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 June 30, 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:
June 30, 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 June 30, 1998, the results of its operations for
the six month periods ended June 30, 1998 and 1997, and its cash flows for the
six month period ended June 30, 1998. All such adjustments are of normal and
recurring nature.
<PAGE>
I/NET Inc.
Consolidated Statements of Income
(Unaudited)
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Six Months Ending
June 30, June 30,
1998 1997
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Revenues $ 883,132 $ 675,808
Cost of Revenues 484,405 299,976
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Gross Profit $ 398,727 $ 375,832
Selling, General, and Administrative Expenses 235,043 295,546
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Earnings from operations $ 163,684 $ 80,286
Interest Expense - Net of interest income of $4,607
in 1998 and $578 in 1997. (41,058) (53,397)
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Earnings (Loss) before Extraordinary Item $ 122,626 26,889
Extraordinary item:
Gain on extinguishment of debt (note 13) - 97,946
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Net Earnings $ 122,626 $ 124,835
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Net Earnings per share
Earnings before Extraordinary Item $ - $ -
Extraordinary Item $ - $ -
Net Earnings per share $ - $ -
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Basic and Diluted Weighted Average Number of
Common Shares Outstanding 31,037,652 30,887,652
=========== ===========
See accompanying summary of accounting policies and notes to consolidated
financial statements
<PAGE>
I/NET, Inc.
Consolidated Balance Sheet
(unaudited)
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June 30, 1998
Assets (Note 2 and 3)
Current Assets
Cash $ 102,048
Trade Receivables 175,040
Total Current Assets $ 277,088
Office Furniture and Equipment, Net of
Accumulated Depreciation $177,091 29,310
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Total Assets $ 306,398
============
Liabilities and (Capital Deficit)
Current Liabilities
Accounts Payable $ 199,603
Accruals:
Commissions (Note 1) 258,000
Other 124,053
Advances from Stockholders' (Note 2) 100,780
Current maturities of long-term debt (Note 3) 735,000
------------
Total Current Liabilities $ 1,417,436
Long-term Debt, less current maturities (Note 3) 535,448
------------
Total Liabilities $ 1,952,884
------------
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 (13,564,198)
Total (Capital Deficit) (1,646,486)
Total Liabilities and (Capital Deficit) $ 306,398
===========
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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Six Months Ending
June 30 June 30
1998 1997
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Operating Activities
Net Earnings $ 122,626 $ 124,835
Depreciation and Amortization 15,000 15,000
Extraordinary Item: Gain on Extinquishment of debt - (97,946)
Changes in Assets and Liabilities
Accounts Receivable (95,284) (146,531)
Accounts Payable 58,457 71,516
Accruals (14,646) (9,090)
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Cash Provided By (Used In) Operating Activities $ 86,153 $ (42,216)
Investing Activities
Capital Expenditures (8,016) -
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Cash (Used In) Investing Activities $ (8,016) -
Financing Activities
Advances from Stockholder - 50,000
Repayment of Advances from Stockholders (33,998) -
Proceeds from the Issuance of Common Stock - 50,000
Proceeds from the Issuance of Notes Payable - 50,000
Principle Payments on Long-Term Debt (78,030) (112,259)
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Cash Provided by (Used In) Financing Activities (112,028) $ 37,741
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Decrease in Cash and Cash Equivalents $ (33,891) $ (4,475)
Cash and Cash Equivalents, Beginning of Period 135,939 20,517
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Cash and Cash Equivalent, End of Period $ 102,048 $ 16,042
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 Instruments
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 June 30, 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 it
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 June 30, 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.
See accompanying notes to consolidated financial statements
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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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 stockholders consist of: June 30, 1998
Non-interest bearing notes payable to
stockholders, due on demand $ 10,280
Secured stockholder's advances
bearing interest at 8%, and are due on
demand 90,500
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$ 100,780
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3. Long-term Debt Long-term debt consists of: June 30, 1998
Notes payable to vendors (see below) $ 926,508
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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1,270,448
Less current maturities 735,000
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Total Long-term Debt $ 535,448
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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 $926,508 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 June 30, 1998).
Another note in the amount of $118,744 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.
Another note in the amount of $255,193 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, January 2004.
Another vendor note in the amount of $11,394 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 1999.
Another vendor note in the amount of $100,522 is due in monthly installments of
5% of the previous month's cash receipts (as defined) but at a minimum rate
$3,000 monthly and bears interest at 10%. Final payment, assuming minimum
payments only, is October 2001.
See accompanying notes to consolidated financial statements
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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For the years following June 30, 1998 aggregate maturities of long-term debt
over the next five years assuming repayment of stockholders' advances (Note 2)
and notes are as follows:
1999 $735,000
2000 $ 70,000
2001 $ 77,000
2002 $402,000
2003 $ 54,000
Subsequent to 2003 $ 33,000
4. Stock Warrants
During prior years, the Company sold 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. In 1997, the Company
issued 460,000 additional warrants at prices ranging from $.50 to $1.00. These
warrants were issued in connection with the obtaining of the right for the
Company to port certain Netscape Communications Corporation Internet Servers to
the IBM AS/400 platform. (See Note 11). These warrants expire in 2000. All
warrants were exercisable at June 30, 1998.
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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5. Related Party Transactions/Major Customers
The Company provided Internet products, and Transactions/Major websight
consulting services to a few major Customers customers namely International
Business Machines (IBM) and International Marketing Strategies (IMS) as follows:
Six months ended June 30, 1998 1997
---------------------------------------
Internet Products:
IBM $ 325,000 $ -
IMS 139,000 252,000
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$ 464,000 $ 252,000
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Websight Consulting Services:
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IBM $ 347,000 $ 301,000
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IBM is also a minority stockholder in the Company
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.
As of June 30, 1998, the Company had a net operating loss carryforward
approximately $10,123,000 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.
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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Significant components of the Company's deferred tax assets are as follows:
June 30, 1998
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Deferred Tax Assets:
Accruals $ 97,000
Trademark 61,000
Net operating loss carryforwards 3,543,000
Tax Credit carryforwards 42,000
Capital loss carryforwards 24,000
Deferred Revenue 17,000
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Total Deferred Tax Assets $3,767,000
Valuation Allowance ( 3,767,000)
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$ -
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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
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 charges
against operations in 1998.
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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8. Operating Lease
The Company leases its facilities and certain equipment under non-cancelable
leases. Rental expense under these leases was approximately $52,000 for the
month six months ended June 30, 1998 and $40,000 for the six months ended June
30 1997. Future minimum annual lease payments for the years subsequent to June
30, 1998 are as follows:
1999 $112,000
2000 $ 94,000
2001 $ 60,000
9. Incentive Stock Option Plan
The Company maintains and 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
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
and June 30, 1998 115,500 $.37-2.50 $ .65
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At June 30, 1998, 582,255 shares of common stock are reserved for the incentive
stock option plan and 32,000 options were vested and exercisable. The remaining
contractual life on these options is four years. The remaining contractual life
of the 83,000 shares outstanding is nine years.
Under SFAS no. 123 "Accounting for Stock Based Compensation", the Company
is required to provide pro forma information regarding net income and earnings
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statement
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per share as if compensation cost for the Company's stock option plan had been
etermined 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 No. 123, the Company's net income for
the six months ended June 30, 1998 would have been affected.
10. Supplemental Disclosure
Interest paid for the six months ended June 30,1998 Disclosure of Cash Flow and
1997 was $24,000 and $16,000 respectively. Information The Company paid no
income taxes during 1998 and 1997.
11. Contingencies
Royalties
In 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
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In addition, I/NET has agreed to pay Netscape an annual development support fee
of $250,000 for a three year period.
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
$325.000 in the six months 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
$75,000 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. 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 operating
capital to continue its product development. Management believes the Company
will continue as a going concern and is actively marketing its products,
<PAGE>
I/NET Inc. Notes to
Consolidated Financial Statements
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which would enable the Company to meet its current obligations and provide
additional funds for continue new product development. In addition, management
is currently negotiating several additional 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 Condition and Results of
Operation
Six months ended June 30, 1998 and 1997.
Results of Operation
Revenues for six months ended June 30, 1998 were $883,132 as compared to
$675,808 for the six months ended June 30, 1997. When analyzed by product
category, revenues of Website consulting services to IBM were $347,000 in 1998,
as compared to $301,000 in 1997. Sale of Internet products accounted for
revenues of $469,000 in 1998 and $252,000 in 1997. Revenue from the porting of
Netscape products, which are included in the above, to the AS/400 operating
system produced revenue of $325,000 in 1998 and $0 in 1997.
Cost of revenues increased by $184,000 as compared to 1997. The primary cause
for this increase was the hiring of additional development personnel for the
Netscape and IBM projects and addition of a Netscape development fee of $125,000
in 1998.
General and administrative expenses decreased by $61,000 as compared to 1997.
The cause for this decrease was the reduction of administrative personnel costs
and continued cost containment measures.
Interest expenses decreased by $12,000 due to decreased borrowings in the first
six months of 1998 as interest-bearing debt continues to be repaid.
<PAGE>
I/NET Inc.
Notes to Consolidated Financial Statements
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Also in 1997, the Company recognized an extraordinary item in the amount of
$98,000 from the recognition of forgiveness of indebtedness.
14. Financial Condition
The Company's primary need for capital has been and Liquidity to invest in
computer software development. As of June 30, 1998. The Company's working
capital deficit was $1,140,000 as compared to a deficit of $1,333,000 at June
30, 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 marketing its products, which would enable the Company to meet its
current obligations and provide additional funds for continue new product
development. In addition, management is currently negotiating several additional
several additional contracts for its services and products. However, there can
be no assurance these activities will be successful.
In June 1997, SFAS No. 130 "Reporting Comprehensive Income "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 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: August 7, 1998
By: /s/ Steven J. Markee
- --------------------------------------------------------
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> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1
<CASH> 102,048
<SECURITIES> 0
<RECEIVABLES> 175,040
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 277,088
<PP&E> 206,401
<DEPRECIATION> 177,091
<TOTAL-ASSETS> 306,398
<CURRENT-LIABILITIES> 1,417,436
<BONDS> 0
0
0
<COMMON> 31,038
<OTHER-SE> 11,886,674
<TOTAL-LIABILITY-AND-EQUITY> 306,398
<SALES> 883,132
<TOTAL-REVENUES> 883,132
<CGS> 484,405
<TOTAL-COSTS> 484,405
<OTHER-EXPENSES> 235,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,058
<INCOME-PRETAX> 122,626
<INCOME-TAX> 0
<INCOME-CONTINUING> 122,626
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122,626
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
