16
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 six month period ended June 30, 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 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>
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
June 30, 1997
31,037,652
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 June 30, 1997, the results of its operations for
the six month periods ended June 30, 1997 and 1996, and its cash flows for the
six month period ended June 30, 1997. All such adjustments are of a normal and
recurring nature.
.
<PAGE>
I/NET, Inc.
Consolidated Statements of Operations
(unaudited)
Six Months Ending
-------------------------
June 30 June 30
1997 1996
-------------------------
Revenues $ 675,808 $ 484,180
Cost of Revenues 299,976 365,302
---------- ----------
Gross Profit $ 375,832 $ 118,878
Selling, General, and Administrative
Expenses 295,546 409,670
Earnings (Loss) from operations $ 80,286 $ (290,792)
Interest Expense - Net of interest income
of $578 in 1997 and $11,303 in 1996 (53,397) (54,155)
----------- -----------
Earnings (Loss) before
Extraordinary Item $ 26,889 $ (344,947)
Extraordinary item:
Gain on extinguishment of debt (note 3) 97,946 -
---------- ----------
Net Earnings (Loss) $ 124,835 $ (344,947)
========== ==========
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 30,887,652 24,628,717
========== ==========
===================================================================
See accompanying summary of accounting policies and notes to
consolidated financial statements
<PAGE>
I/NET Inc.
Consolidated Balance Sheet
(unaudited)
June 30
1997
-------------
Assets (Note 2 and 3)
Current Assets
Cash $ 16,042
Accounts Receivable - Trade 175,513
----------
Total Current Assets $ 191,555
Office Furniture and Equipment, Net of
Accumulated Depreciation of $497,553 47,392
----------
Total Assets $ 238,947
==========
Liabilities and Stockholders' Equity (Capital Deficit)
Current Liabilities
Current maturities of long-term debt (Note3) $ 745,164
Accounts Payable 214,121
Accruals:
Commissions (Note 1) 250,000
Other 145,826
Advances from Stockholders' (Note 2) 169,778
----------
Total Current Liabilities $1,524,889
Long-Term Debt, less current maturities (Note 3) 736,055
Total Liabilities $2,260,944
Commitments and Contingencies (Notes 8 and 11)
Stockholders' Equity (Capital Deficit)
Common Stock $.001 par value; Authorized
50,000,000 shares; Issued and
outstanding 31,037,652 31,038
Additional Paid in Capital 11,886,674
Deficit (13,939,709)
------------
Total Stockholders' Equity (Capital Deficit) (2,021,997)
------------
Total Liabilities and Stockholders' Equity (Capital
Deficit) $ 238,947
============
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
1997 1996
---------- ----------
Operating Activities
Net Earnings (Loss) $ 124,835 $(344,947)
Depreciation and Amortization 15,000 18,226
Extraordinary item: Gain on
extinguishment of debt (97,946) -
Changes in Assets and Liabilities
Accounts Receivable (146,531) 52,300
Prepaid Expenses and other assets - (44,750)
Accounts Payable 77,516 (21,452)
Accruals $ (9,090) (5,984)
----------- ----------
Cash (Used In) Operating Activities (42,216) (346,607)
Investing Activities
Proceeds from Note Receivable - 30,000
Capital Expenditures - (13,708)
----------- ----------
Cash Provided By Investing Activities $ - $ 16,292
Financing Activities
Advances from Stockholder 50,000 -
Proceeds from issuance of notes payable 50,000 -
Proceeds from the issuance of common
stock 50,000 -
Principle Payments on Long-Term Debt (112,259) (74,171)
---------- ----------
Cash Provided By (Used In) Financing
activities $ 37,741 $ (74,171)
---------- ----------
(Decrease) in Cash and Cash Equivalents $ (4,475) $(404,486)
Cash and Cash Equivalents, Beginning of
Period 20,517 682,828
---------- ---------
Cash and Cash Equivalents, End of Period $ 16,042 278,342
========== ==========
See accompanying summary of accounting policies and notes to
consolidated financial statements
<PAGE>
I/NET, Inc.
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.
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 June 30,
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.
<PAGE>
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 June 30,
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) $1,108,910
Notes payable to bank with monthly payments of
$5,000, including interest at 1.5% above the
bank's prime rate (effectively 10% at June 30,
1997) with final payment due in November, 1997.
The note is collateralized by all of the
Company's assets $22,309
Secured notes payable to stockholders bearing
interest at 8% and are due in February 2002 $350,000
------------------------------------------------------------------
$1,481,219
Less current maturities $745,164
------------------------------------------------------------------
Total Long - Term Debt $736,055
------------------------------------------------------------------
Unsecured notes payable to various vendors totaling $1,108,910 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 $149,884 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 then 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%. This note has an outstanding balance of
$294,546 as of June 30, 1997. Final payment, assuming minimum payments only,
is due in April 2004.
Another vendor note in the amount of $50,725 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 2003.
Another vendor note in the amount of $26,093 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 then totaling $32,000 in four equal monthly installments
of $8,000 commencing May 1, 1997. This note has an outstanding balance of
$8,000 as of June 30, 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 $138,980 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 May 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:
1998 $ 915,000
1999 $ 68,000
2000 $ 76,000
2001 $ 84,000
Subsequent to 2001 $ 600,000
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
through 1999. During April 1997, a warrantholder exercised its option to
purchase 200,000 shares of I/NET's stock at $.25 per share for cash. All
remaining warrants are exercisable at $2.40 per share. 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 June 30, 1997.
5. Related Party Transactions/Major Customers
The Company provided Internet software products and Website consulting
services to a few major customers as follows:
Six Months
Ending
June 30 June 30
1997 1996
-------------------------------------------------------------------
Internet Products
International Marketing
Strategies - (IMS) $ 213,000 $ 300,000
SUPPORT NET, INC. $ 39,000 $ 68,000
-------------------------------------------------------------------
$ 252,000 $ 368,000
------------------------------------------------------------------
Website Consulting Services
International Business Machines
(IBM) $ 301,000 -
-------------------------------------------------------------------
IBM is also a minority stockholder in the Company.
<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 June 30,
1997 are as follows:
Deferred Tax Assets:
Accruals $ 99,00
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 June 30, 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
six month period ended June 30, 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 or 1996.
<PAGE>
8. Operating Leases
The Company leases its facilities and certain equipment under non-cancelable
operating leases. Rental expense under these leases was approximately $40,000
for six months ended June 30, 1997 and $77,000 in 1996. Future minimum annual
lease payments subsequent to June 30, 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 42,500 $ 2.50
Lapsed (27,500) $ 2.50
Granted June 1997 100,000 $ .37
------------------------------------------------
June 30, 1997 115,000 $0.37 - 2.50
================================================
Of the 139,436 options outstanding at January 1, 1996, 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 June 30, 1997, 582,255 shares of common stock are reserved for the
incentive stock option plan and 9,000 options were vested and exercisable.
The remaining contractual life of the 106,000 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 $ 25,000 $ -0-
vendor notes payable
===================================================================
Interest paid for the six months ended June 30, 1997 and 1996 was $16,000 and
$11,000 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
Six Month's Ended June 30, 1997 and 1996.
Results of Operations
The Company's revenues for the six months ended June 30, 1997 totaled
$675,808 compared to $484,180 for the same period in 1996. The initial
signing of a contract with IBM in March 1997 and subsequent revenue generated
by this contract is the reason for this dramatic increase. The Company's main
source of revenues for the first six months of 1997 and 1996 was the sale of
its Internet products and a consulting agreement with IBM. 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 six months ended June 30, 1997 totaled
$299,976. For the 1996 six month period, the Company's costs of revenues were
$365,302. The Company's selling, general, and administrative expenses were
$295,546 for the six months as compared with $409,670 for the six 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 six months ended June 30, 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.
14. Financial Condition and Liquidity
At June 30, 1997, the Company had unrestricted cash in amount of $16,042
compared with unrestricted cash of $278,342 at March 31, 1996. Operating
activities for the period used $42,216 in 1997, as compared to cash used of
$346,607 in 1996.
The resultant decrease in the amount of cash used from operating activities
is the result of an increase in earnings for the six months ended June 30,
1997.
The Company successfully re-negotiated 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.
<PAGE>
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.
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: July 28, 1997
By: Stephen J. Markee
Director, President, CEO and CFO
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 16,042
<SECURITIES> 0
<RECEIVABLES> 175,513
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 191,555
<PP&E> 544,945
<DEPRECIATION> 497,553
<TOTAL-ASSETS> 238,947
<CURRENT-LIABILITIES> 1,524,889
<BONDS> 0
0
0
<COMMON> 31,038
<OTHER-SE> 11,886,674
<TOTAL-LIABILITY-AND-EQUITY> 238,947
<SALES> 675,808
<TOTAL-REVENUES> 675,808
<CGS> 299,947
<TOTAL-COSTS> 299,947
<OTHER-EXPENSES> 295,546
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,397
<INCOME-PRETAX> 26,889
<INCOME-TAX> 0
<INCOME-CONTINUING> 26,889
<DISCONTINUED> 0
<EXTRAORDINARY> 97,946
<CHANGES> 0
<NET-INCOME> 124,835
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
