United States
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 quarterly period ended March 31, 2000
--------------
[ ] 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.
(Exact Name of Small Business Issuer as specified in its Charter)
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DELAWARE 87-0046720
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(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
Check whether the Issuer: (1) has 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.
Yes X No __
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practical date:
March 31, 2000
31,037,652
Transitional Small Business Disclosure Format (check one)
Yes No X
<PAGE>
ITEM 1. FINANCIAL INFORMATION
I/NET, Inc.
Consolidated Balance Sheet
(Unaudited)
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March 31, 2000
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Assets (Notes 2 and 3)
Current Assets
Cash $175,398
Receivables:
Trade $180,352
Note (Note 5) 209,000 389,352
------- -------
Total Current Assets 564,750
Office Furniture and Equipment, Net of
Accumulated Depreciation of $25,995 13,587
-------
Total Assets $ 578,337
=========
Liabilities and Capital Deficit
Current Liabilities
Accounts Payable $12,020
Accruals:
Commissions (Note 1) 258,000
Interest 179,005
Other 23,500 460,505
-------
Advances from Stockholders' (Note 2) 95,500
Current maturities of long-term debt (Note 3) 591,000
---------
Total Current Liabilities 1,159,025
Long-term Debt, less current maturities (Note 3) 469,804
---------
Total Liabilities 1,628,829
Commitments and Contingencies (Notes 7,8,11 and 14)
Capital Deficit (Notes 4 and 9)
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 (12,968,204)
------------
Total Capital Deficit (1,050,492)
-----------
Total Liabilities and Capital Deficit $578,337
===========
See accompanying summary of accounting policies and notes to consolidated
financial statements
<PAGE>
I/NET, Inc.
Consolidated Statements of Earnings
(Unaudited)
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Three Months Ended
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March 31, March 31,
2000 1999
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Revenues (Note 5) $ 409,901 $ 520,618
Cost of Revenues 209,393 272,894
---------- ----------
Gross Profit 200,508 247,724
Selling, General, and Administrative Expenses 143,678 175,812
---------- ----------
Earnings from operations 56,830 71,912
Other income (expense):
Interest expense (15,042) (16,675)
Interest income 5,332 1,134
Other income 883 5,585
Gain on sale of securities ( Note 13) 28,199 -
---------- ----------
19,372 (9,956)
---------- ----------
Net Earnings $ 76,202 $ 61,956
========== ==========
Net Earnings per Share (Note 12)
Basic and Diluted $ - $ -
========== ==========
Average Number of Basic Common Shares
Outstanding (Note 12) $31,037,652 $31,037,652
========== ===========
Average Number of Diluted Common Shares
Outstanding (Note 12) 31,118,421 31,854,945
========== ==========
See accompanying summary of accounting policies and notes to consolidated
financial statements
<PAGE>
I/NET, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended
------------------
March 31, March 31,
2000 1999
----------- ----------
Operating Activities
Net Earnings $76,202 $ 61,956
Depreciation and Amortization 3,000 7,500
Gain on sale of securities (Note 13) (28,199) -
Changes in Assets and Liabilities
Trades Receivables (25,099) (61,020)
Accounts Payable (2,397) 17,624
Accruals (5,597) (13,399)
--------- ---------
Cash Provided By Operating Activities 17,910 12,661
Investing Activities
Proceeds from sale of securities (Note 13) 28,199 -
Capital expenditures - (2,725)
--------- ---------
Cash Used In Investing Activities 28,199 (2,725)
Financing Activities
Principal payments on notes to stockholders (7,332) (5,280)
Principal payments on long-term debt (35,060) (15,890)
--------- --------
Cash Used In Financing Activities (42,392) (21,170)
Increase (Decrease) in Cash and Cash Equivalents 3,717 (11,234)
Cash and Cash Equivalents, Beginning of Period 171,681 103,847
------- --------
Cash and Cash Equivalents, End of Period $175,398 $92,613
======= ========
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 included herein have been prepared by
I/NET, Inc. (the "Company") 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 the Company's 1999 annual
report on Form 10-KSB.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of March 31, 2000, the results of its operations for
the three month periods ended March 31, 2000 and 1999 and its cash flows for the
three month periods ended March 31, 2000 and 1999. All such adjustments are of a
normal and recurring nature.
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) and its wholly-owned subsidiary, Stek, Ltd. (a
Caymanian corporation).
Stek, Ltd. was formed to receive shares of SEGOES, Ltd. which it earned for the
successful completion of the development, installation and operation of the
SEGOES website which operates an Internet based offshore asset management and
trading system.
Description of the Business
- ---------------------------
The Company operates as one business 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 Appsmall.com (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 significantly from those estimates.
<PAGE>
I/NET, Inc.
Summary of Accounting Policies
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Cash and Cash Equivalents
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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 equipment and furniture 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 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 product's general release to customers.
Costs incurred prior to technological feasibility or subsequent to the product's
general release to customers, as well as selling, general, and administrative
costs associated with the products, are expensed as incurred.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments consist of cash, receivables, notes payable,
accounts payable and long-term debt. Due to the short-term nature of the items,
other than long-term debt, and the variable interest rates on a substantial
portion of the long-term debt, management estimates that carrying amounts of the
Company's financial instruments approximate their fair values at March 31, 2000.
Revenue Recognition
- -------------------
Revenues for the sale of the Company's Internet products are recognized when the
customer has accepted the product. The Company records its revenue from Websight
consulting contracts on a monthly basis as amounts are invoiced for time and
expenses incurred.
Earnings Per Share
- ------------------
Basic earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect, in periods in
which they have a dilutive effect, the effect of common shares issuable upon
exercise of stock options and warrants.
<PAGE>
I/NET, Inc.
Summary of Accounting Policies
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New Accounting Pronouncements
- -----------------------------
SFAS 133 regarding derivative instruments is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000, as amended by SFAS 137. The
statement will become effective for the Company for the quarter ended March 31,
2001. 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.
See accompanying notes to consolidated financial statements.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
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1. Commissions
During a prior year, the Company negotiated to release a distributor from its
exclusive contract to distribute certain Company products. In exchange for this
release, the Company agreed to pay commissions totaling $258,000 at March 31,
2000.
2. Short-term Advances from Stockholders
Advances from stockholders as of March 31, 2000 consists of:
Non-interest bearing notes payable to
Stockholders, due on demand $ 20,500
Stockholder's advances bearing
interest at 8%, due on demand and
secured by all the Company's assets 75,000
--------
$ 95,500
3. Long-term Debt
Long-term debt as of March 31, 2000 consists of:
Notes payable to vendors (see below) $ 756,494
Notes payable to stockholders bearing interest
at 8% and due in December, 2001, secured
by all the Company's assets 304,310
----------
1,060,804
Less current maturities 591,000
----------
Total Long-term Debt $469,804
==========
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
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Notes Payable to Vendors
- ------------------------
Unsecured notes payable to various vendors totaling $756,494 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 10.75 % at March 31, 2000).
Another note in the amount of $69,523 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, which the Company was
unable to pay, was due in September 1996. The Company continues to make monthly
payments as required by the original note. This note bears interest at 8% and is
classified as current.
Another note in the amount of $205,708, is due in 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%. Final payment, assuming
minimum payments only, is June 2004.
Another note in the amount of $40,608 is due in monthly installments of 5% of
the previous month's cash receipts (as defined) but at a minimum rate of $3,500
monthly and bears interest at 10%. Final payment, assuming minimum payments
only, is April 2001.
Aggregate maturities of long-term debt over the next five years assuming
repayment of stockholders' advances (Note 2) and notes are as follows:
2000 $686,000
2001 $351,000
2002 $ 50,000
2003 $ 56,000
2004 $ 13,000
4. Stock Warrants
In 1997, the Company issued 460,000 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 September 2000.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
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5. Major Customers
The Company provided Internet products, websight consulting services and support
services to three major customers totaling $376,000 and $495,000 for the three
months ending March 31, 2000 and 1999 respectively. These three customers in the
aggregate accounted for 92% and 95% of the Company's revenue for these periods
respectively.
During 1998, the Company signed a licensing agreement and supplemental support
services agreement with Career/NET L.L.C. for its previously developed
Career/NET product. In March of 1999, Career/NET L.L.C. desired to be relieved
of the support services agreement in exchange for giving a $209,000 demand
promissory note which bears interest at 7% per annum. The Company continues to
perform ongoing programming and website development services for Career/NET.
6. Taxes on Income
Income taxes are calculated using the liability method.
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 as of March 31, 2000
are as follows:
Accruals $88,000
Trademark 51,000
Net operating loss carryforwards 3,406,000
Tax Credit carryforwards 27,000
Capital loss carryforwards 24,000
-----------
Total Deferred Tax Assets $3,596,000
Valuation Allowance (3,596,000)
------------
$ -
------------
As of March 31, 2000, the Company had a net operating loss carryforward of
approximately $10,017,000 and investment tax credit carryforwards of
approximately $22,000 available to reduce future taxable income and taxes,
respectively. These carryforwards expire from 2000 through 2011.
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
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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 charged
against operations during the three months ended March 31, 2000 or 1999.
8. Operating Leases
The Company leases its facilities and certain equipment under non-cancelable
operating leases. Management expects that in the normal course of business,
leases will be renewed or replaced with other leases. Rental expense under these
leases was approximately $26,000 and $24,000 for the three months ended March
31, 2000 and 1999 respectively. Future minimum annual lease payments subsequent
to March 31, 2000 are as follows:
2000 $99,000
2001 $47,000
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. Options outstanding are summarized as follows:
Option Price Weighted Average
Shares Per Share Price Per Share
---------------------------------------------------------
January 1, 1999 115,000 $.37-2.50 $.63
Lapsed October
1999 (100,000) .37 .37
Granted December
1999 50,000 .29 .29
------- --------- ---
December 31, 1999
and March 31, 2000 65,000 $.29-2.50 $.80
======= ========= ====
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
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At March 31, 2000, 582,255 shares of common stock were reserved for the
incentive stock option plan and 15,000 options were vested and exercisable. The
remaining weighted average contractual life on these options is five years. The
50,000 options are not vested and have a remaining contractual life of ten
years.
Under SFAS No. 123, "Accounting for Stock Based Compensation" the Company is
required to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plan had been
determined in accordance with the fair based method prescribed in SFAS No. 123.
The Company estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following assumptions used
for the grant in 1999: expected volatility of 80 percent; risk-free interest
rate of 6.2 percent, and an expected option life of 7.2 years. Net earnings for
the three month periods ending March 31, 2000 and 1999 would not have been
materially affected. The fair value of the options granted during 1999 was $.19
per share.
10. Supplemental Disclosure of Cash Flow Information
Interest paid for the three months ended March 31, 2000 and 1999 was $7,000 and
$9,000 respectively. The Company paid no income taxes during 2000 and 1999.
11. Contingencies
Royalties
In a prior year, the Company entered into a software license agreement wherein
Netscape granted to the Company the right to port certain of its Internet Server
products to the IBM AS/400 platform. This agreement, which terminates on
September 30, 2000, allows the Company to market and distribute the ported
products upon their modification to the AS/400 platform.
In exchange for this license agreement, the Company 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
Paid by IBM on behalf
of I/NET in September 1999 $1,000,000
September 30, 2000 $1,000,000
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
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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.
During prior years, IBM has provided advances against royalties in the amount of
$600,000. These amounts will be reimbursed to IBM after deduction of Netscape
royalties in the amount of 10% of total revenue received from sale of the ported
products. If the revenue from the sales of these Netscape products is
insufficient, the Company will not have to repay any of these advanced
royalties. To date, sales of this product have been insignificant.
Litigation
From time to time, the Company is involved in various legal actions arising in
the normal course of business. Management does not anticipate any material
losses as a result of these proceedings.
12. Earnings Per Share
A reconciliation of shares used in calculating basic and diluted earnings per
share follows:
Three months ended March 31, 2000 1999
---- ----
Basic 31,037,652 31,037,652
Effect of assumed conversion of
options and warrants 80,769 817,293
---------- ----------
Diluted 31,118,421 31,854,945
========== ==========
For the three months ended March 31, 2000, warrants to purchase 230,000
shares of common stock at prices ranging from $.75 to $1.00 per share and
options to purchase 15,000 shares of common stock at $2.50 per share were not
included in the computation of the diluted earnings per share as they were
anti-dilutive.
For the three months ended March 31 1999, options to purchase 15,000 shares of
common stock at $2.50 per share were not included in the computation of the
diluted earnings as they were anti-dilutive.
13. Sale of Securities
In January 2000, Stek, Ltd., the Company's wholly owned Caymanian subsidiary
sold approximately 20,000 shares of its 1,500,000 shares of SEGOES, Ltd. stock
with net proceeds to the Company of $28,199. The Company had received these
shares in January 1999 for the successful completion of the development,
installation and operation of the SEGOES website.
14. 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 workin
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 initiatives to expand its business opportunities. However, there can
be no assurance these activities will be successful.
<PAGE>
I/NET, Inc.
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Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
- ---------------------
Revenues for the three months ended March 31, 2000 were $410,000 compared to
$521,000 for the three months ended March 31, 1999. When analyzed by product
category, revenues of Website consulting services provided to IBM were $251,000
in the first quarter of 2000, as compared to $184,000 in 1999. Sale of Internet
products accounted for revenues of $141,000 in 2000 and $90,000 in 1999. Revenue
from the termination of a support services agreement and ongoing programming
revenues from Career/NET L.L.C. accounted for revenues of $221,000 in 1999 and
from programming revenues amounted to $7,000 in 2000.
Cost of revenues decreased by approximately $64,000 to $209,000 in 2000 as
compared to $273,000 in 1999. The cause for this decrease was the reduction in
support fees charged for the Netscape project.
General and administrative expenses deceased by approximately $32,000 to
$144,000 in 2000 as compared to $176,000 in 1999. The cause for this decrease
was reduced professional fees as well as lower employee costs.
Other income (expense) increased by $29,000 primarily due to the gain on the
sale by Stek Ltd. of SEGOES, Ltd. stock in the amount of $29,000.
Financial Condition and Liquidity
- ---------------------------------
The Company's primary need for capital will be to invest in computer software
development. As of March 31, 2000, the Company's working capital deficit was
$594,000, as compared to a deficit of $986,000 at March 31, 1999. Earnings and
continued debt repayment have provided the resulting decrease in working
capital deficit in 2000 and 1999.
In March 2000, the Company signed an extension to its current Websight
consulting agreement with IBM through the end of March 2001. In addition, the
Company has signed new exclusive worldwide marketing and distribution agreements
for the distribution of its Webserver products. Appsmall.com has the exclusive
right through September 2000 to market and distribute the Company's products in
the United States, Canada, Europe and the Middle East and Africa. General
Business Services Co. LTD (GBS) of Tokyo, Japan has the exclusive territory of
Japan for 2000.
<PAGE>
I/NET, Inc.
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The Company believes that the additional sales provided by the above
mentioned agreements, the continued development of new products, together with
the renegotiations of its defaulted debt, should provide the Company with
sufficient working capital to market its products, which would enable the
Company to meet its current obligations and provide additional funds for
continued new product development. The Company continues to explore alternative
options to reduce its debt obligations, which could increase the Company's
financial stability. In addition, management is currently negotiating several
additional contracts for its services and products. However, there can be no
assurance these activities will be successful.
"Safe Harbor" Provisions Under the Private Securities Litigation Reform Act
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Statements in this filing that are not historical facts are forward-looking
statements, which involve risks and uncertainties that could affect the
Company's results of operations, financial position and cash flows. of 1995
Actual results may differ materially from those projected in the forward-looking
statements, due to variety of factors, some of which may be beyond the control
of the Company. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
In accordance with the requirements of the Exchange Act the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
being duly authorized
I/NET, Inc.
Date: May 10, 2000
By: /s/ Stephen 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 175,398
<SECURITIES> 0
<RECEIVABLES> 389,352
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 564,750
<PP&E> 39,582
<DEPRECIATION> 25,995
<TOTAL-ASSETS> 578,337
<CURRENT-LIABILITIES> 1,159,025
<BONDS> 0
0
0
<COMMON> 31,038
<OTHER-SE> 11,886,674
<TOTAL-LIABILITY-AND-EQUITY> 578,337
<SALES> 409,901
<TOTAL-REVENUES> 409,901
<CGS> 209,393
<TOTAL-COSTS> 209,393
<OTHER-EXPENSES> 143,678
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,042
<INCOME-PRETAX> 76,202
<INCOME-TAX> 0
<INCOME-CONTINUING> 76,202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,202
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>