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 EXHANGE ACT OF 1934
For the nine month period ended September 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 West 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:
September 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 September 30, 1997,
the results of its operations for the nine month periods ended
September 30, 1997 and 1996, and its cash flows for the nine month
period ended September 30, 1997. All such adjustments are of normal and
recurring nature.
<PAGE>
I/NET, Inc.
Consolidated Statements of Operations
(unaudited)
Nine Months Ending
September 30 September 30
1997 1996
-------------------------------
Revenues $ 1,094,997 $ 596,702
Cost of Revenues 476,697 536,574
------------ ------------
Gross Profit $ 618,300 $ 60,128
Selling, General, and Administrative Expenses 468,589 631,139
------------ ------------
Earnings (loss) from operations $ 149,711 $ (571,011)
Interest Expense - Net of interest income
of $789 in 1997
and $11,303 in 1996 (79,126) (84,704)
------------ ------------
Earnings (Loss) before
Extraordinary Item $ 70,585 $ (655,715)
Extraordinary item:
Gain on extinguishment of debt (note 3) 97,946 -
------------ ------------
Net Earnings (Loss) $ 168,531 $ (655,715)
============ ============
Net Earnings (Loss) per share
Earnings (loss) before extraordinary
item $ - $ (0.02)
Extraordinary item $ - $ -
------------ ------------
Net Earnings (Loss) per share $ - $ (0.02)
============ ============
Weighted average shares outstanding 30,937,652 29,061,362
============ ============
See accompanying summary of accounting policies and notes to
consolidated financial statements
<PAGE>
I/NET, Inc.
Consolidated Balance Sheet
(unaudited)
September 30, 1997
-------------------
Assets (Note 2 and 3)
Current Assets
Cash $ 25,276
Accounts Receivable - Trade 186,253
------------------
Total Current Assets $ 211,529
Office Furniture and Equipment, Net of
Accumulated Depreciation $505,053 39,892
Prepaid License Fees (Note 3) 3,000,000
------------------
Total Assets $ 3,251,421
==================
Liabilities and (Capital Deficit)
Current Liabilities
Current maturities of long-term debt (Note 3) $ 1,675,556
Accounts Payable 235,929
Accruals:
Commissions (Note 1) 250,000
Other 147,529
Advances from Stockholders' (Note 2) 169,778
------------------
Total Current Liabilities $ 2,478,792
Long-term Debt, less current maturities (Note 3) 2,750,930
------------------
Total Liabilities $ 5,229,722
------------------
Commitments and Contingencies (Notes 8 and 11)
Stockholders' Equity (Capital Deficit)
Common Stock $.001 par value;
Authorized 50,000,000shares:
Issued and outstanding 31,037,652 31,038
Additional Paid in Capital 11,886,674
Deficit (13,896,013)
------------------
Total (Capital Deficit) (1,978,301)
------------------
Total Liabilities and (Capital Deficit) $ 3,251,421
==================
See accompanying summary of accounting policies
and notes to consolidated financial statements
<PAGE>
I/NET, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ending
---------------------------------
September 30 September 30
1997 1996
------------ -------------
Operating Activities
Net Earnings (Loss) $ 168,531 $ (655,715)
Depreciation and Amortizatio 22,500 27,339
Extraordinary Item: Gain on
Extinguishment of debt (97,946) -
Changes in Assets and Liabilities
Accounts Receivable (157,278) 52,300
Prepaid Expenses and other assets - (22,250)
Accounts Payable 93,324 452
Royalties Payable -
Accruals (7,377) 23,856
------------- ------------
Cash Provided By (Used In)
Operating Activities $ 21,754 $ (574,018)
Investing Activities
Proceeds from Note Receivable - 30000
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 (166,995) (123,362)
-------------- ------------
Cash (Used In) Financing Activities (16,995) (123,362)
-------------- ------------
Increase (Decrease) in Cash and
Cash Equivalents $ 4,759 $ (681,088)
Cash and Cash Equivalents, Beginning of Period 20,517 682,828
-------------- ------------
Cash and Cash Equivalents, End of Period $ 25,276 $ 1,740
============== ============
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
thereforethe 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
on a contract basis to private sector clients. In addition, the Company, during
1996 further developed and began to market Internet computer software products.
Its 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
effect 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 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, 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 September
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
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.
During February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" was issued by the Financial Accounting Standards Board.
Disclosure requirements are effective for financial statements for periods
ending after December 15, 1997. The new standard establishes standards for
computing and presenting earnings per share. The Company does not expect
adoption of the standard to have a material effect on earnings per share amounts
as currently disclosed in the accompanying financial statements.
<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 $250,000 has been recorded as
of September 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:
Royalties Payable $ 3,000,000
Notes payable to vendors $ 1,068,742
Notes payable to bank with monthly payments of $5,000,
including interest at 1.5% above the bank's prime rate
(effectively 10% at September 30, 1997) with final payment
due in November 1997. The note is collateralized by
all of the Company's assets $ 7,744
Secured notes payable to stockholders bearing interest
at 8% and are due in February 2002 $ 350,000
-----------------------------------------------------------------------
$ 4,426,486
Less current maturities $ 1,675,556
-----------------------------------------------------------------------
Total Long - Term Debt $ 2,750,930
-----------------------------------------------------------------------
<PAGE>
Royalties Payable
On September 30, 1997, the Company entered into a software
license agreement with Netscape Communications Corporation
(Netscape) wherein Netscape granted to the Company the right
to port certain of its Internet Server products to the IBM
AS/400 platform. This agreement is for a period of three years
and allows the Company to market and distribute the ported
products upon their modification to the AS/400 platform.
In exchange for this license agreement, I/NET has agreed to pay minimum
royalties to Netscape in the amount of $3,000,000 according to the
following repayment schedule:
Due upon signing $ 250,000
September 30, 1998 $ 750,000
September 30, 1999 $ 1,000,000
September 30, 2000 $ 1,000,000
In addition, I/NET has agreed to pay to Netscape annual development
support fees in the amount of $250,000 for a period of three years.
International Business Machines Corporation (IBM) has guaranteed to
Netscape the above listed royalties in the event that product sales are
insufficient to repay amounts due under this agreement.
In addition, IBM will provide advances against royalties in the amount
of $600,000 as certain tasks are completed during the porting of the
Netscape products to the IBM platform. These amounts will be reimbursed
to IBM after deduction of Netscape royalties, in the amount of 10% of
total revenue received from the sale of the ported products with the
first reimbursement due in March 1999.
Notes Payable to Vendors
Unsecured notes payable to various vendors totaling $1,068,742 are due
in various installments and at varying interest rates.
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 $145,416 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% and 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 $286,926 as of September 30, 1997.
Final payment, assuming minimum payments only, is due in April 2004.
Another vendor note in the amount of $44,650 is due in monthly
installments of 5% of the previous month's cash receipts (as defined)
but at a minimum of $2,000 bi-monthly and bears interest at the prime
rate plus 2%. Final payment, assuming minimum payments only,
is due July 2002.
Another vendor note in the amount of $17,733 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 contributed 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. This note has been repaid as
of September 30, 1997. The noteholder is required to contribute cash
and marketing expertise to this newly formed joint-venture, there have
been no operating activities on this joint venture to date. This
$97,946 has been treated as an extraordinary item for financial
statement purposes.
Another vendor note in the amount of $133,362 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 from
September 30, 1997, assuming repayment of stockholders' advances (Note
2) and notes are as follows
1998 $1.845,000
1999 $1,070,000
2000 $1,078,000
2001 $ 86,000
Subsequent to 2001 $ 517,000
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 September
30, 1997.
5. Related Party Transactions/Major Customers
The Company provided Internet software products and Website consulting
services to few major customers as follows:
Nine Months Ending
September 30 September 30
1997 1996
-------------------------------
Internet Products
International Marketing Strategies-(IMS) $ 379,000 $ 300,000
SUPPORT NET, INC. (Included with IMS
for 1997) $ - $ 123,000
LANSA, INC. $ 138,000 $ -
- --------------------------------------------------------------------------------
$ 517,000 $ 423,000
- --------------------------------------------------------------------------------
Website Consulting Service
International Business Machines (IBM) $ 500,000 $ -
- --------------------------------------------------------------------------------
Facilities Management
Kalamazoo Board of Realtors $ - $ 108,000
<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 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, 1997 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 September 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 nine month period ended September 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.
8. Operating Leases
The Company leases its facilities and certain equipment under
non-cancelable operating leases. Rental expense under these leases were
approximately $56,000 for nine months ended September 30, 1997 and
$116,000 in 1996. Future minimum annual lease payments subsequent to
September 30, 1997 are as follows:
1998 $93,000
1999 $93,000
2000 $93,000
2001 $93,000
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
- --------------------------------------------------------------------------------
September 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 September 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 year.
<PAGE>
10. Supplemental Disclosure of Cash Flow Information
Non-cash investing and financing activities are summarized as follows:
Nine months ending
September 30, 1997
-------------------
Extinguishment of indebtedness $ 98,000
================================================================================
Conversion of accrued interest payable
into vendor notes payable $ 25,000
================================================================================
Granting of prepaid licenses $ 3,000,000
================================================================================
Interest paid for nine months ended September 30, 1997 and 1996 was
$44,000 and $11,000 respectively. The company paid no income taxes
during 1997 and 1996.
11. Litigation
The Company is involved in various legal action 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 in the past and has a significant working capital deficit,
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.
On September 30, 1997, the Company signed a three year agreement with
Netscape Communications Corp., a world leader in delivering Internet
solutions to the marketplace. This agreement grants I/NET the right to
port and market certain of its Internet Server products to the IBM
AS/400 platform. Currently, according to Zona Research, Inc. Netscape
has an overall 80% marketshare of Webservers and IBM has an
installed base of 420,000 AS/400's. IBM was instrumental in
arranging this agreement and for providing partial funding in the
amount of 600,000 in the form of advances against future royalties to
enable this project to begin. The $600,000 will be paid to I/NET as
certain milestones in the porting project are completed. The company
anticipates that this agreement will have a significant positive
impact to the operating results over the next few years.
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
Nine months Ended September 30, 1997 and 1996.
Results of Operations
The Company's revenues for the nine months ended September 30,1997
totaled $1,094,997 compared to $596,702 for the same period in 1996
dramatic increase. The Company's main source of revenues for the first
nine 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
it's Internet products which are currently available in the
marketplace.
Company cost of revenues for the nine months ended September 30, 1997
totaled $476,697. For the 1996 nine month period, the Company's costs
of revenues were $536,574. The Company's selling, general, and
administrative expenses were $468,589 for the nine months as compared
with $631,139 for the nine 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 nine months ended September 30, 1997. The selling, general,
and administrative expenses decreased due to the reduction of
administrative personnel and renegotiating lease payments for its
facilities.
14. Financial Condition and Liquidity
At September 30, 1997, the Company had unrestricted cash of $25,276
compared with unrestricted cash of $1,740 at September 30, 1996.
Operating activities for the period provided $21,754 in 1997, as
compared to cash used of $574,018 in 1996.
The resultant increase in the amount of cash recorded from operating
activities is the result of an increase in earnings for nine month
ended September 30, 1997.
<PAGE>
The Company successfully re-negotiated a previously defaulted vendor
note during March 1997, which has resulted in more favorable repayment
terms over five years. In addition, the Company reached an agreement
with vendor to form a Joint Venture with Career Network Inc., in which
I/NET would provide its technology and talents in exchange for the
extinguishment of $98,000 of indebtedness.
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: November 7, 1997
By: Stephen J. Markee
-----------------
Stephen J. Markee
Director, President, CEO and CFO
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Sep-30-1997
<CASH> 25,276
<SECURITIES> 0
<RECEIVABLES> 186,253
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 211,529
<PP&E> 544,945
<DEPRECIATION> 505,053
<TOTAL-ASSETS> 3,251,421
<CURRENT-LIABILITIES> 2,478,792
<BONDS> 0
0
0
<COMMON> 31,038
<OTHER-SE> 11,886,674
<TOTAL-LIABILITY-AND-EQUITY> 3,251,421
<SALES> 1,094,997
<TOTAL-REVENUES> 1,094,997
<CGS> 476,697
<TOTAL-COSTS> 476,697
<OTHER-EXPENSES> 468,589
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,126
<INCOME-PRETAX> 70,585
<INCOME-TAX> 0
<INCOME-CONTINUING> 70,585
<DISCONTINUED> 0
<EXTRAORDINARY> 97,946
<CHANGES> 0
<NET-INCOME> 168,531
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
