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, 1997. [ ] Transition Report under
Section 13 or 15(d)of the Securities Exchange Act of 1934 For the transition
Period from _________to_________
Commission File no. 0-23806
I/NET, Inc.
(Name of Small Business Issuer in its Charter)
DELAWARE 87-0046720
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
Incorporation or organization)
643 W. Crosstown Parkway
Kalamazoo, Michigan 49008
(Address of Principal Executive Officers)
Issuer's Telephone Number: (616) 344-301
Securities Registered under Section 12(b) of the Exchange Act:
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 delinquentfiles 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.[X
<PAGE>
State Issuer's revenues for its most recent fiscal year:
$1,692,170
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.
$3,345,290
There are approximately 17,606,792 shares of common voting stock of the
registrant held by non-affiliates. This valuation is based upon the average bid
price 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 30, 1998
(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, 1997
31,037,652
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Transitional Small Business Disclosure Format(check one): Yes X NO___
-THIS SPACE INTENTIONALLY LEFT BLANK
<PAGE>
TABLE OF CONTENTS
Item 1. Description of Business................................................4
Item 2. Description of Property................................................7
Item 3. Legal Proceedings......................................................7
Item 4. Submission of Matters to a Vote of Security Holders....................7
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..............................................8
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 prior years, the Company sold and issued approximately 6,000,000 shares
of its common stock for cash, trademark, and extinguishment of debt. In
connection with the issuances, the Company issued warrants to the purchasers of
the common stock to acquire up to 2,039,285 shares of common stock at prices
ranging from $.25 to $2.40 per share. The warrants expire through 1999. During
April 1997, a warrant exercised its option to purchase 200,000 shares of common
stock at $.25 per share for cash. The remaining 1,839,285 warrants are
exercisable at $2.40 per share 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 remaining warrants were exercisable at December 31, 1997.
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. I/NET also performs Websight Consulting
Services for IBM.
During 1995, I/NET brought to the marketplace its own Web Server/400TM as the
first commercially available product, which can connect the nearly 425,000
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), 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.
I/NET's Commerce Server/400 TM 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 Dreyfus Brokerage
Services, Inc. These companies have installed the product in various locations
throughout the world. In February, 1997, IBM bestowed
<PAGE>
upon I/NET the prestigious Partner in Development "Product of the Year Award"
for Commerce Server/400TM. Six thousand international attendees to the IBM
Business Partner Executive Conference were on hand to witness the presentation.
This event spurred the signing of new distribution contracts to represent
I/NET's products.
IBM AS/400 is the world's most popular multi-user business computing system,
with nearly 425,000 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.
The Company successfully negotiated a new contract with IBM in March 1997 in
which it will provide Website consulting services for IBM. This contract, while
cancelable, is for a period of twenty-four months.
I/NET has also signed an agreement with Netscape Communications Corp., a world
leader in delivering Internet solutions to the marketplace. This agreement gives
I/NET the right to port their entire suite of Internet servers to the AS/400,
and also distribute these products for the next three years. IBM was
instrumental in arranging this agreement, as they know it will benefit the
entire AS/400 community.
All I/NET developed software is year 2000 compliant.
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 are performed by IMS.
COMPETITIVE BUSINESS CONDITIONS AND THE SMALL BUSINESS ISSUER'S COMPETITIVE
POSITIONS 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.
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 develops 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 1997 and 1996 as
follows:
<PAGE>
Year ended December 31, 1997 1996
- --------------------------------------------------------------------------------
Internet Products
International Business Machines $ 200,000 $ -
International Marketing Strategies (IMS) 405,000 346,000
SUPPORT NET, INC. (Included with IMS
for 1997) - 158,000
LANSA, Inc. 300,000 -
- --------------------------------------------------------------------------------
$905,000 $504,000
- --------------------------------------------------------------------------------
Facilities Management Services
Greater Kalamazoo Association of Realtors $ - $108,000
- --------------------------------------------------------------------------------
Website Consulting Services
International Business Machines (IBM) $702,000$ -
- --------------------------------------------------------------------------------
IBM is also a minority stockholder in the Company.
PATENTS, TRADEMARKS, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS, INCLDUING DURATION
I/NET has various trademarks for its products, including WEB SERVER/400,
COMMERCE SERVER/400, and CAREER/NET.
On September 30, 1997, the Company entered into a software license agreement
with Netscape Communications Corporation (Netscape) wherein Netscape granted to
the Company the right to port certain of its Internet Server products to the IBM
AS/400 platform. This agreement is for a period of three years and allows the
Company to market and distribute the ported products upon their modification to
the AS/400 platform.
In exchange for this license agreement, I/NET has agreed to pay minimum
royalties to Netscape in the amount of $3,000,000 according to the following
repayment schedule:
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
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 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.
<PAGE>
NEED FOR ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTIONS OR SERVICES
The performance of services and the supply of products by the Company are not
subject to governmental approval.
EFFECT OF EXISITING 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 was no research and development costs incurred by the Company during the
calendar years ended December 31, 1997 and 1996.
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, 1997, the Company had 14 full time employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company has 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 which 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 1997.
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 1997 and 1996 is summarized by
quarter below:
<PAGE>
1997 1997 1997 1997 1996 1996 1996 1996
1st qtr 2nd qtr 3rd qtr 4th qtr 1st qtr 2nd qtr 3rd qtr 4th qtr
HIGH $0.75 $0.50 $0.41 $0.36 $1.13 $0.97 $0.81 $0.81
LOW $0.50 $0.34 $0.34 $0.21 $0.63 $0.60 $0.41 $0.56
These bid prices are quotations of broker-dealers that reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not represent
actual transactions.
HOLDERS
The number of record holders of the Company's common stock as of December 31,
1997, were 292. 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, 1997 AND 1996
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 1997, were $1,692,170 as compared to
$724,032 for the year ended December 31, 1996. When analyzed by product
category, revenues of Website development services to IBM were $702,000 in 1997,
as compared to $0 in 1996 as a contract with IBM was signed in March 1997 to
provide these services. Revenues from facilities management services were $0 in
1997 and $120,000 in 1996 as the contract with the Greater Kalamazoo Association
of Realtors expired in October 1996. Internet products accounted for revenues of
$905,000 in 1997 and $504,000 in 1996 as new products were being introduced to
the market. Revenue from the porting of Netscape products to the AS/400
operating system produced revenue of $200,000 in 1997 and $ 0 in 1996.
Cost of revenues increased by $10,000 as compared to 1997. The primary cause for
this increase was the hiring of additional personnel for the Netscape and IBM
projects.
General and administrative expenses decreased by $487,000 as compared to 1996.
The primary cause for this decrease was a reduction in administrative personnel,
negotiation of a new lease agreement for its facilities and a reduction of
commission expense of $250,000 in 1997 as compared to 1996.
Interest expenses increased by $34,000 due to the increased borrowing in the
first quarter of 1997.
During March 1997, the Company entered into an agreement with a note holder to
form a joint venture. I/NET contributed previously written-off technology
together with a trademark and web presence in exchange for the forgiveness of
$97,946 of indebtedness. The noteholder is required to contribute cash and
marketing expertise in this newly formed joint venture. There have been no
operating activities on this joint venture to date. This $97,946 has been
treated as an extraordinary item for financial statement purposes.
FINANCIAL CONDITION AND LIQUIDITY
The Company's primary need for capital has been to invest in computer software
development. As of December 31,
<PAGE>
1997, the Company's working capital deficit was $1,106,000, as compared to a
deficit of $1,765,000 at December 31, 1996. The resulting decrease in working
capital deficit is earnings in 1997 of $378,000 compared to a loss in 1996 of
$1,132,000.
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 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.
All I/NET developed software is year 2000 compliant.
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 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.
ITEM 7. FINANCIAL STATEMENTS
SECTION PAGE NUMBER
Report of Independent Certified Public Accountants............................20
Consolidated Balance Sheets as of December 31, 1997 and 1996..................21
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996..................................................22
Consolidated Statements of Stockholders' Equity (Capital Deficit)
for the years ended December 31, 1997 and 1996..............................23
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and l996..................................................24
Summary of Accounting Policies.............................................25-26
Notes to Consolidated Financial Statements.................................27-33
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 OFFICER
The following table sets forth the names, nature of all positions, and offices
held by all directors and executive officers of the Company for the calendar
year ended December 31, 1997, and to the date hereof, and the period or periods
during which each such director or executive officer has served in their
respective positions.
Name Position Held Date of Election or Designation
------ --------------- ---------------------------------
James C. Knapp* Chairman of the Board of Directors 1986
Stephen J. Markee* President and CEO, 1985
Director, 1986
and CFO 1995
Paul A. Bertoldi* Vice President Systems Development 1989
*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.
-THIS SPACE INTENTIONALLY LEFT BLANK-
<PAGE>
BUSINESS EXPERIENCE
JAMES C, KNAPP, CHAIRMAN: Mr. Knapp, one of I/NET's initial founders, is 47
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. He is
also an international speaker on Internet security.
STEPHEN J. MARKEE, PRESIDENT, CEO AND CFO: Mr. Markee is 52 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 State Army
during the Viet Nam 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 resources. 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 35 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 brothers-in-law, 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 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.
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:
<PAGE>
- - 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.
-THIS SPACE INTENTIONALLY LEFT BLANK-
<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 Annual
Principal Position Dec. 31 Compensation
$
- ---------------------- ----------------- ------------ ------------- ------------
James C. Knapp 1997 $125,000
Chairman 1996 $130,208 -0- -0-
- ---------------------- ----------------- ------------ ------------- ------------
- ---------------------- ----------------- ------------ ------------- ------------
Stephen J. Markee 1997 $125,000
President, CEO, 1996 $130,208 -0- -0-
CFO and Director
- ---------------------- ----------------- ------------ ------------- ------------
- ---------------------- ----------------- ------------ ------------- ------------
Paul A. Bertoldi 1997 $ 77,703
Vice President, 1996 $ 72,917 -0- -0-
Systems Development
- ---------------------- ----------------- ------------ ------------- ------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Long Term Compensation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Awards Payouts
- --------------------------------------------------- ----------------------------
- ---------------- --------------- --------------- --------------- ---------------
(f)* (g) (h) (i)**
- ----------------- ---------- ------------ ------------ ---------- --------------
- ----------------- ---------- ------------ ------------ ---------- --------------
Name and Year Ended Restricted Option/SAR's LTIP All Other
Principal Dec. 31 Stock Award (#) Payouts Compensation
Position ($) ($) ($)
- ----------------- ---------- ------------ ------------ ----------- -------------
- ----------------- ---------- ------------ ------------ ----------- -------------
James C. Knapp 1997 $7,876
Chairman 1996 -0- -0- -0- $8,104
- ------------------ --------- ------------ ------------ ------------ ------------
- ------------------ --------- ------------ ------------ ------------ ------------
Stephen J. Markee 1997 $4,932
President, CEO, 1996 -0- -0- -0- $6,420
CFO and Director
- ------------------ --------- ------------ ------------ ------------ ------------
- ------------------ --------- ------------ ------------ ------------ ------------
Paul A. Bertoldi 1997 $4,745
Vice President, 1996 -0- -0- -0- $5,564
Systems
Development
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
*See the caption "All Other Compensation" herein 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 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:
<PAGE>
Weighted
Option Price Average Price
Shares Per Share Per Share
January 1, 1996 139,436 $.18-2.50 $1.72
Lapsed ( 96,936) .18-2.50 1.39
- --------------------------------------------------------------------------------
December 31, 1996 42,500 2.50 2.50
Granted June 1997 100,000 .37 .37
Lapsed (27,500) 2.50 2.50
- --------------------------------------------------------------------------------
December 31, 1997 115,000 $.37-2.50 $ .65
- -------------------------------------------------------------------------------
Of the 139,936 options outstanding at January 1, 1996, all but 77,634 had an
exercise price of $2.50. The 77,634 had been granted to one employee, had an
exercise price of $.18 and lapsed in 1996.
At December 31, 1997, 582,255 shares of common stock are reserved for the
incentive stock option plan and 9,000 options were vested and exercisable. The
remaining contractual life of the 106,000 shares outstanding in ten years.
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 discretion of the Company's Board of
Directors, may be matched within certain limits by the Company. In addition, the
Company may make additional discretionary contributions to the plan as profit
sharing contributions. All contributions to the plan are limited by applicable
Internal Revenue Code regulations. There were no Company contributions charged
against operations in 1997 or 1996.
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, 1997.
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 1.32%
James C. Knapp Kalamazoo, MI 5,417,719 17.45%
Stephen J. Markee Richland, MI 6,196,743 19.97%
--------------------- ---------------
Total 12,025,161 38.74%
===================== ===============
OWNERS OF 5%
Steven Wallace Beverly Hills, CA 2,244,000 7.23%
===================== ===============
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,
1997 and 1996, 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 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.
<PAGE>
CERTAIN BUSINESS RELATIONSHIPS
Except as stated below, during the last two calendar years ended December 31,
1997 and 1996, 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 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.
INDEBTEDNESS OF MANAGEMENT AND STOCKHOLDERS
James C. Knapp, Chairman of the Board of Directors, Stephen J. Markee,
President, CEO and CFO, and Steven Wallace, a stockholder, have loaned the
Company funds for working capital. These funds are provided at an interest rate
of prime plus 2%. The balance outstanding at December 31, 1997 was $455,500. At
December 31, 1996, the Company owed $390,500 to Mr. Markee. These loans are
secured by all of the Company's assets. 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, 1997 and 1996.
TRANSACTIONS WITH PROMOTERS
During the last two calendar years ended December 31, 1997 and 1996, 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 18, 1998 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 18, 1998 By: /s/ Stephen J. Markee
Stephen J. Markee, Director
President, CEO and CFO
Date: March 18, 1998 By: /s/ James C. Knapp
James C. Knapp, Chairman
of the Board of Directors
Date: March 18, 1998 By: /s/ Paul A. Bertoldi
Paul A. Bertoldi, Vice President
Systems Development
<PAGE>
I/NET, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Consolidated Financial Statements
Years ended December 31, 1997 and 1996
<PAGE>
I/NET, Inc.
Contents
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants 20
Financial Statements:
Consolidated Balance Sheets 21 and 22
Consolidated Statements of Operations 23
Consolidated Statements of Capital Deficit 24
Consolidated Statements of Cash Flows 25
Summary of Accounting Policies 26 & 27
Notes to Consolidated Financial Statements 28 - 34
<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, 1997 and 1996, and the related consolidated
statements of operations, 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, 1997, and 1996, 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 12 to the
financial statements, 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. 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 12. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Kalamazoo, Michigan /s/BDO SEIDMAN, LLP
January 14, 1998 Certified Public Accountants
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
December 31, 1997 1996
ASSETS ( NOTE 3)
CURRENT:
Cash and cash equivalents $ 135,939 $ 20,517
Trade Receivables 79,756 28,982
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 215,695 49,499
OFFICE FURNITURE AND EQUIPMENT,
less accumulated depreciation
of $162,091 and $482,553 36,295 62,392
- --------------------------------------------------------------------------------
$ 251,990 $111,891
- --------------------------------------------------------------------------------
<PAGE>
I/NET, Inc.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
December 31, 1997 1996
- --------------------------------------------------------------------------------
LIABILITIES AND CAPITAL DEFICITS
CURRENT LIABILITIES:
Accounts payable $141,145 $ 142,605
Accruals:
Commissions (Note 1) 250,000 250,000
Other 146,699 179,698
Advances from stockholders (Note 2) 134,778 119,778
Current maturities of long-term debt (Note 3) 649,000 1,122,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,321,622 1,814,081
LONG-TERM DEBT, less current maturities (Note 3) 699,479 494,642
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 2,021,101 2,308,723
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 8 AND 11)
CAPITAL DEFICIT (NOTES 4 AND 9):
Common stock, $.001 par value - shares
authorized 50,000,000 issued and
outstanding 31,037,652 in 1997
and 30,837,652 in 1996 31,038 30,838
Additional paid-in capital 11,886,674 11,836,874
Deficit (13,686,823)(14,064,544)
- --------------------------------------------------------------------------------
TOTAL CAPITAL DEFICIT ( 1,769,111) 2,196,832)
- --------------------------------------------------------------------------------
$ 251,990 $ 111,891
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
<PAGE>
I/NET, Inc.
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Year ended December 31, 1997 1996
- --------------------------------------------------------------------------------
REVENUES (NOTE 5) $1,692,170 $ 724,032
COST OF REVENUES 739,093 729,070
- --------------------------------------------------------------------------------
Gross Profits 953,077 (5,038)
SELLING, GENERAL, and ADMINISTRATIVE EXPENSES 573,003 1,060,402
- --------------------------------------------------------------------------------
Earnings (Loss) from operations 380,074 ( 1,065,440)
INTEREST EXPENSE- net of interest income $1,843
in 1997 and $12,088 in 1996 100,299 66,612
- --------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM 279,775 (1,132,052)
EXTRSORDINARY ITEM: GAIN ON EXTINGUISHMENT
of debt (Note 3) 97,946 -
- --------------------------------------------------------------------------------
NET EARNINGS (LOSS) 377,721 $ (1,132,052)
- --------------------------------------------------------------------------------
NET EARNINGS (LOSS) PER SHARE
Basic and Diluted
Earnings (loss) before extraordinary item $ .01 $ (.04)
Extraordinary item - -
---------- ------------
Net Earnings (loss) per share .01 (.04)
========== ============
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 30,987,652 30,837,652
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
I/NET, Inc.
Consolidated Statements of Capital Deficit
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Common Stock Additional
Paid
Shares Amount Capital Deficit Total
BALANCE, January 1,
1996 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)
Issuance of
stock for cash 200,000 200 49,800 - 50,000
Net earnings
for the year 377,721 377,721
- --------------------------------------------------------------------------------
BALANCE, December 31,
1997 31,037,652 $31,038 $11,886,674 $(13,686,823)$(1,769,111)
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
I/NET, Inc.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Year ended December 31, 1997 1996
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES (NOTE 10):
Earnings (Loss) $ 377,721 $(1,132,052)
Depreciation and amortization 26,097 36,458
Extraordinary Item: Gain on
extinquishment of debt(Note 3) ( 97,946) -
Changes in assets and liabilities:
Receivables ( 50,774) 23,318
Accounts payable ( 1,460) 7,140
Accruals ( 8,214) 207,220
- --------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 245,424 (857,916)
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES (NOTE 10):
Proceeds from note receivable - 30,000
Capital expenditures - (13,708)
- --------------------------------------------------------------------------------
CASH PROVIDED BY INVESTING ACTIVITIES - 16,292
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES (NOTE 10):
Proceeds from issuance of notes
to stockholders 100,000 300,000
Proceeds from issuance of common stock 50,000 -
Principal payments on long-term debt (245,002) (120,687)
Principal payments on notes to stockholders ( 35,000) -
- --------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (130,002) 179,313
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 115,422 (662,311)
Cash & Cash Equivalents, beginning of year 20,517 682,828
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 135,939 $20,517
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
I/NET, Inc.
Summary of Accounting Policies
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company,
I/NET, Inc., (a Delaware Corporation)and its wholly-owned subsidiary 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 consulting services
on a contract basis to private sector clients. In addition, the Company during
1996 further developed and began to market Internet computer software products.
Its major customers were International Marketing Strategies (IMS) and
International Business Machines (IBM) in 1997 and IMS in 1996. (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 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 and
Depreciation 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.
STOCK BASED COMPENSATION
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard: (SFAS) No. 123, "Accounting For Stock Based Compensation."
The Company chose to apply Accounting Pronouncement Board (APB) Opinion 25 and
related interpretations in accounting for its stock options. As a result, this
statement did not have an effect on the financial position or results of
operations of the Company.
DEVEOLPED 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 products general release to
customers.
See accompanying notes to consolidated financial statements.
<PAGE>
I/NET, Inc.
Summary of Accounting Policies
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Costs incurred prior to technological feasibility or subsequent to the
product's general release to customers, as well as selling, general, and
administrative costs associated with the products, are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, receivables, notes
payable, accounts payable and long-term debt. Due to the short-term nature of
the items, other than long-term debt and the variable interest rates on a
substantial portion of the long-term debt, management estimates that carrying
amounts of the Company's financial instruments approximate their fair values at
December 31, 1997.
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 completion of costs.
ADVERTISING COSTS
The Company expenses the cost of advertising as incurred. There were no
advertising expenses in 1997, and advertising expenses were approximately
$12,000 in 1996.
EARNINGS (LOSS) PER SHARE
Earnings (Loss) per share amounts have been calculated using the weighted
average number of common shares outstanding, for the respective periods.
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share". This pronouncement requires dual presentation of basic and diluted
earning per share. All outstanding warrants and options are anti-dilutive at
December 31, 1997.
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.
See accompanying notes to consolidated financial statements.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. COMMISSIONS
During 1996, 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 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 stockholders consist of:
December 31, 1997 1996
Non-interest bearing notes payable to
stockholders, due on demand $ 29,278 $ 29,278
Secured stockholder's advances bearing
interest at 8%, and are due on demand 105,500 90,500
$ 134,778 $119,778
- --------------------------------------------------------------------------------
3. LONG-TERM DEBT CONSISTS OF:
December 31, 1997 1996
Notes payable to vendors (see below) $ 998,479 $1,134,304
Notes payable to bank, paid during 1997 - 50,375
Notes payable for a trademark,
paid during 1997 - 131,963
Notes payable to stockholders
bearing interest at 8% and due in
December, 2001, secured by all
the company's assets 350,000 300,000
- --------------------------------------------------------------------------------
1,348,479 1,616,642
Less current maturities 649,000 1,122,000
- --------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 699,479 $ 494,642
- --------------------------------------------------------------------------------
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES PAYABLE TO VENDORS
Unsecured notes payable to various vendors totaling $998,479 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 December 31, 1997).
Another note in the amount of $129,108 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.
During March 1997, the Company reached agreement with a vendor on a
previously defaulted note in the amount of $279,158 together with accrued
interest in the amount of $24,784. The new agreement in the then amount of
$303,942 calls for monthly installments of 5% of the previous months cash
receipts (as defined) but at a minimum rate of $10,000 bi-monthly and bears
interest at the prime rate plus 2%. This note has an outstanding balance of
$274,000 as of December 31 1997. Final payment, assuming minimum payments only,
is January 2004.
Another vendor note in the amount of $26, 616 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 July 2000.
Another vendor note in the amount of $9,143 is due in monthly installments of
$2,998 including interest at 11%. Final payment is March 1998.
During March 1997, the Company entered into an agreement with a note holder to
form a joint venture. I/NET contributed previously written-off technology
together with a trademark and web presence in exchange for the forgiveness of
$97,946 of indebtedness. The noteholder is required to contribute cash and
marketing expertise to this newly formed joint venture. There have been no
operating activities on this joint venture to date. This $97,946 has been
treated as an extraordinary item for financial statement purposes.
Another vendor note in the amount of $118,957 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 January 2002.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aggregate maturities of long-term debt over the next five years assuming
repayment of stockholders' advances (Note 2) and notes are as follows:
1998 $ 784,000
1999 $ 76,000
2000 $ 78,000
2001 $ 430,000
Subsequent to 2001 $ 116,000
4. STOCK WARRANTS
During prior years, the Company sold and issued approximately 6,000,000
shares of its common stock for cash, trademark, and extinguishment of debt. In
connection with the issuances, the Company issued warrants to the purchasers of
the common stock to acquire up to 2,039,285 shares of common stock at prices
ranging from $.25 to $2.40 per share. The warrants expire through 1999. During
April 1997, a warrant holder exercised its option to purchase 200,000 shares of
common stock at $.25 per share for cash. The remaining 1,839,285 warrants are
exercisable at $2.40 per share 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 remaining warrants were exercisable at December 31, 1997.
5. RELATED PARTY TRANSACTIONS/MAJOR CUSTOMERS
The Company provided Internet products, facilities management services and
websight consulting services to a few majorcustomers as follows:
Year ended December 31, 1997 1996
- --------------------------------------------------------------------------------
Internet Products:
International Business Machines $ 200,000 $ -
International Marketing
Strategies(IMS) 405,000 346,000
SUPPORT NET, INC.
(included with IMS for 1997) - 158,000
LANSA, INC. 300,000 -
- --------------------------------------------------------------------------------
$905,000 $504,000
- --------------------------------------------------------------------------------
Facilities Management Services:
Greater Kalamazoo Association
of Realtors $ - $108,000
- --------------------------------------------------------------------------------
Websight Consulting Services:
International Business Machines (IBM) $702,000 -
- --------------------------------------------------------------------------------
IBM is also a minority stockholder in the Company.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
December 31, 1997 1996
Deferred Tax Assets:
Accruals $ 97,000 $ 99,000
Depreciation and amortization - 12,000
Trademark 61,000 66,000
Net operating loss carryforward 3,594,000 3,624,000
Tax credit carryforwards 42,000 42,000
Capital loss carryforwards 24,000 24,000
Deferred Revenue 17,000 17,000
- --------------------------------------------------------------------------------
Total Deferred Tax Assets 3,835,000 3,884,000
Valuation Allowance (3,835,000) (3,884,000)
- --------------------------------------------------------------------------------
$ - $ -
- --------------------------------------------------------------------------------
As of December 31, 1997, the Compan had a net operating loss carryforward
approximately $10,257,000 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 Board
of Directors, may be matched within certain limits by the Company. Inaddition,
the Company may make additional discretionary contributions to the plan as
profit sharing contributions. All contributions to the plan are limited by
applicable Internal Revenue Code regulations. There were no Company
contributions charged against operations in 1997 or 1996.
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. OPERATING LEASE
The Company leases its facilities and certain equipment under non-cancelable
operating leases.Rental expense under these leases was approximately $80,000 and
$138,000 for the year ended December 31, 1997 and 1997 respectively. Future
minimum annual lease payments subsequent to December 31, 1997 are as follows:
1998 $106,000
1999 $104,000
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 PerShare Price Per Share
- --------------------------------------------------------------------------------
January 1, 1996 139,436 $.18-2.50 $1.72
Lapsed ( 96,936) .18-2.50 1.39
- --------------------------------------------------------------------------------
December 31, 1996 42,500 2.50 2.50
Granted June 1997 100,000 .37 .37
Lapsed (27,500) 2.50 2.50
- --------------------------------------------------------------------------------
December 31, 1997 115,000 $.37-2.50 $ .65
- --------------------------------------------------------------------------------
Of the 139,936 options outstanding at January 1, 1996, all but 77,634 had an
exercise price of $2.50. The 77,634 had been granted to one employee, had an
exercise price of $.18 and lapsed in 1996.
At December 31, 1997, 582,255 shares of common stock are reserved for the
incentive stock option plan and 9,000 options were vested and exercisable. The
remaining contractual life on these options is seven years. The remaining
contractual life of the 106,000 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 value based method prescribed in SFAS No.
123. The Company estimates the fair value of each stock option at the grant date
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 1997
would have been reduced from $377,721 to the pro forma amount of $344,721.
Earnings per share were not affected.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash investing and financing activities are summarized as follow
Year ended December 31, 1997 1996
Extinquishment of indebtedness $ 98,000 -
- --------------------------------------------------------------------------------
Conversion of accounts payable into
vendor notes payable $ - $223,000
- --------------------------------------------------------------------------------
Conversion of accrued interest payable
into vendor notes payable $ 25,000 $ 36,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Interest paid for the years ended December 31, 1997 and 1996, was $57,000 and
$78,000, respectively. The Company paid no income taxes during 1997 and 1996.
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.
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
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 with the first reimbursement due in March
1998. The Company recognized $200,000 of revenue from these advances in 1997 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 $400,000 as revenue as other milestones are
met in 1998.
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. CONINUED 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.
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 135,939
<SECURITIES> 0
<RECEIVABLES> 79,756
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 215,695
<PP&E> 198,386
<DEPRECIATION> 162,091
<TOTAL-ASSETS> 251,990
<CURRENT-LIABILITIES> 1,321,622
<BONDS> 0
0
0
<COMMON> 31,038
<OTHER-SE> 11,886,674
<TOTAL-LIABILITY-AND-EQUITY> 251,990
<SALES> 1,692,170
<TOTAL-REVENUES> 1,692,170
<CGS> 739,093
<TOTAL-COSTS> 739,093
<OTHER-EXPENSES> 5730,03
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,142
<INCOME-PRETAX> 279,775
<INCOME-TAX> 0
<INCOME-CONTINUING> 279,775
<DISCONTINUED> 0
<EXTRAORDINARY> 97,946
<CHANGES> 0
<NET-INCOME> 377,721
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
