 31, 1997 as there
has not been any commissionable sales of these products to date.
2. Short Term Advances from Stockholders
Advances from stockholders consist of:
Non-Interest bearing notes payable to stockholders,
due on demand $29,278
Secured stockholders' advances bearing interest at 8% and
are due on demand $140,500
- --------------------------------------------------------------------------------
$169,778
================================================================================
3. Long Term Debt
Long - term debt consists of:
Notes payable to vendors (see below) $1,139,020
Notes payable to bank with monthly payments of $5,000, including interest
at 1.5% above the bank's prime rate (effectively 9.75% at March 31, 1997)
with final payment due in December, 1997. The note is collateralized by
all of the Company's assets
$36,500
Secured notes payable to stockholders bearing interest at 8% and due in
February 2002
$350,000
-------------------------------------------------------------------------
Less current maturities 1,559,753
756,472
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Long - Term Debt $803,281
-------------------------------------------------------------------------
Unsecured notes payable to various vendors totaling $1,139,020 are due in
various installments and at varying interest rates.
<PAGE>
Two notes totaling $440,655 are due on demand. These notes bear interest at
the prime rate plus 2%.
Another note in the amount of $155,849 is due in monthly installments at
the rate of 5% of the previous months cash receipts (as defined) but at a
minimum of $2,000 bi-monthly. The principle balance of this note was due in
September, 1996. The Company is in default on the repayment on this note
but continues to make repayments as required by the original note. This
note bears interest at 8% as is classified as short term debt.
During March 1997, the Company reached agreement with a vendor on a
previously defaulted note in the amount of $279,158 together with accrued
interest in the amount of $24,784. The new agreement in the amount of
$303,942, calls for monthly installments of 5% of the previous months cash
receipts ( as defined ) but at a minimum rate of $10,000 bi-monthly and
bears interest at the prime rate plus 2%. Final payment, assuming minimum
payments only, is due in May 2004.
Another vendor note in the amount of $58,273 is due in monthly installments
of 5% of the previous month's cash receipts ( as defined) but at minimum of
$2,000 bi-monthly and bears interest at the prime rate plus 2%. Final
payment, assuming minimum payments only, is due February 2004.
Another vendor note in the amount of $34,233 is due in monthly installments
of $2,998 including interest at 11%. Final payment is due March 1998.
During March 1997, the Company entered into an agreement with a note holder
to form a joint venture. I/NET will contribute a previously written-off
technology together with a trademark and web presence in exchange for the
forgiveness of $97,946 of indebtedness and the repayment of the remaining
portion of the note totaling $32,000 in four equal monthly installments of
$8,000 commencing May 1, 1997. The noteholder is required to contribute
cash and marketing expertise to this newly formed joint-venture. This
$97,946 has been treated as an extraordinary item for financial statement
purposes.
Another vendor note in the amount of $148,601 is due in monthly
installments of 5% of the previous month's cash receipts (as defined) but
at a minimum rate of $3,000 monthly and bears interest at 10%. Final
payment, assuming minimum payments only, is due July 2002.
<PAGE>
Aggregate maturities of long- term debt over the next five years assuming
repayment of stockholders' advances (Note 2) and notes are as follows:
1997 $ 926,000
1998 $ 65,000
1999 $ 72,000
2000 $ 79,000
2001 $ 88,000
Subsequent to 2001 $ 500,000
4. 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 the 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 $.25 to $2.40 per share. The warrants expire
during 1997. In connection with these sales, underwriters were also issued
warrants for 1,145,714 shares of common stock at prices ranging from $0.29
to $2.10 and are exercisable for five years, expiring in 1999. All warrants
were exercisable at March 31, 1997.
5. Related Party Transactions/Major Customers
The Company provided Internet software products, and website consulting
services to a few major customers as follows:
--------------------------------------------------------------------
Internet Products
International Marketing Strategies - (IMS) $ 80,000
SUPPORT NET, INC. $ 20,000
HBO & Company $ 61,000
----------------------------------------------------- --------------
$ 161,000
----------------------------------------------------- --------------
Websight Consulting Services
International Business Machines (IBM) $ 100,000
--------------------------------------------------------------------
IBM is also a minority stockholder in the Company, and $100,000 was due
from it as of March 31, 1997.
<PAGE>
6. Taxes on Income
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying mounts 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 March 31,
are as follows:
Deferred Tax Assets:
Accruals $ 99,000
Depreciation and amortization 12,000
Trademark 66,000
Net operating loss carryforwards 3,616,000
Tax credit carryforwards 42,000
Capital loss carryforwards 24,000
--------------------------------------------------- -------------------------
Total Deferred Tax Assets 3,859,000
Valuation Allowance (3,859,000)
--------------------------------------------------- -------------------------
$-0-
--------------------------------------------------- -------------------------
As of March 31, 1997, the Company had a net operating loss carryforward of
approximately $10,635,000 and investment tax credit carryforwards of
approximately $42,000 available to reduce future taxable income and taxes,
respectively. Accordingly, an income tax provision is not recorded for the
three month period ended March 31, 1997. These carryforwards expire from
1998 through 2011.
7. 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
in 1997.
<PAGE>
8. Operating Leases
The Company leases its facilities and certain equipment under
non-cancelable operating leases. Rental expense under these leases was
approximately $20,000 for three months ended March 31, 1997 and $37,000 in
1996. Future minimum annual lease payments subsequent to March 31, 1997 are
as follows:
1997 $80,000
1998 $80,000
1999 $80,000
2000 $80,000
2001 $59,000
9. 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 exercise
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, 1996 139,436 $0.18-2.50
Lapsed (96,936) $0.18-2.50
- --------------------------------------------------------------------------------
December 31, 1996
and March 31, 1997 42,500 $ 2.50
================================================================================
Of the 139,436 options outstanding at January 1, 1997, all but 77,634 had
an exercise price of $2.50. The 77,634 had been granted to one employee,
had an exercise price of $.18 and lapsed in 1996.
At March 31, 1997, 582,255 shares of common stock are reserved for the
incentive stock option plan and 25,500 options were vested and exercisable.
The remaining contractual life of the 42,500 shares outstanding is seven
years.
<PAGE>
10. Supplemental Disclosure of Cash Flow Information
Non-cash investing and financing activities are summarized as follows:
1997 1996
Forgiveness of indebtedness $ 98,000 $ -0-
================================================ ======================
================================================ ======================
Conversion of accrued interest payable into
vendor notes payable $ 25,000 $ -0-
================================================ ======================
Interest paid for the three months ended March 31, 1997 and 1996 was
$11,000 and $3,000 respectively. The company paid no income taxes during
1997 and 1996.
11. 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.
12. Continued Existence
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Although the
Company has suffered recurring losses from operations, has a significant
working capital deficit and requires additional capital to continue its
product development, management believes the Company will continue as a
going concern. Management is actively marketing its new products which
would enable the Company to meet its current obligations and provide
additional funds for continued new product development. During March 1997,
the Company signed a significant contract with IBM (a minority stockholder)
for which it will develop Internet products. In addition, management is
currently negotiating several additional contracts for its services and
products. However, there can be no assurance these activities will be
successful.
<PAGE>
13. Management's Discussion and Analysis
Three Month's Ended March 31, 1997 and 1996.
Results of Operations
The Company's revenues for the three months ended March 31, 1997 totaled
$269,798 compared to $205,789 for the same period in 1996. The initial
signing of a contract with IBM in March 1997 was the reason for this
increase. The Company's main source of revenues for the first three months
of 1997 and 1996 was the sale of its Internet products. The Company
successfully negotiated a new contract with IBM in March 1997 in which it
will develop Internet products for IBM. This contract, while cancelable, is
for a period of twenty four months. The Commerce Server/400 which was
introduced in August of 1996, won the prestigious IBM Partner in
Development "Product of the Year Award" in February 1997.This product
provides the ability to conduct secured, encrypted financial and other
transactions over the Internet and World Wide Web. The Company has enlisted
a distributor for these products and a related suite of products which are
currently under development.
Company cost of revenues for the three months ended March 31, 1997 totaled
$130,950. For the 1996 three month period, the Company's costs of revenues
were $176,570. The Company's selling, general, and administrative expenses
were $186,052 for the three months as compared with $205,943 for the three
months of 1996. The decrease in cost of revenue is attributed to the
reduction of production employees and the renegotiation of a new lease for
its primary operating facilities, during the three months ended March 31,
1997. The selling, general, and administrative expenses decreased due to
the reduction of administrative personnel and renegotiating it's lease
payments for it's facilities. Net interest expenses increased to $26,725
for the three months ended March 31, 1997 from $24,071 for the three months
ended March 31, 1996 due to increased borrowings.
14. Financial Condition and Liquidity
At March 31, 1997, the Company had unrestricted cash in amount of $3,510
compared with unrestricted cash of $430,230 at March 31, 1996. Operating
activities for the period used $83,278 in 1997, as compared to cash used of
$206,592 in 1996.
The resultant decrease in the amount of cash used from operating activities
is the result of an increase in earnings for the three months ended March
31, 1997.
The Company successfully renegotiated a previously defaulted vendor note
during March 1997, which has resulted more favorable repayment terms over
the next five years. In addition, the Company reached an agreement with a
vendor to form a Join Venture with Career Network Inc., in which I/NET
would provide its technology and talents in exchange for the forgiveness of
$98,000 of indebtedness.
In addition, in March 1997, the Company signed a consulting agreement with
IBM (a stockholder) to provide services over the next two years for this
computing giant.
The Company is also engaged in substantive negotiations with Netscape
Communications Corp. and IBM to provide contract services to these
companies.
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: May 13, 1997
By: /s/ Stephen J. Markee
Stephen J. Markee, Director, President, CEO and CFO
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,510
<SECURITIES> 0
<RECEIVABLES> 179,717
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 183,227
<PP&E> 544,945
<DEPRECIATION> 490,053
<TOTAL-ASSETS> 238,119
<CURRENT-LIABILITIES> 1,607,653
<BONDS> 0
0
0
<COMMON> 30,838
<OTHER-SE> 11,836,874
<TOTAL-LIABILITY-AND-EQUITY> 238,119
<SALES> 269,748
<TOTAL-REVENUES> 269,748
<CGS> 130,950
<OTHER-EXPENSES> 186,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,996
<INCOME-PRETAX> (73,929)
<INCOME-TAX> 0
<INCOME-CONTINUING> (73,929)
<DISCONTINUED> 0
<EXTRAORDINARY> 97,946
<CHANGES> 0
<NET-INCOME> 24,017
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
