U.S. Securities and Exchange Commission
Washington D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the three month period ended March 31, 1998
[ ] 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 (IRS 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 __
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State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practical date:
March 31, 1998
31,037,652
PART 1 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 1997 annual report on Form
10-KSB.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of March 31, 1998, the results of its
operations for the three month periods ended March 31, 1998 and 1997, and its
cash flows for the three month period ended March 31, 1998. All such adjustments
are of normal and recurring nature.
<PAGE>
I/NET Inc.
Consolidated Statements of Income
(unaudited)
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Three Months Ending
March 31, March 31,
1998 1997
Revenues $ 432,781 $ 269,748
Cost of Revenues 242,226 130,900
Gross Profit $ 190,555 $ 138,848
Selling, General, and Administrative Expenses 139,489 186,052
Earnings (loss) from operations $ 51,066 $ (47,204)
Interest Expense Net of interest income of
$3,908 in 1998 and $271 in 1997. (17,501) (26,725)
Earnings (Loss) before Extraordinary Item $ 33,565 $ (73,929)
Extraordinary item:
Gain on extinguishment of debt (note 3) - 97,946
Net Earnings $ 33,565 24,017
Net Earnings per share
Earnings before Extraordinary Item $ - $ -
Extraordinary Item $ - $ -
Net Earnings per share $ - $ -
Basic and Diluted Weighted Average Number of
Common Shares Outstanding 31,037,652 30,837,652
See accompanying summary of accounting policies and notes to consolidated
financial statements
<PAGE>
I/NET, Inc.
Consolidated Balance Sheet
(unaudited)
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March 31, 1998
Assets (Note 2 and 3)
Current Assets
Cash $ 73,126
Trade Receivables 137,037
Total Current Assets $ 210,163
Office Furniture and Equipment, Net of
Accumulated Depreciation $169,591 36,811
Total Assets $ 246,974
Liabilities and (Capital Deficit)
Current Liabilities
Accounts Payable $ 107,891
Accruals:
Commissions (Note 1) 255,500
Other 200,818
Advances from Stockholders' (Note 2) 117,278
Current maturities of long-term debt (Note 3) 753,000
Total Current Liabilities $ 1,434,487
Long-term Debt, less current maturities (Note 3) 548,034
Total Liabilities $ 1,982,521
Commitments and Contingencies (Notes 8 and 11) -
Stockholders' Equity (Capital Deficit)
Common Stock $.001 par value; Authorized 50,000,000 Shares:
Issued and outstanding 31,037,652 31,038
Additional Paid in Capital 11,886,674
Deficit (13,653,259)
Total (Capital Deficit) (1,735,547)
Total Liabilities and (Capital Deficit) $ 246,974
See accompanying summary of accounting policies and notes to consolidated
financial statements
<PAGE>
I/NET Inc.
Consolidated Statements of Cash Flows
(unaudited)
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Three Months Ending
March 31 March 31
1998 1997
Operating Activities
Net Earnings $ 33,565 $ 24,017
Depreciation and Amortization 7,500 7,500
Extraordinary Item: Gain on Extinquishment of debt - (97,946)
Changes in Assets and Liabilities
Accounts Receivable (57,281) (150,735)
Accounts Payable 15,825 96,391
Accruals 10,542 37,490
Cash Provided By (Used In) Operating Activities $ 10,151 $ (83,283)
Investing Activities
Capital Expenditures ( 8,016) $ -
Cash (Used In) Investing Activities $ (8,016) $ -
Financing Activities
Advances from Stockholder - 50,000
Repayment of Advances from Stockholders (17,500) -
Proceeds from the Issuance of Notes Payable - 50,000
Principle Payments on Long-Term Debt (47,448) (33,724)
Cash Provided by (Used In) Financing Activities $ (64,948) $ 66,276
Decrease in Cash and Cash Equivalents $ (62,813) $ (17,007)
Cash and Cash Equivalents, Beginning of Period 135,939 20,517
Cash and Cash Equivalent, End of Period $ 73,126 $ 3,510
See accompanying summary of accounting policies and notes to consolidated
financial statements
<PAGE>
I/NET, Inc.
Summary of Accounting Policies
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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
The Company is engaged in the business of providing Website services on a
contract basis to private sector clients. In addition, the Company has further
developed and is marketing Internet computer software products. Its major
customers are International Marketing Strategies (IMS) and International
Business Machines (IBM).
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 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
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.
<PAGE>
I/NET, Inc.
Summary of Accounting Policies
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Developed Computer Software
Software development costs are accounted for in accordance with the
provisions of Statement of Financial Accounting Standard (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 products general release to
customers. Costs incurred prior to technological feasibility or subsequent to
the product's general release to customers, as well as selling, general, and
administrative costs associated with the products, are expensed as incurred.
Fair Value of Financial
The Company's financial instruments consist of Instruments 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 carrying
amounts of the Company's financial instruments approximate their fair values
at March 31, 1998.
Revenue Recognition
Revenues for 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 completions of costs.
Earnings Per Share
Earnings per share amounts have been calculated using the weighted average
number of common shares outstanding, for the respective periods. Effective
<PAGE>
I/NET Inc.
Summary of Accounting Policies
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December 31,1997, the Company adopted SFAS No. 128, "Earnings per Share." This
pronouncement requires dual presentation of basic and diluted earnings per
share. All outstanding warrants and options are anti-dilutive at March 31, 1998.
New Accounting Pronouncements
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" were
issued. SFAS No. 130 addressed standards for reporting and display of
comprehensive income and its components and SFAS No. 131 requires disclosure of
reportable operating segments. In October 1997, Statement of Position (SOP) 97-2
"Software Revenue Recognition" was issued by the AICPA Accounting Standards
Executive Committee. This SOP provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing or otherwise
marketing computer software. All statements are effective for the Company for
the year ended December 31, 1998. The Company will be reviewing these
pronouncements to determine their applicability to the Company, if any.
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
1. Commissions
In prior years the Company agreed to release a distributor from its exclusive
contract to distribute certain I/NET products. In exchange for this release
I/NET agreed to pay a 7.5% commission to the other distributor of I/NET's sales
of certain products sold through September 30, 1999 but at a minimum of $250,000
and a maximum amount of $500,000.
2. Short-term Advances from Stockholders
Advances from stockholder consist of:
March 31, 1998
Non-interest bearing notes payable to
stockholders, due on demand 26,778
Secured stockholder's advances
bearing interest at 8%, and are due on
demand 90,500
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$117,278
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3. Long-term Debt
Long-term debt consists of:
March 31, 1998
Notes payable to vendors (see below) $ 957,091
Notes payable to stockholders
bearing interest at 8% and due in
December, 2001, secured by all
the company's assets 343,940
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1,301,034
Less current maturities 753,000
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Total Long-term Debt $ 548,034
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<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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Notes Payable to Vendors
Unsecured notes payable to various vendors totaling $957,091 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 10.5% at March 31, 1998).
Another note in the amount of $123,282 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 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 current.
This note in the amount of $264,536 calls for monthly installments of 5% of the
previous months cash receipts (as defined) but at a minimum rate of $10,000 bi-
monthly and bears interest at the prime rate plus 2%. Final payment, assuming
minimum payments only, is February 2004.
Another vendor note in the amount of $18,907 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 December 1999.
Another vendor note in the amount of $109,711 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 November 2001.
See accompanying notes to consolidated financial statements
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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Aggregate maturities of long-term debt over the next five years assuming
repayment of stockholders' advances (Note 2) and notes are as follows:
1998 $ 753,000
1999 $ 76,000
2000 $ 75,000
2001 $ 413,000
Subsequent to 2001 $ 101,000
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 1,839,285 shares of common stock at $2.40 per
share. The warrants expire through 1999 and are not dilutive. Also, in
connection with these sales, underwriters were issued warrants for 1,145,714
shares of common stock at a weighted average price of $.90 and are exercisable
for five years, expiring in 1999. All warrants were exercisable at March 31,
1998.
5. Related Party Transactions/Major Customers
The Company provided Internet products, and websight services to major customers
as follows:
Three months ended March 31, 1998
Internet Products:
International Business Machines $ 200,000
International Marketing Strategies
(IMS) 28,000
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$ 228,000
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Websight Consulting Services:
International Business Machines $ 201,000
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IBM is also a minority stockholder in the Company.
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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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 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 are as follows:
March 31, 1998
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Deferred Tax Assets:
Accruals $ 97,000
Trademark 61,000
Net operating loss
carryforwards 3 ,578,000
Tax Credit carryforwards 42,000
Capital loss carryforwards 24,000
Deferred Revenue 17,000
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Total Deferred Tax Assets $ 3,819,000
Valuation Allowance ( 3,819,000)
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$ -
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As of March 31, 1998, the Company had a net operating loss carryforwards
approximately $10,223,000 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 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 Board of
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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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 1998 or 1997.
8. Operating Leases
The Company leases its facilities and certain equipment under non-cancelable
leases. Rental expense under these leases was approximately $26,000 for the
three months ended March 31, 1998 and $20,000 for the three months ended
March 31, 1997. Future minimum annual lease payments subsequent to March 31,
1998 are as follows:
1998 $ 81,000
1999 $ 106,000
2000 $ 90,000
2001 $ 60,000
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
were 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 Weighted Average
Shares Per Share Price Per Share
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January 1, 1997 42,500 $2.50 $2.50
Granted June 1997 100,000 .37 .37
Lapsed (27,500) 2.50 2.50
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December 31, 1997 115,000 $.37-2.50 $ .65
and March 31, 1998
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<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statement
At March 31, 1998, 582,255 shares of common stock are reserved for the incentive
stock option plan and 12,000 options were vested and exercisable. The remaining
contractual life on these options is five years. The remaining contractual life
of the 103,000 shares outstanding is ten years.
Under SFAS No. 123, "Accounting for Stock Based Compensation", the Company is
required to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plan had been
determined in accordance with the fair based method prescribed in SFAS No. 123.
The Company estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following assumptions used
for the grant in 1997; expected volatility of 93 percent; risk-free interest
rate of 6.4 percent, and an expected option life at 10 years.
Under the accounting provisions of SFAS #123, the Company's net income for the
three months ended March 31, 1998 would have been unaffected.
10. Supplemental Disclosure of Cash Flow Information
Interest paid for the three months ended March 31, 1998 and 1997 was 13,000 and
$11,00 respectively. The Flow Information Company paid no income taxes during
1998 and 1997.
11. Contingencies
Royalties
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.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
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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:
Paid by IBM on behalf of I/NET in October, 1997 $ 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 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. The first reimbursement was due in March
1998. The Company recognized $200,000 of revenue from these advances in 1997 and
$200,000 in the first quarter of 1998 as certain milestone events were met.
These advances are treated as if under a research and development agreement
whereby I/NET is not obligated to repay any of these funds advanced by IBM
except from royalties of future sales, if any. It anticipates recording the
remaining $200,000 as revenue as other milestones are met in 1998.
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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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. Continue 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. The company has
suffered recurring losses from operations in prior years, 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
and is actively marketing its 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.
13. Management's Discussion and Analysis of Financial Conditon and Results of
Operation
Three months ended March 31, 1998 and 1997.
Results of Operation
Revenues for the three months ended March 31, 1998 were $432,781 as compared
to $269,748 for the quarter ended March 31, 1997. When analyzed by product
category, revenues of Website consulting services to IBM were $201,000 in 1998,
as compared to $100,000 in 1997 as the contract with IBM was signed in March
1997 to provide these services. Internet products accounted for revenues of
$228,000 in 1998 and $100,000 in 1997. Revenue from the porting of Netscape
products, which are included in the above, to the AS/400 operating system
produced revenue of $200,000 in 1998 and $0 in 1997.
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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Cost of revenues increased by $111,000 as compared to 1997. The primary cause
for this increase was the hiring of additional development personnel for the
Netscape and IBM projects.
General and administrative expenses decreased by $47,000 as compared to 1997.
The primary cause for this decrease was a reduction in administrative personnel.
Interest expenses decreased by $9,000 due to decreased borrowings in the first
quarter of 1998 as interest-bearing debt continues to be repaid.
14. Financial Condition
The Company's primary need for capital has been and Liquidity to invest in
computer software development. As of March 31, 1998. The Company's working
capital deficit was $1,224,000, as compared to a deficit of $1,424,000 at
March 31, 1997. The resulting decrease in working capital deficit is earnings
in 1998 and 1997.
The Company believes that the additional sales provided by the above mentioned
agreements, the continued development of new products, together with the
renegotiations of its defaulted debt, should provide the Company with sufficient
working capital to fund its needs for 1998. However, there can be no assurance
these activities will be successful.
In June 1997, SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosure about Segments of an Enterprise Related Information" were issued by
the AICPA Accounting Standards Executive Committee. This SOP provides guidance
on when revenue should be recognized and in what amounts for licensing, selling
or otherwise marketing computer software. All statements are effective for the
Company for the year ended December 31, 1998. The Company will be reviewing
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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these pronouncements to determine their applicability to the Company, if any.
All I/NET developed software is year 2000 compliant.
<PAGE>
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following person on behalf of the
registrant and in the capacities and on the dates indicated:
I/NET Inc.
Date: May 7, 1998
By: ____________________________
Stephen J. Markee
Director, President, CEO and CFO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000789860
<NAME> I/NET
<MULTIPLIER> 1
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<EXCHANGE-RATE> 1
<CASH> 73,126
<SECURITIES> 0
<RECEIVABLES> 137,037
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 210,163
<PP&E> 206,402
<DEPRECIATION> 169,591
<TOTAL-ASSETS> 246,974
<CURRENT-LIABILITIES> 1,434,487
<BONDS> 0
0
0
<COMMON> 31,038
<OTHER-SE> 11,886,674
<TOTAL-LIABILITY-AND-EQUITY> 246,974
<SALES> 432,781
<TOTAL-REVENUES> 432,781
<CGS> 242,226
<TOTAL-COSTS> 242,226
<OTHER-EXPENSES> 139,489
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,501
<INCOME-PRETAX> 33,565
<INCOME-TAX> 0
<INCOME-CONTINUING> 33,565
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,565
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
