U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 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 W. Crosstown Parkway
Kalamazoo, Michigan 49008
(Address of Principal Executive Officers)
Issuer's Telephone Number: (616) 344-3017
Securities Registered under Section 12(b) of the Exchange Act: None
Title of Each Class Name of Each Exchange on Which Registered
NONE
Securities Registered under Section 12(g) of the Exchange Act:
$0.001 par value common voting stock
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such 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 ___
Check if there is no disclosure of delinquent files in response to item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
<PAGE>
State Issuer's revenues for its most recent fiscal year: December 31, 1996 -
$724,032
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
$11,181,863.
There are approximately 16,689,348 shares of common voting stock of the
Registrant held by non-affiliates. This valuation is based upon the average bid
price ($0.68) for shares of common voting stock of the Registrant on the
"Electronic Bulletin Board" of the National Association of Securities Dealers,
Inc. ("NASD") on January 31, 1997
.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Not Applicable.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
December 31, 1996
30,837,652
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Transitional Small Business Disclosure Format (check one): Yes X No ___
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<PAGE>
TABLE OF CONTENTS
Item 1. Description of Business..............................................4
Item 2. Description of Property..............................................6
Item 3. Legal Proceedings....................................................6
Item 4. Submission of Matters to a Vote of Security Holders..................6
Item 5. Market for Common Equity and Related Stockholder Matters.............7
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................7
Item 7. Financial Statements.................................................9
Item 8. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure.............................................9
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................10
Item 10. Executive Compensation..............................................13
Item 11. Security Ownership of Certain Beneficial Owners and Management......15
Item 12. Certain Relationships and Related Transactions......................15
Item 13. Reports on Form 8-K and Exhibits....................................16
Signatures...................................................................17
<PAGE>
PART 1
Item 1. DESCRIPTION OF BUSINESS
I/NET, Inc. (The "Company" or "I/NET") was organized under the laws of the state
of Delaware during 1986 under the name of a predecessor corporation. The Company
had its initial public offering with the Securities and Exchange Commission
during 1987.
BUSINESS DEVELOPMENT
I/NET was incorporated in 1983 as a contract research and development firm
specializing in software development for digital imaging and voice recognition.
Systems created by I/NET are currently in service in; real estate,
pharmaceutical research, government, newspapers, and information management.
During 1993 and 1994, the Company issued 1,428,571 shares of its stock for cash,
a trademark, and reduction of debt totaling $4,455,000. In connection with the
transactions, the Company issued warrants to the purchaser to acquire 2,039,285
shares of common stock at prices ranging from $0.25 to $2.40 per share. These
warrants expire in 1997. As part of these transactions, the underwriters were
also issued 1,145,714 warrants exercisable at prices ranging from $0.29 to $2.10
and expire in 1999. During 1995, the Company issued an additional 18,859,081
shares of common stock for $3,883,326. These shares were issued for the
reduction of indebtedness, for a stock award program for the officers and key
employees, and to raise additional capital. There were no warrants issued with
these transactions. All warrants were exercisable at December 31, 1996.
BUSINESS
I/NET, in prior years, was 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. It was founded in 1982 in
response to demand for high-quality information systems services on the part of
government, commercial, and not-for-profit organizations, requiring digital
imaging as part of their overall solution. Since its formation, I/NET has
delivered and installed microcomputer-based decision support systems for systems
sold worldwide, supporting hundreds of users and employing distributed
databases, sophisticated telecommunications networks, and state-of-the-art
development tools. Past projects which the Company has undertaken in multi-
media applications have incorporated digital imaging and voice recognition.
The Company has performed development work under contract with IBM for many
years, including developing multi-media software running on the IBM system
AS/400, a mid-range computer system. The Company's contracts with IBM, a
minority stockholder in the Company, were completed at the end of 1995.
During 1995, I/NET brought to the marketplace its own Web Server/400 as the
first commercially available product, which can connect the nearly 500,000
AS/400 midrange computers worldwide to the Internet. The "Web" lets Internet
users around the world exchange information in the form of displayed text,
images, sound, and video. Available since July, 1995, I/NET's Web Server/400 is
currently used by businesses around the world, with installations in Hong Kong,
Germany, England, the Netherlands, Italy, Korea, Japan, and Israel, in addition
to Canada and the United States. Current installations include: IBM AS/400
Homepage (www.as400.ibm.com), Pacific Brokerage Services, Inc.
(www.tradepbs.com), Software 2000, Inc., Marcam Corporation, Dynamic Healthcare
Technologies, Inc. (www.dht.com), Automated Training Systems (www.ibmuser.com),
Mattel Toys, MCI, Eli Lilly, Builders Square, Toyota of America, Caesers Palace,
United Technologies Automotive, and Anheuser-Busch.
<PAGE>
I/NET's Commerce Server/400 was made available in August, 1996. This product
provides AS/400 users with the ability to conduct secured, encrypted financial
and other transactions over the Internet. Current customers include IBM,
Enterprise Rent-A-Car, MCI, State Bar of California, and Pacific Brokerage
Services, Inc. These companies have installed the product in various locations
throughout the world.
IBM AS/400 is the world's most popular multi-user business computing system,
with nearly 500,000 units installed worldwide supporting from 1 to 7,000 users.
IBM and its 8,000 Business Partners offer AS/400 customers 25,000 applications,
including 3,000 for the client/server. Among AS/400 customers are 98 percent of
the Fortune 100 Industrials.
DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES
The Company has signed exclusive worldwide marketing and distribution agreements
with International Marketing Strategies, (IMS) for the distribution of its Web
Server/400 products. All marketing services will be performed by IMS.
COMPETITIVE BUSINESS CONDITIONS AND THE SMALL BUSINESS ISSUER'S COMPETITIVE
POSITION IN THE INDUSTRY AND METHODS OF COMPETITION
The Company's contract work performed for IBM has been competitively acquired,
and usually the final selection is between I/NET and departments within IBM. As
mentioned previously, the Company is currently finalizing an agreement with IBM
to provide future services for IBM's AS/400 Internet products. I/NET and IBM are
the only two companies with software available to connect the AS/400 to the
Internet. Currently, I/NET's products are installed on over 90% of the AS/400's
operating as Internet servers.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND THE NAMES OF PRINCIPAL SUPPLIERS
Developing software requires few tangible raw materials. The most important
element in this process is the personnel who plan, design, and develop the
software code. I/NET has consistently hired the best talent available. It
recruits top-of-the-class talent from two Kalamazoo-based colleges as well as
candidates from the Detroit and Chicago metropolitan areas.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
The Company provided Internet products, facilities management services, and
software development services to a few major customers during 1996 and 1995 as
follows:
1996 1995
-------------------- ------------------
Internet Products
International Marketing Strategies (IMS) $ 346,000 $ 50,000
SUPPORT NET, INC. 158,000 -
-------------------- ------------------
504,000 $ 50,000
Facilities Management Services
Greater Kalamazoo Associations of Realtors
$ 120,000 $ 149,000
================ ==================
Software Development Services
International Business Machines (IBM)
$ - $ 978,000
==================== ==================
IBM is also a minority stockholder in the Company and $40,000 was due from it as
of December 31, 1995.
<PAGE>
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR
LABOR CONTRACTS, INCLUDING DURATION
I/NET acquired the trademark "Career/NET" in prior years. This trademark was
written off during 1995 as the product did not meet the market acceptance as
anticipated.
NEED FOR ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTIONS OR SERVICES
The performance of services and the supply of products by the Company is not
subject to governmental approval.
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
No present governmental regulations have any adverse impact on the present or
contemplated business operations of the Company, and no such probable
governmental regulations are anticipated to have any adverse effect.
ESTIMATE OF THE AMOUNT SPENT DURING EACH OF THE LAST TWO FISCAL YEARS ON
RESEARCH AND DEVELOPMENT ACTIVITIES, AND IF APPLICABLE, THE EXTENT TO WHICH THE
COST OF SUCH ACTIVITIES ARE BORNE DIRECTLY BY CUSTOMERS
There were no research and development costs incurred by the Company during the
calendar years ended December 31, 1996 and 1995.
COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS (FEDERAL, STATE, AND
LOCAL)
There are no foreseeable adverse effects on the present or contemplated business
operations resulting from environmental laws, rules, or regulations.
NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES
As of December 31, 1996, the Company had 13 full-time and total employees.
Item 2. DESCRIPTION OF PROPERTY
The Company leases its principal executive and operating offices at 643 West
Crosstown Parkway, Kalamazoo, Michigan, which is comprised of 5,600 square feet.
Item 3. LEGAL PROCEEDINGS
The Company is not the subject of any material legal proceeding, and to the
knowledge of management, no proceedings are presently contemplated against the
Company by any federal, state, or local governmental agency.
To the knowledge of management, no director or executive officer of the Company
is party to any legal proceeding in which it may have an interest adverse to the
Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during 1996.
<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is listed on the "Electronic Bulletin Board" of the
NASD. The stock activity for the calendar years 1996 and 1995 is summarized by
quarter below:
1996 1996 1996 1996 1995 1995 1995 1995
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
HIGH $1.13 $0.97 $0.81 $0.81 $0.71 $0.50 $0.41 $0.77
LOW $0.63 $0.60 $0.41 $0.56 $0.37 $0.18 $0.25 $0.25
These bid prices are quotations of broker-dealers that reflect inter-dealer
prices, without retail mark-up, mark- down or commission any may not represent
actual transactions.
HOLDERS
The number of record holders of the Company's common stock as of December 31,
1996, was 299. This number does not include an indeterminate number of
stockholders whose shares are held by brokers in street name.
DIVIDENDS
There are currently present material restrictions that limit the ability of the
Company to pay dividends on its common stock as it has a deficit in its
stockholders' equity. The Company has not paid any dividends with respect to its
common stock nor does it intend to do so in the foreseeable future.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CALENDAR YEARS ENDED DECEMBER 31, 1996 AND 1995
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 1996, were $724,032 as compared to
$1,276,757 for the year ended December 31, 1995. When analyzed by product
category, revenues of software development services to IBM were $0 in 1996, as
compared to $978,000 in 1995 as the contract with IBM expired at the end of
1995. Revenues from facilities management services were $120,000 in 1996 and
$149,000 in 1995 as the contract with the Greater Kalamazoo Association of
Realtors expired in October 1996. The new Internet products accounted for
revenues of $563,000 in 1996 and $96,000 in 1995 as new products were being
introduced to the market.
Cost of revenues decreased by $101,000, as compared to 1996. The primary cause
for this reduction was the closing of the Phoenix office and the termination of
the employees at that location during the first quarter of 1995.
General and administrative expenses increased by $175,000 as compared to 1995.
The primary cause for this increase was its accrual of a commission of $250,000
to a former exclusive distributor of the Company's Internet products to release
this distributor from it's exclusive contract.
<PAGE>
Interest expenses decreased by $92,000 due to the conversion of vendor notes
payable in the amount of $597,000 into common stock during late 1995.
During the year ended December 31, 1995, it was determined that the Company
would not be able to provide the additional funding necessary to develop,
market, deploy and maintain its previously capitalized computer software product
named Embarc. This failure to obtain financing has resulted in the write-off of
the development costs of the product in the amount of $2,151,000.
In addition, the Company has determined that the carrying amount of a trademark
which it acquired at a cost of $225,000 and the related inventory in the amount
of approximately $107,000 for its Career/NET product could not be recovered
through future operations. Accordingly, the Company wrote off these amounts.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to
Be Disposed Of," the Company assessed the expected recoverability of the
carrying amount of the trademark and related inventory discussed above and, due
to significant changes in the extent to which these assets were anticipated to
be used, it recognized an impairment loss measured as the amount by which the
carrying amount of the assets exceeded the expected discounted future cash
flows.
During 1995, the Company issued 12,400,000 shares of unregistered common stock
to certain officers and key employees in recognition of outstanding service
performed during a time of financial instability and severe hardship. Although
at the time of issuance, there was no active market in the Company's common
stock and there was a deficit in stockholders' equity, an accounting value of
$0.20 per share was assigned based upon subsequent cash purchases of the stock.
The recipients are restricted in their ability to sell or otherwise transfer the
shares within a time frame of two to three years from the date of issuance.
FINANCIAL CONDITION AND LIQUIDITY
The Company's primary need for capital has been to invest in computer software
development. As of December 31, 1996, the Company's working capital deficit was
$1,765,000, as compared to a deficit of $897,000 at December 31, 1995. The
resulting increase in working capital deficit is primarily from sales volumes
failing to be reached under its distribution agreements for its Internet
products, together with a lack of sales of additional products and services.
During February, 1997, the Company signed an agreement to provide development
and training of enhanced internet products for HBO & Company. This customer has
also committed to purchase an additional $200,000 of Internet products by the
end of 1997. In addition, IMS during the first quarter of 1997 has signed
non-exclusive distribution agreements with various IBM Managing Industry
Remarketers ("MIR's") in the United States. These MIR's provide access to
hundreds of software distributors through which I/NET's products can be sold.
These agreements are in addition to worldwide agreements signed during the
fourth quarter of 1996.
During February, 1997, the Company was awarded IBM's highest recognition for
development of Commerce Server/400 by IBM's Partners in Development Program as
The AS/400 1996 Product of the Year. This honor was bestowed at IBM's annual
Business Partner's Executive Conference, which was attended by 6,000
international guests.
The Company believes that the additional sales provided by the above mentioned
agreements, the continued development of new products, together with the
renegotiation of its defaulted debt, should provide the Company with sufficient
working capital to fund its needs for 1997. However, there can be no assurance
these activities will be successful.
<PAGE>
Item 7. FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants............................20
Consolidated Balance Sheets as of December 31, 1996 and 1995..................21
Consolidated Statements of Operations for the years ended December 31, 1996
and 1995......................................................................22
Consolidated Statements of Stockholders' Equity (Capital Deficit) for the years
ended December 31, 1996 and 1995..............................................23
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1995......................................................................24
Summary of Accounting Policies.............................................25-26
Notes to Consolidated Financial Statements.................................27-35
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, nature of all position, any offices
held by all directors and executive officers of the Company for the calendar
year ended December 31, 1996, and to the date hereof, and the period or periods
during which each such director or executive officer has served in their
respective positions.
Position Date of Election or
Name Held Designation
James C. Knapp* Chairman of the 1986
Board of Directors
Stephen J. Markee* President, CEO, 1985
Director, 1986
and CFO 1995
Paul A. Bertoldi* Vice President 1989
Systems Development
* These individuals presently serve in the capacities indicated opposite their
respective names.
TERM OF OFFICE
The terms of office of the current directors shall continue until the annual
meeting of stockholders, which has been scheduled by the Board of Directors to
be held on the third Friday in May of each year; the annual meeting of the Board
of Directors immediately follows the annual meeting of stockholders, at which
executive officers for the coming year are elected.
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<PAGE>
BUSINESS EXPERIENCE
James C. Knapp, Chairman.
Mr. Knapp, one of I/NET's initial founders, is 46 years of age, and received a
BBA Degree from the University of Maryland in 1972. He began his computer
education at the age of 15 in a special program sponsored by IBM, and served in
the United States Air Force as a teacher for missile computer guidance systems.
He has been listed in the ACR Directory of Top Computer Executives since 1981,
and was inducted into the "Who's Who in the Computer Industry" in 1990. His
efforts in digital imaging and voice recognition have been recognized
internationally. Mr. Knapp has been a featured speaker at the Massachusetts
Institute of Technology and the Harvard Business School.
Stephen J. Markee, President, CEO and CFO.
Mr. Markee is 51 years of age. He received a BS Degree from Ferris State
University in 1970 and an MBA from Western Michigan University ("WMU") in 1971.
He is a licensed certified public accountant in the state of Michigan. Mr.
Markee served in the United States Army during the Vietnam conflict, and was
decorated and medically retired in 1968. After completing his education, he
served as assistant Auditor General for the state of Michigan before joining WMU
as Director of Internal Auditing in 1976. While at WMU, he also taught
accounting classes in the MBA program. He then changed directions, from public
to private sector, as Vice President of Planning and Control for a division of
Standex International Corporation, where he was responsible for information
systems, accounting, and human relations. He joined I/NET in 1986 as President
and CEO. He has guided I/NET to a successful equity partnership with IBM, and
engineered the sale of intellectual property rights to IBM in 1989. Mr. Markee
has served on the Board of Directors of the Kalamazoo County Chamber of
Commerce, Chairman of the Kalamazoo County Convention and Visitors Bureau, Past
President of the local chapter of the Institute of Management Accountants, and
President of the Parchment Schools Foundation. He is a frequent speaker to civic
and business groups, and has appeared on the Financial News Network ("FNN").
Paul A. Bertoldi, Vice President, Systems Development.
Mr. Bertoldi is 34 years of age. He received a BBA Degree from Western Michigan
University ("WMU") in 1984, and a MBA Degree from WMU in 1992. He graduated
magna cum laude and was named a Presidential Scholar as one of the top
undergraduates of WMU. Since becoming one of I/NET's first employees, Mr.
Bertoldi has helped design the architecture of state-of-the-art imaging and
voice recognition systems in the field of real estate,medical imaging, and
document imaging. Mr. Bertoldi is currently involved in the development of
application in multi-media and pen computing. He is an active member in both the
Data Processing Management Association ("DPMA") and Association of Computer
Machinery ("ACM"). In 1988, he was recognized as a Certified Data Processor by
the Association for Certification for Computer Professionals.
FAMILY RELATIONSHIPS
With the exception that Mr. Knapp and Mr. Bertoldi are brother-in-laws, there
are no family relationships between any directors or executive officers of the
Company, either by blood or by happenstance of marriage.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Under the Delaware General Corporation Law, a corporation has the power to
indemnify any person who is made a party to any civil, criminal, administrative
or investigative proceeding, other than action by or any right of the
corporation, by reason of the fact that such person was a director, officer,
employee or agent of the corporation, against expenses, including reasonable
attorney's fees, judgments, fines and amounts paid in settlement of any such
actions; provided, however, in any criminal proceeding, the indemnified person
shall have had no reason to believe the conduct committed was unlawful.
Regardless, it is the position of the Securities and Exchange Commission that
indemnification against liabilities for violation of the federal securities law,
rules and regulations is against public policy.
<PAGE>
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
To the knowledge of management, during the past five years, no present or former
director, executive officer or person nominated to become a director or an
executive officer of the Company:
- Filed a petition under the federal bankruptcy laws or any state insolvency
law, nor had a receiver, fiscal agent or any partnership in which he or she
was a general partner at or within two years before the time of such
filing, or any corporation or association of which he or she was an
executive officer at or within two years before the time of such filing;
- Was convicted in a criminal proceeding or named subject of a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
- Was the subject of any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining him from or otherwise limiting, the
following activities:
- Acting as a futures commission merchant, introducing broker, commodity
trading advisor, commodity pool operator, floor broker, leverage
transaction merchant, associated person of any of the foregoing, or as an
investment advisor, underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in or
continuing any conduct or practice in connection with such activity;
- Engaging in any activity in connection with the purchase or sale of any
security or commodity or in connection with any violation of federal or
state securities laws or federal commodities laws;
- Was the subject of any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any federal or state authority barring,
suspending or otherwise limiting for more than 60 days the right of such
person to engage in any activity described above under this Item, or to be
associated with person engaged in any such activity;
- Was found by a court of competent jurisdiction a civil action or by the
Securities and Exchange Commission to have violated any federal or state
securities law, and the judgment in such civil action or finding by the
Securities and Exchange Commission has not been subsequently reversed,
suspended or vacated.
- Was found by a court of competent jurisdiction in a civil action or by the
Commodity Futures Trading Commission to have violated any federal
commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
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<PAGE>
Item 10. EXECUTIVE COMPENSATION
Cash Compensation
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the periods indicated:
================================================================================
SUMMARY COMPENSATION TABLE
================================================================================
Annual Compensation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------
NAME AND ........................ Year Ended $ Salary $ Bonus Other
PRINCIPAL POSITION ............. Dec. 31, Annual
Compensa-
tion
- --------------------------------------------------------------------------------
James C. Knapp .................. 1996 $130,208 -0- -0-
Chairman ...................... 1995 $ 36,458 -0- -0-
Stephen J. Markee ............... 1996 $130,208 -0- -0-
President, CEO, ............... 1995 $ 36,458 -0- -0-
CFO and Director
Brian W. Wood ................... 1995 $ 9,375 -0- -0-
Former
Vice President,
Finance
Paul A. Bertoldi ................ 1996 $ 72,917 -0- -0-
Vice President, ............... 1995 $ 61,250 -0- -0-
Systems
- --------------------------------------------------------------------------------
Year (f)* (g) (h) (i)**
ended ---- --- --- -----
NAME AND ................... Restricted Options/SAR's LTIP All other
PRINCIPAL POSITION ........ Stock Award (#) Payouts Compensa-
tion
- --------------------------------------------------------------------------------
James C. Knapp ........1996 -0- -0- -0- $8,104
Chairman ............1995 $1,000,000 -0- -0- $5,445
Stephen J. Markee .....1996 -0- -0- -0- $6,420
President, CEO, .....1995 $1,000,000 -0- -0- $5,738
CFO and Director
Brian W. Wood .........1995 -0- -0- -0- $6,989
Former
Vice President,
Finance
Paul A. Bertoldi ......1996 -0- -0- -0- $5,564
Vice President, .....1995 $40,000 -0- -0- $5,254
Systems
- --------------------------------------------------------------------------------
*See the caption "All Other Compensation" herin for restricted stock award
**Approximate value of health, dental and life insurance paid by the Company
================================================================================
BONUSES AND DEFERRED COMPENSATION
None.
Compensation Pursuant to Plans
The Company has an Incentive Stock Option Plan ("ISOP"). All full-time
employees are eligible under the plan to receive shares that vest 20% a
year and must be exercised within 10 years from the award date or within
three months of termination of employment. The exercise price is determined
by the market price at the date of award. The ISOP reserved 582,255 shares
of common stock as an incentive for directors, executive officers and
employees. In January, 1994, the Company allocated 280,279 shares at $2.50
per share to current employees who were not shareholders. Six thousand
(6,000) shares lapsed during 1994, 212,477 shares lapsed during 1995, and
99,936 shares lapsed during 1996. The outstanding shares total 42,500
leaving 539,755 shares available to be granted and to be exercisable at
market price on the date of such grant.
<PAGE>
PENSION TABLE
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 direction 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
during the last two calendar years ended December 31, 1996 and 1995.
The Company does not follow a practice of paying post-retirement benefits
to its former employees. Therefore, the provisions of Statement of
Financial Accounting Standards No. 106 "Employers" Accounting for Post-
Retirement Benefits Other Than Pensions" will have no effect on the
Company
OTHER COMPENSATION
During 1995, the Company issued 12,400,000 shares of unregistered common
stock to certain officers and key employees in recognition of outstanding
service performed during a time of financial instability and severe
hardship. Although at the time of issuance, there was not an active market
in the Company's common stock and there was a deficit in stockholders'
equity, an accounting value of $0.20 per share was assigned based upon
subsequent cash purchases of the stock. The recipients are restricted in
their ability to sell or otherwise transfer the shares within a time frame
of two to three years from the date of issuance.
Of the shares awarded, Messieurs Knapp and Markee received 5,000,000 each
while Mr. Bertoldi received 200,000 shares.
COMPENSATION OF DIRECTORS
See Cash Compensation of this Item.
EMPLOYMENT CONTRACTS
There are no employment contracts for any employees or officers as of December
31, 1996.
TERMINATION OF EMPLOYMENT AND CHANGES OF CONTROL ARRANGEMENT
There are no compensatory plans or arrangements, including payments to be
received from the Company, with respect to any person named in the Summary
Compensation Table set out above which would in any way result in payments
to any such person because of his or her resignation, retirement or other
termination of such person's employment with the Company or its
subsidiaries, or any change in control of the Company.
-THIS SPACE INTENTIONALLY LEFT BLANK -
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the share holdings of the Company's
directors and executive officers and those persons or entities who own more
than 5% of the Company's common stock.
Amount and Nature of
Name Address Beneficial Ownership Percent of Class
- ------------------------------------------------------------------------------
Executive Officers and Directors
Paul A. Bertoldi Kalamazoo, MI 410,699 1.33%
James C. Knapp Kalamazoo, MI 5,692,719 18.46%
Stephen J. Markee Richland, MI 6,039,187 19.58%
------------------------------------
Total 12,142,605 39.37%
================================================================================
Owners of 5%
Steven Wallace Beverly Hills, CA 1,844,000 5.98%
================================================================================
CHANGES IN CONTROL
To the knowledge of management, there are no present arrangements or
pledges of securities of the Company which may result in a change in
control of the Company.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
Except as stated below, during the last two calendar years ended December
31, 1996 and 1995, there were no material transactions or any currently
proposed transaction, or series of similar transactions, to which the
Company or any of its subsidiaries was or is to be a party, in which the
amount involved exceeded $60,000 and in which any director or executive
officer, or any security holder who is known to the Company to own of
record of beneficially more than 5% of any class of the Company's common
stock, or any member of the immediate family of any of the foregoing
persons, had an interest. See the caption "Dependence of One or a Few Major
Customers" of the caption "Business" of Item 1, for information concerning
contractual services provided to IBM, a stockholder of the Company, which
services were the result of competitive bids, and Note 5 to the
Consolidated Financial Statements.
<PAGE>
CERTAIN BUSINESS RELATIONSHIPS
Except as stated below, during the last two calendar years ended December
31, 1996 and 1995, there were no material transactions or any currently
proposed transactions, or series of similar transactions, to which the
Company or any of its subsidiaries was or is to be a party, in which the
amount involved exceeded $60,000 and in which any director or executive
officer, or any security holder who is known to the Company to own of
record of beneficially more than 5% of any class of the Company's common
stock, or any member of the immediate family of any of the foregoing
persons, had an interest. Services were provided during 1995 to IBM as
outlined in Item 2, "Dependence on One or a Few Major Customers."
INDEBTEDNESS OF MANAGEMENT
James C. Knapp, Chairman of the Board of Directors and Stephen J. Markee,
President, CEO and CFO, have loaned the Company funds for working capital.
These funds were provided at an interest rate of prime plus 2%. The balance
outstanding at December 31, 1996 was $390,500. At December 31, 1995, the
Company owed $83,500 to Mr. Markee. With the exception of this transaction,
there were no material transactions to which the Company or any of its
subsidiaries was or is to be a party, in which the amount involved exceeded
$60,000 and in which any director or executive officer, or any security
holder who is known to the Company to own or record of beneficially more
than 5% of any class of the Company's common stock, or any member of the
immediate family of any of the foregoing persons, had an interest during
the last two calendar years ended December 31, 1995 and 1994.
TRANSACTIONS WITH PROMOTERS
During the last two calendar years ended December 31, 1996 and 1995, there
were no material transactions or any currently proposed transactions, or
series of similar transactions, to which the Company or any of its
subsidiaries was or is to be a party, in which the amount involved exceeded
$60,000 and in which any promoter, founder, or member of their immediate
family of any of the foregoing persons, had an interest.
Item 13. REPORTS ON FORM 8-K AND EXHIBITS
Reports on Form 8-K:
None
EXHIBITS:
None
-THIS SPACE INTENTIONALLY LEFT BLANK -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereto duly authorized.
I/NET, Inc.
Date: March 28, 1997 By: /s/ Stephen J. Markee
Stephen J. Markee, Director
President, CEO, and CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
Date: March 28, 1997 By /s/ Stephen J. Markee
Stephen J. Markee, Director
President, CEO, and CFO
Date: March 28, 1997 By: /s/ James C. Knapp
James C. Knapp, Chairman
of the Board of Directors
Date: March 28 ,1997 By: /s/ Paul A. Bertoldi
Paul A. Bertoldi, Vice President
Systems Development
<PAGE>
I/NET, Inc.
Consolidated Financial Statements
Years Ended December 31, 1996 and 1995
--------------------------------------
<PAGE>
I/NET, Inc.
Report of Independent Certified Public Accountants 20
Financial Statements:
Consolidated Balance Sheets 21
Consolidated Statements of Operations 22
Consolidated Statements of Stockholders' Equity 23
Consolidated Statements of Cash Flows 24
Summary of Accounting Policies 25 & 26
Notes to Consolidated Financial Statements 27 - 35
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
I/NET, Inc.
Kalamazoo, Michigan
We have audited the accompanying consolidated balance sheets of I/NET,
Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (capital deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
I/NET, Inc. at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 13 to
the financial statements, the Company has suffered recurring losses from
operations, has a significant working capital deficit and requires
additional capital to continue its product development. These factors raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note
13. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
Certified Public Accountants
January 17, 1997
<PAGE>
- --------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------
Assets (Note 3)
Current:
Cash and cash equivalents $ 20,517 $ 682,828
Receivables:
Trade 28,982 12,300
Note - 30,000
Billed contracts (Note 5) - 40,000
- --------------------------------------------------------------------------------
Total Current Assets 49,499 765,128
Office Furniture and Equipment,
less accumulated depreciation
of $482,553 and $446,095 62,392 85,142
- --------------------------------------------------------------------------------
$111,891 $850,270
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
I/NET, Inc.
Consolidated Balance Sheets
December 31, 1996 1995
- --------------------------------------------------------------------------------
Liabilities and Capital Deficit
Current Liabilities:
Accounts payable $ 142,605 $ 358,958
Accruals:
Commissions (Note 1) 250,000 -
Other 179,698 258,124
Advances from stockholders (Note 2) 119,778 119,778
Current maturities of long-term debt (Note 3) 1,122,000 925,000
- --------------------------------------------------------------------------------
Total Current Liabilities 1,814,081 1,661,860
Long-Term Debt, less current maturities (Note 3) 494,642 253,190
- --------------------------------------------------------------------------------
Total Liabilities 2,308,723 1,915,050
- --------------------------------------------------------------------------------
Commitments and Contingency (Notes 1, 8 and 11)
Capital Deficit (Notes 4 and 9):
Common stock, $.001 par value -
shares authorized 50,000,000;
issued and outstanding 30,837,652 in 1996 and 1995 30,838 30,838
Additional paid-in capital 11,836,874 11,836,874
Deficit (14,064,544) (12,932,492)
- --------------------------------------------------------------------------------
Total Capital Deficit (2,196,832) (1,064,780)
- --------------------------------------------------------------------------------
$ 111,891 $ 850,270
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
21
<PAGE>
- --------------------------------------------------------------------------------
I/NET, Inc.
Consolidated Statements of Operations
Year ended December 31, 1996 1995
- --------------------------------------------------------------------------------
Revenues (Note 5) $ 724,032 $ 1,276,757
Cost of Revenues 729,070 830,449
- --------------------------------------------------------------------------------
Gross profit (loss) (5,038) 446,308
Selling, General, and Administrative Expenses 1,060,402 886,057
Special Charges (Note 12) - 4,962,604
- --------------------------------------------------------------------------------
Loss from operations (1,065,440) (5,402,353)
Interest Expense - net of interest
income $12,888 in 1996 and $7,084 in 1995
66,612 159,149
- --------------------------------------------------------------------------------
Net Loss $ (1,132,052) $ (5,561,502)
- --------------------------------------------------------------------------------
Net Loss per Common Share $ (0.04) $ (0.37)
- --------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding 30,837,652 15,199,191
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
22
<PAGE>
- --------------------------------------------------------------------------------
I/NET, Inc.
Consolidated Statements Of Stockholders' Equity
(Capital Deficit)
Common Stock Additional
-------------------------
Paid-in
Shares Amount Capital Deficit Total
- --------------------------------------------------------------------------------
Balance, January 1, 1995
11,978,571 $ 11,979 $ 7,972,407 $ (7,370,990) $ 613,396
Issuance of common stock:
For accounts & notes payable
2,659,081 2,659 640,667 - 643,326
For compensation
12,400,000 12,400 2,467,600 - 2,480,000
For cash
3,800,000 3,800 756,200 - 760,000
Net loss for the year
- - - (5,561,502) (5,561,502)
- --------------------------------------------------------------------------------
Balance, December 31, 1995
30,837,652 30,838 11,836,874 (12,932,492) (1,064,780)
Net loss for the year
- - - (1,132,052) (1,132,052)
- --------------------------------------------------------------------------------
Balance, December 31, 1996
30,837,652 $ 30,838 $ 11,836,874 $ (14,064,544) $ (2,196,832)
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
23
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Year ended December 31, 1996 1995
- --------------------------------------------------------------------------------
Operating Activities (Note 10):
Net loss (1,132,052) $ (5,561,502)
Depreciation and amortization 36,458 93,855
Provision for bad debts - 154,805
Write-down of miscellaneous other assets - 35,015
Special charges (Note 12) - 4,962,604
Changes in assets and liabilities:
Receivables 23,318 62,028
Inventories - 20,787
Prepaid expenses and other assets - 47,282
Accounts payable 7,140 (64,042)
Accruals 207,220 214,456
- --------------------------------------------------------------------------------
Cash Used in Operating Activities (857,916) (34,712)
- --------------------------------------------------------------------------------
Investing Activities (Note 10):
Proceeds from note receivable 30,000 97,600
Developed computer software - (44,564)
Capital expenditures (13,708) -
- --------------------------------------------------------------------------------
Cash Provided by Investing Activities 16,292 53,036
- --------------------------------------------------------------------------------
Financing Activities (Note 10):
- --------------------------------------------------------------------------------
Proceeds from issuance of notes to stockholders 300,000 8,500
Proceeds from issuance of common stock - 760,000
Proceeds from issuance of notes payable - 100,000
Principal payments on long-term debt (120,687) (221,114)
- --------------------------------------------------------------------------------
Cash Provided by Financing Activities 179,313 647,386
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (662,311) 665,710
Cash and Cash Equivalents, beginning of year 682,828 17,118
- --------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 20,517 $ 682,828
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes
to consolidated financial statements.
25
<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 I/NET, 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
Prior to 1996, the Company was 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, during 1996, further developed and began to
market Internet computer software products. It's major customer was
International Marketing Strategies (IMS) in 1996 and International
Business Machines (IBM) in 1995. (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 a maturity of three months or less
when purchased 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 at year end.
See accompanying notes to consolidated financial statements.
26
<PAGE>
- --------------------------------------------------------------------------------
I/NET, Inc.
Summery of Accounting Policies
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. See Note 12 for write-off of capitalized computer software
costs in 1995.
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 December 31,
1996.
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.
Advertising Costs
The Company expenses the cost of advertising as incurred.
Advertising expenses were approximately $12,000 and $50,000 in
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.
See accompanying notes to consolidated financial statements.
27
<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 December 31, 1996 as there has not been any
commissionable sales of these products to date.
2. Short-Term Advances
from Stockholders
Advances from stockholders consist of:
1996 1995
- -----------------------------------------------------------------------------
Non-interest bearing notes payable to
stockholders, due on demand $ 29,278 $ 29,278
Stockholders' advances bearing interest at
the prime rate plus 2% (effectively
10.25% at December 31, 1996), due on
demand 90,500 90,500
- -----------------------------------------------------------------------------
$ 119,778 $ 119,778
- -----------------------------------------------------------------------------
3. Long-Term Debt
Long-term debt consists of:
1996 1995
- ----------------------------------------------------------------------------
Notes payable to vendors (see below) $ 1,134,304 $ 927,929
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 December 31,
1996), with final payment due in
December, 1997. The note is
collateralized by all of the Company's
assets 50,375 102,261
28
<PAGE>
- --------------------------------------------------------------------------------
I/NET, Inc.
Notes to Consolidated Financial Statements
1996 1995
- --------------------------------------------------------------------------------
Note payable for a trademark, with
monthly payments of $1,500 including
interest at the prime rate (8.25% at
December 31, 1996) with the balance
due February 15, 1997 $ 131,963 $ 148,000
Notes payable to stockholders bearing
interest at 8% and due in December,
2001 300,000 -
- ----------------------------------------------------------------------------
1,616,642 1,178,190
Less current maturities 1,122,000 925,000
- ----------------------------------------------------------------------------
Total Long-Term Debt $ 494,642 $ 253,190
- ----------------------------------------------------------------------------
Notes payable to various vendors totaling $1,134,304 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% (effectively 10.25% at
December 31, 1996).
The Company is in default on two notes totaling $437,974 and
is renegotiating alternative repayment terms with the
noteholders.
Another vendor note in the amount of $59,694 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
2004.
Another vendor note in the amount of $42,155 is due in
monthly installments of $2,998 including interest at 11%.
Final payment is due March 1998.
Another vendor note in the amount of $153,826 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.
Aggregate maturities of long-term debt over the next five years
assuming repayment of stockholders' advances (Note 2) and notes are
as follows:
1997 $ 1,122,000
1998 $ 40,000
1999 $ 34,000
2000 $ 37,000
2001 $ 341,000
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 in 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 December 31, 1996.
29
<PAGE>
- --------------------------------------------------------------------------------
I/NET, Inc.
Notes to Consolidated Financial Statements
5. Related Party
Transactions/Major
Customers
The Company provided Internet products, facilities management
services and software development services to a few major customers
as follows:
1996 1995
- ----------------------------------------------------------------------------
Internet Products:
International Marketing Strategies -
(IMS) $ 346,000 $ 50,000
SUPPORT NET, INC. 158,000 -
- ----------------------------------------------------------------------------
$ 504,000 $ 50,000
- ----------------------------------------------------------------------------
Facilities Management Services:
Greater Kalamazoo Association of
Realtors $ 120,000 $ 149,000
- ----------------------------------------------------------------------------
Software Development:
International Business Machines (IBM) $ - $ 978,000
- ----------------------------------------------------------------------------
IBM is also a minority stockholder in the Company and $40,000 was
due from it as of December 31, 1995.
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.
30
<PAGE>
- --------------------------------------------------------------------------------
I/NET, Inc.
Notes to Consolidated Financial Statements
Significant components of the Company's deferred tax assets as of
December 31, are as follows:
1996 1995
- ----------------------------------------------------------------------------
Deferred Tax Assets:
Accruals $ 99,000 $ 15,000
Deferred revenue - 13,000
Depreciation and amortization 12,000 19,000
Trademark 66,000 100,000
Net operating loss carryforwards 3,624,000 2,332,000
Tax credit carryforwards 42,000 42,000
Capital loss carryforwards 24,000 24,000
- ----------------------------------------------------------------------------
Total Deferred Tax Assets 3,867,000 2,545,000
Valuation Allowance (3,867,000) (2,545,000)
- ----------------------------------------------------------------------------
$ - $ -
- ----------------------------------------------------------------------------
As of December 31, 1996, the Company had a net operating loss
carryforward of approximately $10,659,000 and investment tax credit
carryforwards of approximately $42,000 available to reduce future
taxable income and taxes, respectively. 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 1996 or 1995.
31
<PAGE>
- --------------------------------------------------------------------------------
I/NET, Inc.
Notes to Consolidated Financial Statements
8. Operating Leases
The Company leases its facilities and certain equipment under non-
cancelable operating leases. Rental expense under these leases was
approximately $138,000 for the year ended December 31, 1996 and
$195,000 in 1995. Future minimum annual lease payments
subsequent to December 31, 1996 are as follows:
1997 $ 88,000
1998 $ 84,000
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, 1995 351,913 $ 0.18-2.50
Lapsed (212,477) $ 0.18-2.50
- ----------------------------------------------------------------------------
December 31, 1995 139,436 $ 0.18-2.50
Lapsed (96,936) $ 0.18-2.50
- ----------------------------------------------------------------------------
December 31, 1996 42,500 $ 2.50
- ----------------------------------------------------------------------------
Of the 351,913 options outstanding at January 1, 1995, 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.
32
<PAGE>
- --------------------------------------------------------------------------------
I/NET, Inc.
Notes to Consolidated Financial Statements
At December 31, 1996, 582,255 shares of common stock are reserved
for the incentive stock option plan and 17,000 options were vested
and exercisable. The remaining contractual life of the 42,500 shares
outstanding is seven years.
10. Supplemental
Disclosure of
Cash Flow
Information
Noncash investing and financing activities are summarized as follows:
1996 1995
---- ----
Issuance of commonstock for retirement of debt $ - $ 597,000
- --------------------------------------------------------------------------------
Conversion of accounts payable into vendor
- - notes payable $ 223,000 $1,417,000
- --------------------------------------------------------------------------------
Conversion of accrued interest payable into
vendor notes payable $ 36,000 $ -
- --------------------------------------------------------------------------------
Interest paid for the years ended December 31, 1996 and 1995 was
$78,000 and $11,000, respectively. The Company paid no income
taxes during 1996 and 1995.
11. Litigation
The Company is involved in various legal actions arising from the
normal course of business. Management does not anticipate any
material losses as a result of these proceedings.
12. Special Charges
During the year ended December 31, 1995, it was determined that the
Company would not be able to provide the additional funding
necessary to develop, market, deploy and maintain its previously
capitalized computer software product named Embarc. This failure
to obtain financing has resulted in the write-off of the development
costs of the product in the amount of $2,151,000.
In addition the Company has determined that the carrying amount of
a trademark which it acquired at a cost of $225,000 and related
inventory in the amount of approximately $107,000 for its
Career/NET product could not be recovered through future
operations. Accordingly, the Company wrote off these amounts. The
product had not reached the market acceptance as anticipated.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and For Long-Lived Assets to Be Disposed Of," the Company
assessed the expected recoverability of the carrying amount of the
trademark and related inventory discussed above and, due to
significant changes in the extent to which those assets were anticipated
to be used, it recognized an impairment loss measured as the amount
by which the carrying amount of the assets exceeded the expected
discounted future cash flows.
During 1995, the Company issued 12,400,000 shares of unregistered
common stock to certain officers and key employees in recognition of
outstanding service performed during a time of financial instability
and severe hardship. Although at the time of issuance, there was not
an active market in the Company's common stock and there was a
deficit in stockholders' equity, an accounting value of $0.20 per share
was assigned based upon subsequent cash purchases of the stock. The
recipients are restricted in their ability to sell or otherwise transfer the
shares within a time frame of two to three years from the date of
issuance.
Special charges consist of the following for the year ended December
31, 1995:
Capitalized computer software costs $ 2,151,000
Trademark 225,000
Inventory 107,000
Stock award 2,480,000
- ----------------------------------------------------------------------------
Total $ 4,963,000
- ----------------------------------------------------------------------------
33
<PAGE>
- --------------------------------------------------------------------------------
I/NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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. 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.
34
<PAGE>
PERIOD-TYPE 12 MONTH
FISCAL-YEAR-END DEC-31-1996
PERIOD-END DEC-31-1996
CASH 20,517
SECURITIES 0
RECEIVABLES 28,982
ALLOWANCES 0
INVENTORY 0
CURRENT-ASSETS 49,499
PP&E 544,945
DEPRECIATION 482,553
TOTAL-ASSETS 111,891
CURRENT-LIABILITIES 1,814,081
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 30,838
OTHERSE 11,836,874
TOTAL-LIABILITY-AND-EQUITY 111,891
SALES 724,032
TOTAL REVENUES 724,032
CGS 729,070
OTHER EXPENSES 1,060,402
LOSS-PROVISION 0
INTEREST-EXPENSE 79,500
INCOME-PRETAX (1,132,052)
INCOME-TAX 0
INCOME-CONTINUING (1,132,052)
DISCONTINUED 0
EXTRAORDINARY 0
0
CHANGES 0
NET-INCOME (1,132,052)
EPS-PRIMARY (.04)
EPS-DILUTED (.04)
