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, 1998.
[ ] Transition Report under Section13 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
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(State or Other Jurisdiction of (IRS Employer I.D. No.)
Incorporation or organization)
643 W. Crosstown Parkway
Kalamazoo, Michigan 49008
(Address of Principal Executive Officers)
Issuer's Telephone Number: (616) 344-3017
Securities Registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered under Section 12(g) of the Exchange Act:
$0.001 par value common voting stock
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
(1) Yes X No____ (2) Yes X No____
Check if there is no disclosure of delinquent files in response to item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
<PAGE>
State Issuer's revenues for its most recent fiscal year: $1,768,379
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: $20,356,973. 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 15,
1999.
There are approximately 17,606,792 shares of common voting stock of the
Registrant held by non-affiliates.
(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, 1998
31,037,652
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format (check one): Yes X NO ___
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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...................................7
Item 7. Financial Statements..................................................9
Item 8. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure..............................................9
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act............9
Item 10. Executive Compensation...............................................11
Item 11. Security Ownership of Certain Beneficial Owners and Management.......13
Item 12. Certain Relationships and Related Transactions.......................13
Item 13. Reports on Form 8-K and Exhibits.....................................14
Signatures....................................................................15
<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.
On January 25, 1999, I/NET, Inc. signed a letter of intent for the acquisition
of Consolidated Graphics Group, Inc. (CGG), a privately-held computer graphics,
multimedia, printing and direct marketing firm based in Cleveland, Ohio. At the
closing of the acquisition, I/NET will issue 16 million shares of its common
stock to acquire all of the outstanding stock of CGG, which had revenues of
approximately $12 million in 1998 and has total assets of approximately $20
million.
Completion of the acquisition is subject to customary terms and conditions,
including approval of definitive documentation by the I/NET Board of Directors
and completion of due diligence, as well as I/NET's common stock being eligible
for listing on the NASDAQ SmallCap Market. The companies expect the acquisition
to be completed in the second quarter of 1999. CGG will remain in Cleveland and
operate as a subsidiary of I/NET with corporate headquarters in Kalamazoo.
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 International
Business Machine (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/400 TM 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: Software 2000,
Inc., Marcam Corporation, Dynamic Healthcare Technologies, Inc., 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 upon I/NET the prestigious
Partner in Development "Product of the Year Award" for Commerce Server/400TM.
During 1998, the Company was licensed by the United States Department of
Commerce to export its strong encrypted version of this product to various end
users throughout the world.
<PAGE>
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 contract with IBM in March 1997 for
providing Website consulting services. This contract, while cancelable, is for a
period of twenty-four months and an extension is currently being renegotiated.
I/NET has also signed an agreement with Netscape Communications Corp. (Netscape)
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. The Company released this product
during February 1999.
DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES
The Company has signed exclusive worldwide marketing and distribution agreements
with International Marketing Strategies, (IMS) and IMS-Europe for the
distribution of its Web Server/400 products. All marketing services are
performed by IMS and IMS-Europe.
COMPETITIVE BUSINESS CONDITIONS AND THE SMALL BUSINESS ISSUER'S COMPETITIVE
POSITION IN THE INDUSTRY AND METHODS OF COMPETITION
The Company's contract work performed for IBM has been competitively acquired,
and usually the final selection is between I/NET and departments within IBM.
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 east coast of the United States.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
The Company provided Internet products and Website consulting services to a few
major customers during 1998 and 1997 as follows:
Year ended December 31, 1998 1997
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Internet Products
IBM $390,000 $200,000
IMS 580,000 405,000
LANSA, Inc. - 300,000
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$970,000 $905,000
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Website Consulting Services
IBM $700,000 $702,000
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PATENTS, TRADEMARKS, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS, INCLUDING 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 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
Paid by IBM on behalf of
I/NET in September, 1998 $ 750,000
September 30, 1999 $1,000,000
September 30, 2000 $1,000,000
IBM has guaranteed to Netscape the above listed royalties in the event that
product sales are insufficient to repay amounts due under this agreement. In
addition, I/NET has agreed to pay to Netscape annual development support feels
in the amount of $250,000 for a period of three years. Netscape has agreed to
waive its fee for 1998.
<PAGE>
IBM is providing 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. If the revenue from the sales of these Netscape products are
insufficient, I/NET will not have to repay any of these royalties advanced. The
Company recognized $390,000 of revenue from these advances in 1998 and $200,000
in 1997 as certain milestone events were met.
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 except as they relate to strong encrypted
software products which are under government regulation.
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
No present governmental regulations have any adverse impact on the present or
contemplated business operations of the Company, and no such probable
governmental regulations are anticipated to have any adverse effect.
ESTIMATE OF THE AMOUNT SPENT DURING EACH OF THE LAST TWO FISCAL YEARS ON
RESEARCH AND DEVELOPMENT ACTIVITIES, AND IF APPLICABLE, THE EXTENT TO WHICH THE
COST OF SUCH ACTIVITIES ARE BORNE DIRECTLY BY CUSTOMERS
There was no research and development costs incurred by the Company during the
calendar years ended December 31, 1998 and 1997.
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, 1998, the Company had 18 full time employees and one part
time employee.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company has its principal executive and administrative offices are located
at 643 West Crosstown Parkway, Kalamazoo, Michigan, which is comprised of
approximately 5,600 square feet. This facility is leased and rental payments on
the space amounted to $77,000 for 1998.
Management considers its offices to be well maintained, in good operating
condition and suitable and adequate for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during 1998.
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 1998 and 1997 is summarized by
quarter below:
1998 1998 1998 1998 1997 1997 1997 1997
1st qtr 2nd qtr 3rd qtr 4th qtr 1st qtr 2nd qtr 3rd qtr 4th qtr
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HIGH $0.24 $0.36 $0.28 $1.03 $0.75 $0.50 $0.41 $0.36
LOW $0.18 $0.17 $0.13 $0.08 $0.50 $0.34 $0.34 $0.21
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,
1998, was 291. 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, 1998 AND 1997
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 1998, were $1,768,379 as compared to
$1,692,170 for the year ended December 31, 1997. When analyzed by product
category, revenues of Website consulting services to IBM were $700,000 in 1998,
as compared to $702,000 in 1997. Internet products accounted for revenues of
$970,000 in 1998 and $905,000 in 1997. Cost of revenues increased by $161,000 as
compared to 1997. The primary cause for this increase was the hiring of
additional personnel for the Netscape and IBM projects.
<PAGE>
General and administrative expenses decreased by $67,000 as compared to 1997.
The cause for this decrease was continued cost containment measures.
Interest expenses decreased by $26,000 due to the continued repayment of
borrowings.
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 joint venture. There have been minimal operating
activities on this joint venture to date. This $97,946 has been treated as an
extraordinary item for financial statement purposes for 1997.
FINANCIAL CONDITION AND LIQUIDITY
The Company's primary need for capital has been to invest in computer software
development. As of December 31, 1998, the Company's working capital deficit was
$1,037,000, compared to a deficit of $1,106,000 at December 31, 1997. The
resulting decrease in working capital deficit is primarily due to earnings in
1998 of $288,000 and continued repayment of its debt obligations.
The Company believes that the additional sales provided by the above mentioned
agreements and the continued development of new products should provide the
Company with sufficient working capital to fund its needs for 1998 with the
proposed anticipated acquisition of Consolidated Graphics Group, Inc., the
Company should be able to benefit from additional financial resources. However,
there can be no assurance these activities will be successful.
All I/NET developed software is year 2000 compliant. All I/NET internal computer
software is year 2000 compliant.
The Company is in the process of reviewing the insurance, regulatory and legal
implications as they relate to the year 2000. The Company at this time does not
anticipate that the costs associated with this review will be material to the
Company's financial condition or results of operations.
The Company's plan to determine the year 2000 compliance status of its key
suppliers and customers is in progress. The plan involves soliciting information
from suppliers and customers through use of surveys, and follow-up discussions
and testing where needed. The Company will send out surveys to all of its key
suppliers and certain key customers and anticipates receiving back a majority of
these surveys. While the Company cannot guarantee year 2000 compliance by its
key suppliers and customers, and in many cases will be relying on statements
from outside vendors without independent verification, preliminary indicators
indicate that key suppliers and customers are aware of the issues and are
working on a solution to achieve compliance on or before the year 2000. The
Company is also in the process of developing a contingency plan to deal with
those key suppliers and customers who may not be year 2000 compliant prior to
the year 2000. If certain key suppliers or customers were not year 2000
compliant and the Company was unaware of the noncompliance, the Company's
results of operations and financial condition could be significantly negatively
impacted. However, at this time the Company is not aware of any key suppliers or
customers who will not be year 2000 compliant by the year 2000. The Company's
next steps will be to complete the solicitation of key customers, obtain more
detailed information from certain key suppliers and customers, follow-up with
those companies who will not respond to the surveys and testing of systems.
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. Management is also embarking on other
strategic initiates to expand its business opportunities. However, there can be
no assurance these activities will be successful.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Section Page Number
Report of Independent Certified Public Accountants.......................18
Consolidated Balance Sheets as of December 31, 1998 and 1997..........19-20
Consolidated Statements of Earnings for the years ended
December 31, 1998 and 1997.............................................21
Consolidated Statements of Capital Deficit for the years
ended December 31, 1998 and 1997.......................................22
Consolidated Statements of Cash Flows for the years
ended December 31, 1998 and l997.......................................23
Summary of Accounting Policies........................................24-25
Notes to Consolidated Financial Statements............................26-32
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, nature of all positions, and offices
held by all directors and executive officers of the Company for the calendar
year ended December 31, 1998, 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
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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.
<PAGE>
BUSINESS EXPERIENCE
JAMES C, KNAPP, CHAIRMAN: Mr. Knapp, one of I/NET's initial founders, is 48
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 53 years of age. He
received a BS Degree from Ferris State University in 1970 and an MBA from
Western Michigan University ("WMU") in 1971. He is a licensed certified public
accountant in the state of Michigan. Mr. Markee served in the United States Army
during the 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. 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 36 years
of age. He received a BBA Degree from WMU in 1984, and an MBA 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
websight consulting and Internet computer software products. He is an active
member in various professional organizations.
FAMILY RELATIONSHIPS
With the exception that Mr. Bertoldi is married to the sister of Mr. Knapp,
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.
<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.
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SUMMARY COMPENSATION TABLE
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Annual Compensation
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- ----------------------- ------------- ------------- ------------ ---------------
(a) (b) (c) (d) (e)
- ----------------------- ------------- ------------- ------------ ---------------
- ----------------------- ------------- ------------- ------------ ---------------
Name and Year Ended $ Salary $ Bonus Other Annual
Principal Position Dec. 31 Compensation
($)
- ----------------------- ------------- ------------- ------------ ---------------
- ----------------------- ------------- ------------- ------------ ---------------
James C. Knapp 1998 $125,674
Chairman 1997 $125,000 -0- -0-
- ----------------------- ------------- ------------- ------------ ---------------
- ----------------------- ------------- ------------- ------------ ---------------
Stephen J. Markee 1998 $125,674
President, CEO, 1997 $125,000 -0- -0-
CFO and Director
- ----------------------- ------------- ------------- ------------ ---------------
- ----------------------- ------------- ------------- ------------ ---------------
Paul A. Bertoldi 1998 $ 75,660
Vice President, 1997 $ 77,103 -0- -0-
Systems
Development
- ----------------------- ------------- ------------- ------------ ---------------
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Long Term Compensation
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Awards Payouts
- --------------------------------------------------------------------------------
- ------------------- ----------- ------------ ------------- --------- -----------
(f)* (g) (h) (i)**
- ------------------- ----------- ------------ ------------- --------- -----------
- ------------------- ----------- ------------ ------------- --------- -----------
Restricted Option/SAR's LTIP All Other
Name and Year Ended Stock Award (#) Payouts Compensation
Principal Position Dec. 31 ($) ($) ($)
- ------------------- ----------- ------------ ------------- --------- -----------
- ------------------- ----------- ------------ ------------- --------- -----------
James C. Knapp 1998 $4,410
Chairman 1997 -0- -0- -0- $3,470
- ------------------- ----------- ------------ ------------- --------- -----------
- ------------------- ----------- ------------ ------------- --------- -----------
Stephen J. Markee 1998 0
President, CEO, 1997 -0- -0- -0- 0
CFO and Director
- ------------------- ----------- ------------ ------------- --------- -----------
- ------------------- ----------- ------------ ------------- --------- -----------
Paul A. Bertoldi 1998 0
Vice President, 1997 -0- -0- -0- 0
Systems
Development
- ------------------- ----------- ------------ ------------- --------- -----------
- --------------------------------------------------------------------------------
*See the caption "All Other Compensation" herein for restricted stock award
**Approximate value of 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 Per
Shares Per Share 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 1998 115,000 $.37-2.50 $ .65
- --------------------------------------------------------------------------------
At December 31, 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 weighted average contractual life of these options is six years. The
remaining weighted average contractual life of the 83,000 shares outstanding in
nine 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 1998 or 1997.
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, 1998.
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.
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<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 outstanding.
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 17.46%
Stephen J. Markee Richland, MI 6,196,743 19.97%
---------- ------
Total 12,025,161 38.75%
---------- ------
---------- ------
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,
1998 and 1997, 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' common stock, or any member of the immediate family of
any of the foregoing persons, had an interest.
CERTAIN BUSINESS RELATIONSHIPS
Except as stated below, during the last two calendar years ended December 31,
1998 and 1997, 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, have loaned the Company funds for working capital. These
funds are provided at an interest rate of 8%. The balance outstanding at
December 31, 1998 was $441,349. At December 31, 1998, the Company owed $174,209
to Mr. Knapp and $267,140 to Mr. Markee. These loans are secured by all of the
Compan'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, 1998 and
1997.
<PAGE>
TRANSACTIONS WITH PROMOTERS
During the last two calendar years ended December 31, 1998 and 1997, 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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
Certain information contained in this form 10-KSB may constitute or include
forward-looking statements. Such forward-looking information involves important
known and unknown risks and uncertainties and other factors that may cause the
actual results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. These risks and uncertainties
include, but are not limited to uncertainties relating to economic conditions;
possible future acquisitions and divestitures; technological changes and
developments in the competitive environment in which the company operates;
spending patterns of the Company's customers; success of the Company in
negotiations with its lenders; size, timing, and recognition of revenue from
significant orders; ability of the Company to successfully implement its
business strategy of developing and licensing client/server decision support
application software designed to address specific industry markets; new product
introductions and announcements by the Company's competitors; changes in Company
strategy; product life cycles, cost and continued availability of third party
software and technology incorporated into the Company's products; potential
obsolescence of the Company's existing products or services; cost and
availability of developers, success in and expense associated with the
development, production, testing, marketing, and shipping of products, including
a failure to ship new products and technologies when anticipated, failure of
customers to accept these products and technologies when planned, and any
defects in products; perceived absolute or relative overall value of the
Company's products by the Company's customers including features, quality, and
pricing compared to other competitive products; amounts, and rate of growth in,
the Company's selling, general and administrative expenses; occurrence of any
expenditures and expenses, including depreciation and research and development
expenses; costs and other effects of legal and administrative cases and
proceedings (whether civil or criminal), settlements, and investigations,
claims, and changes in those items; developments or assertions by or against the
Company relating to intellectual property rights; adoption of new, or changes
in, accounting policies and practices and the application of such policies and
practices; and effects or changes within the Company's organization or in
compensation and benefit plans. Since the purchase of the Company's products is
relatively discretionary and involves a commitment of capital, in the event of
any downturn in any potential customers' business or the economy in general,
purchases of the company's products may be deferred or canceled. Further, the
Company's expense levels are based, in part, on its expectations as to future
revenue and a significant portion of the Company's expenses do not vary with
revenue. As a result, if revenue is below expectations, results of operations
are likely to be materially adversely affected. Shareholders are cautioned not
to place undue reliance on the forward-looking statements made in this Form
10-KSB, which speaks only as of the date hereof.
ITEM 13. REPORTS ON FORM 8-K AND EXHIBITS
Reports on Form 8-K:
None
EXHIBITS:
None
<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 10, 1999 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 10, 1999 By: /s/ Stephen J. Markee
--------------------------------------
Stephen J. Markee, Director
President, CEO and CFO
Date: March 10, 1999 By: /s/ James C. Knapp
--------------------------------------
James C. Knapp, Chairman
of the Board of Directors
Date: March 10, 1999 By: /s/ Paul A. BertoldI
--------------------------------------
Paul A. Bertoldi, Vice President
Systems Development
<PAGE>
I/NET, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Consolidated Financial Statements
Years ended December 31, 1998 and 1997
<PAGE>
I/NET, Inc.
Contents
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants 18
Financial Statements:
Consolidated Balance Sheets 19 - 20
Consolidated Statements of Earnings 21
Consolidated Statements of Capital Deficit 22
Consolidated Statements of Cash Flows 23
Summary of Accounting Policies 24 - 25
Notes to Consolidated Financial Statements 26 - 32
<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, 1998 and 1997, and the related consolidated statements of
earnings, 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, 1998, and 1997, 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 13, 1999, except for Certified Public Accountants
Note 13, as to which date is
January 25, 1999
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------
Assets ( Note 3)
Current:
Cash and cash equivalents $ 103,847 $135 ,939
Trade Receivables 201,961 79,756
- --------------------------------------------------------------------------------
Total Current Assets 305,808 215,695
Office Furniture and Equipment,
less accumulated depreciation
of $123,308 and $162,091 31,100 36,295
- --------------------------------------------------------------------------------
$ 336,908 $251,990
- --------------------------------------------------------------------------------
<PAGE>
I/NET, Inc.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------
Liabilities and Capital Deficit
Current Liabilities:
Accounts payable $ 124,500 $ 92,068
Accruals:
Commissions (Note 1) 258,000 250,000
Interest 141,507 110,451
Other 21,600 85,325
Advances from stockholders (Note 2) 100,780 134,778
Current maturities of long-term debt (Note 3) 696,000 649,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Current Liabilities 1,342,387 1,321,622
Long-term Debt, less current maturities (Note 3) 475,736 699,479
- --------------------------------------------------------------------------------
Total Liabilities 1,818,123 2,021,101
- --------------------------------------------------------------------------------
Commitments and Contingencies (Notes 1, 8, 11, 12 and 13)
Capital Deficit (Notes 4 and 9):
Common stock, $.001 par value - shares authorized
50,000,000 issued and outstanding 31,037,652
in 1998 and 1997 31,038 31,038
Additional paid-in capital 11,886,674 11,886,674
Deficit (13,398,927) (13,686,823)
- --------------------------------------------------------------------------------
Total Capital Deficit (1,481,215) (1,769,111)
- --------------------------------------------------------------------------------
$ 336,908 $ 251,990
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
I/NET, Inc.
Consolidated Statements of Earnings
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Year ended December 31, 1998 1997
- --------------------------------------------------------------------------------
Revenues (Note 5) $1,768,379 $ 1,692,170
Cost of Revenues 899,606 739,093
- --------------------------------------------------------------------------------
Gross profit 868,773 953,077
Selling, General, and Administrative Expenses 506,270 573,003
- --------------------------------------------------------------------------------
Earnings from operations 362,503 380,074
Interest Expense - net of interest income
$6,502 in 1998 and $1,843 in 1997 74,607 100,299
- --------------------------------------------------------------------------------
Earnings before Extraordinary Item 287,896 279,775
Extraordinary Item: Gain on extinquishment
of debt (Note 3) - 97,946
- --------------------------------------------------------------------------------
Net Earnings $ 287,896 $ 377,721
- --------------------------------------------------------------------------------
Net Earnings per Share
Basic and Diluted
Earnings before extraordinary item $ .01 $ .01
Extraordinary item - -
Net earnings per share .01 .01
Basic and Diluted Weighted Average
Number of Common Shares Outstanding 31,037,652 30,987,652
- --------------------------------------------------------------------------------
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,
1997 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)
Net earnings
for the year - - - 287,896 287,896
- --------------------------------------------------------------------------------
Balance, December 31,
1998 31,037,652 $31,038 $11,886,674 $(13,398,927)$(1,481,215)
- --------------------------------------------------------------------------------
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, 1998 1997
- --------------------------------------------------------------------------------
Operating Activities (Note 10):
Earnings $ 287,896 $ 377,721
Depreciation and amortization 28,345 26,097
Extraordinary Item: Gain on extinquishment of debt
(Note 3) - (97,946)
Changes in assets and liabilities:
Receivables ( 122,205) (50,774)
Accounts payable 32,432 (1,460)
Accruals (24,669) (8,214)
- --------------------------------------------------------------------------------
Cash Provided by Operating Activities 201,799 245,424
- --------------------------------------------------------------------------------
Investing Activities (Note 10):
Capital expenditures (23,150) -
- --------------------------------------------------------------------------------
Cash Used In Investing Activities (23,150) -
- --------------------------------------------------------------------------------
Financing Activities (Note 10):
Proceeds from issuance of notes to stockholders - 100,000
Proceeds from issuance of common stock - 50,000
Principal payments on long-term debt (167,312) (245,002)
Principal payments on notes to stockholders 43,429) (35,000)
- --------------------------------------------------------------------------------
Cash Used In Financing Activities (210,741) (130,002)
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (32,092) 115,422
Cash & Cash Equivalents, beginning of year 135,939 20,517
- --------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 103,847 $ 135,939
- --------------------------------------------------------------------------------
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 BUSINESS
The Company operates in one segment consisting of Website consulting services
and development of Internet computer software products. The Company does not
operate based upon product lines but as one business unit. Its major customers
are International Business Machines (IBM) and International Marketing Strategies
(IMS). (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
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.
DEVELOPED COMPUTER SOFTWARE
Software development costs are accounted for in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for
the Cost of Computer Software To Be Sold, Leased or Otherwise Marketed."
Software development costs and certain product enhancements, when significant,
are capitalized subsequent to the establishment of technological feasibility for
the product and prior to the 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.
See accompanying notes to consolidated financial statements.
<PAGE>
I/NET, Inc.
Summary of Accounting Policies
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
Companys financial instruments approximate their fair values at December 31,
1998.
REVENUE RECOGNITION
Revenues for the sale of the Company's Internet products are recognized when the
product has been accepted by the customer. The Company records revenue for its
long-term contracts on the percentage-of-completion basis. Under this method,
revenues are determined by comparing costs incurred to date to the estimated
total costs for the contract. The proportionate amounts of contract revenue are
then recorded based on this percentage of completion 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
December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share". This
pronouncement requires dual presentation of basic and diluted earning per share.
Outstanding warrants and options were not dilutive at December 31, 1998 and
1997.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard to affect
its financial statements.
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. This SOP
had no effect on the financial statements of the Company.
See accompanying notes to consolidated financial statements.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. COMMISSIONS
During a prior year, 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, 1998 1997
- --------------------------------------------------------------------------------
Non-interest bearing notes payable to
stockholders, due on demand $ 10,280 $ 29,278
Secured stockholder's advances bearing
interest at 8%, and are due on demand 90,500 105,500
- --------------------------------------------------------------------------------
$ 100,780 $ 134,778
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. LONG-TERM DEBT
Long-term debt consists of:
December 31, 1998 1997
- --------------------------------------------------------------------------------
Notes payable to vendors (see below) $ 831,167 $ 998,479
Notes payable to stockholders
bearing interest at 8% and due in
December, 2001, secured by all
the company's assets 340,569 350,000
- --------------------------------------------------------------------------------
1,171,736 1,348,479
Less current maturities 696,000 649,000
- --------------------------------------------------------------------------------
Total Long-term Debt $ 475,736 $ 699,479
- --------------------------------------------------------------------------------
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES PAYABLE TO VENDORS
Unsecured notes payable to various vendors totaling $831,167 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 9.75% at December 31, 1998).
Another note in the amount of $84,806 is due in monthly installments at the rate
of 5% of the previous month's 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 month's 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 $233,407 as of December 31
1998. Final payment, assuming minimum payments only, is December 2003.
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 $72,299 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 March 2001.
Aggregate maturities of long-term debt over the next five years assuming
repayment of stockholders' advances (Note 2) and notes are as follows:
1999 $ 696,000
2000 $ 76,000
2001 $ 397,000
2002 $ 52,000
2003 $ 51,000
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. STOCK WARRANTS
During prior years, the Company sold common stock for cash, trademark, and
extinguishment of debt. In connection with these sales, underwriters were issued
warrants for 860,000 shares of common stock at a weighted average price of $.48
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, with a
weighted average price of $.69. These warrants were issued in connection with
obtaining the right for the Company to port certain Netscape Communications
Corporation Netscape Internet Products to the IBM AS/400 platform. These
warrants expire in 2000. During April 1997, a warrantholder exercised its option
to purchase 200,000 shares of common stock at $.25 per share for cash.
Outstanding warrants were not dilutive at December 31, 1998 and 1997.
5. MAJOR CUSTOMERS
The Company provided Internet products and websight consulting services to a few
major customers as follows:
Year ended December 31, 1998 1997
- --------------------------------------------------------------------------------
Internet Products:
IBM $390,000 $200,000
IMS 580,000 405,000
LANSA, INC. - $300,000
- --------------------------------------------------------------------------------
$970,000 $905,000
- --------------------------------------------------------------------------------
Websight Consulting Services:
IBM $700,000 $702,000
- --------------------------------------------------------------------------------
<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, 1998 1997
- --------------------------------------------------------------------------------
Deferred Tax Assets:
Accruals $ 88,000 $ 97,000
Trademark 56,000 61,000
Net operating loss carryforward $3,409,000 3,594,000
Tax credit carryforwards 42,000 42,000
Capital loss carryforwards 24,000 24,000
Deferred Revenue - 17,000
- --------------------------------------------------------------------------------
Total Deferred Tax Assets 3,619,000 3,835,000
Valuation Allowance (3,619,000) (3,835,000)
- --------------------------------------------------------------------------------
$ - $ -
- --------------------------------------------------------------------------------
As of December 31, 1998, the Company had a net operating loss carryforward
approximately $10,026,000 and investment tax credit carryforwards of
approximately $42,000 available to reduce future taxable income and taxes,
respectively. These carryforwards expire from 1999 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. In addition, the
Company may make additional discretionary contributions to the plan as profit
sharing contributions. All contributions to the plan are limited by applicable
Internal Revenue Code regulations. There were no Company contributions charged
against operations in 1998 or 1997.
<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 $105,000
and $80,000 for the years ended December 31, 1998 and 1997 respectively. Future
minimum annual lease payments subsequent to December 31, 1998 are as follows:
1999 $107,000
2000 $ 93,000
2001 $ 40,000
9. INCENTIVE STOCK OPTION PLAN
The Company maintains an incentive stock option plan that provides for the
granting of options to officers and other key employees at an exercise price not
less than 100% of the fair market value on the date of the grant. Twenty percent
of the options become exercisable each year following the date they were
granted, and can remain outstanding for five years following the day they become
fully vested. Changes in options outstanding are summarized as follows:
Option Price Weighted Average
Shares Per Share Price Per Share
- --------------------------------------------------------------------------------
January 1, 1997 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
and 1998
- --------------------------------------------------------------------------------
At December 31, 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 weighted average contractual life on these options is six years. The
remaining weighted average 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 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
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 of 10 years.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net income for 1998 and 1997 would not have been materially affected.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash investing and financing activities are summarized as follows: Year ended
December 31, 1998 1997
- --------------------------------------------------------------------------------
Extinquishment of indebtedness - $ 98,000
- --------------------------------------------------------------------------------
Conversion of accrued interest payable
into vendor notes payable $ - $ 25,000
- --------------------------------------------------------------------------------
Interest paid for the years ended December 31, 1998 and 1997, was $50,000 and
$57,000, respectively. The Company paid no income taxes during 1998 and 1997.
11. CONTINGENCIES
ROYALTIES
On September 30, 1997, the Company entered into a software license agreement
with Netscape 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
Paid by IBM on behalf
of I/NET in September, 1998 $ 750,000
September 30, 1999 $1,000,000
September 30, 2000 $1,000,000
IBM 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, I/NET has agreed to pay to Netscape annual development support fees
in the amount of $250,000 for a period of three years. Netscape has agreed to
waive its fee for one year.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IBM is providing 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. If the revenue from the sales of these Netscape products are
insufficient, I/NET will not have to repay any of these royalties advanced. The
Company recognized $390,000 of revenue from these advances in 1998 and $200,000
in 1997 as certain milestone events were met.
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. CONTINUED EXISTENCE
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. 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. As noted below, management is also
embarking on other strategic initiatives to expand its business opportunities.
However, there can be no assurance these activities will be successful.
13. SUBSEQUENT EVENT
On January 25, 1999, the Company announced the signing of a letter of intent to
acquire for 16,000,000 shares of its common stock, all the assets of
Consolidated Graphics Group, Inc., a privately held company based in Cleveland,
Ohio. This acquisition, pending completion of customary terms and conditions and
due diligence, is expected to be completed in the second quarter of 1999.
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