<PAGE>
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 September 30, 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
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I/NET, INC.
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(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
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(Address of Principal Executive Officers)
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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__
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The registrant had 31,182,652 shares of common stock outstanding as of September
30, 2000.
Transitional Small Business Disclosure Format:
Yes__ No X
---
1
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ITEM 1. FINANCIAL STATEMENTS
I/NET, Inc.
Consolidated Balance Sheet
(Unaudited)
September 30,
2000
-------------
Assets (Notes 2 and 3)
Current Assets
Cash $ 132,627
Trade Receivables 143,747
Prepaid Expenses 20,000
------------
Total Current Assets 296,374
Office Furniture and Equipment, Net of
Accumulated Depreciation of $ 32,995 22,282
------------
Total Assets $ 318,656
============
Liabilities and Capital Deficit
Current Liabilities
Accounts Payable $ 907
Accruals:
Commissions (Note 1) $258,000
Interest 186,581 444,581
--------
Advances from Stockholders (Note 2) 95,500
Current maturities of long-term debt (Note 3) 491,000
------------
Total Current Liabilities 1,031,988
Long-term Debt, less current maturities (Note 3) 436,598
------------
Total Liabilities 1,468,586
Commitments and Contingencies (Notes 6, 7, 11 and 14)
Capital Deficit (Note 8)
Common Stock $.001 par value; Authorized 50,000,000 Shares:
Issued and outstanding 31,182,652 31,183
Additional Paid in Capital 11,910,554
Deficit (13,091,667)
------------
Total Capital Deficit (940,930)
------------
Total Liabilities and Capital Deficit $ 318,656
============
See accompanying summary of accounting policies and notes to consolidated
financial statements
2
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I/NET, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
September September September September
30, 2000 30, 1999 30, 2000 30, 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues (Note 4) $ 390,745 $ 487,325 $ 1,149,314 $ 1,381,874
Cost of Revenues 225,067 180,021 647,520 635,188
----------- ----------- ----------- -----------
Gross Profit 165,678 307,304 501,794 746,686
Selling, General, and Administrative Expenses 138,181 159,519 413,868 458,815
Loss on writedown of investments (Note 9) (209,000) - (209,000) -
----------- ----------- ----------- -----------
(Loss) Earnings from operations (181,503) 147,785 (121,074) 287,871
Other income (expense):
Interest expense (13,967) (16,414) (43,474) (49,975)
Interest income 3,883 4,770 15,040 6,365
Other income (expense) (805) 146 73 3,055
Gain on sale of securities (Note 13) - - 28,199 -
----------- ----------- ----------- -----------
(10,889) (11,498) (162) (40,555)
----------- ----------- ----------- -----------
(Loss) Earnings before Extraordinary Item
and Income Taxes (192,392) 136,287 (121,236) 247,316
Income Tax Benefit - - 25,000 -
----------- ----------- ----------- -----------
(Loss) Earnings before Extraordinary Item (192,392) 136,287 (96,236) 247,316
Extraordinary Item:
Gain on extinquishment of debt net of tax
effect (Note 3) - - 48,975 -
----------- ----------- ----------- -----------
Net (Loss) Earnings $ (192,392) $ 136,287 $ (47,261) $ 247,316
=========== =========== =========== ===========
Net (Loss) Earnings per Share (Note 12)
Basic and Diluted $ (.01) $ .01 $ - $ .01
=========== =========== =========== ===========
Average Number of Basic Common Shares
Outstanding (Note 12) 31,142,652 31,037,652 31,050,152 31,037,652
=========== =========== =========== ===========
Average Number of Diluted Common Shares
Outstanding (Note 12) 31,170,430 31,718,224 31,191,641 31,718,224
=========== =========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements
3
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I/NET, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September, September,
30, 2000 30, 1999
--------- ---------
<S> <C> <C>
Operating Activities
Net (Loss) earnings $ (47,261) $ 247,316
Depreciation and amortization 14,000 13,119
Gain on sale of securities (Note 13) (28,199) -
Loss on writedown of investments (Note 9) 209,000 -
Extraordinary item:
Gain on extinquishment of debt (Note 3) (73,975) -
Changes in Assets and Liabilities
Trade Receivables 11,506 (204,148)
Accounts Payable (16,711) (30,101)
Accruals (10,953) 11,129)
--------- ---------
Cash Provided By Operating Activities 57,407 37,315
Investing Activities
Proceeds from sale of securities (Note 13) 28,199 -
Capital expenditures (15,694) (2,725)
--------- ---------
Cash Provided By (Used In) Investing Activities 12,505 (2,725)
Financing Activities:
Principal payments on notes to stockholders (17,194) (29,543)
Principal payments on long-term debt (91,772) (33,435)
--------- ---------
Cash Used In Financing Activities (108,966) (62,978)
Decrease in Cash and Cash Equivalents (39,054) (28,388)
Cash and Cash Equivalents, Beginning of Period 171,681 103,847
--------- ---------
Cash and Cash Equivalents, End of Period $ 132,627 $ 75,459
========= =========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements
4
<PAGE>
I/NET, Inc.
Summary of Accounting Policies
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. You should read these consolidated
financial statements 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 normal adjustments considered
necessary to present fairly the financial position
of the Company as of September 30, 2000, the
results of its operations for the three-month and
nine-month periods ended September 30, 2000 and
1999 and its cash flows for the nine-month periods
ended September 30, 2000 and 1999. All such
adjustments are of a normal and recurring nature.
Interim results are not necessarily indicative of
results for a full year.
The consolidated financial statements include the
accounts of the Company, I/NET, Inc. (a Delaware
corporation), 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. These shares were earned for the successful
completion of the development, installation and
operation of the SEGOES website, an Internet-based
offshore asset management and trading system.
Description of the Business The Company operates in one business segment,
which provides 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.
5
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I/NET, Inc.
Summary of Accounting Policies
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 Office equipment and furniture are stated at cost.
and Depreciation 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 The Company's financial instruments consist
Instruments of cash, receivables, investments, notes payable,
accounts payable and long-term debt. Due to the
short-term nature of the items, other than
investments and 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 September 30,
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 Website consulting contracts on a
monthly basis as amounts are invoiced for time and
expenses incurred.
Earnings (Loss) Per Share Basic earnings (loss) per share includes no
dilution and is computed by dividing income (loss)
available to common stockholders by the weighted
average number of common shares outstanding for
the period. Diluted earnings (loss) per share
reflect, in periods in which they have a dilutive
effect, the effect of common shares issuable upon
exercise of stock options.
6
<PAGE>
I/NET, Inc.
Summary of Accounting Policies
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.
Investments The Company has a minority interest in three
privately held companies. These investments are
carried at the lower of cost or estimated fair
market value (Note 9).
See accompanying notes to consolidated financial statements.
7
<PAGE>
I/NET, Inc.
Notes to Consolidated Financial Statements
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 September 30, 2000.
2. Short-term Advances Short-term advances from stockholders as of September
30, 2000 consist from Stockholders 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
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$95,500
=======
3. Long-term Debt Long-term debt as of September 30, 2000
consists of:
Notes payable to vendors (see below) $633,150
Notes payable to stockholders bearing
interest at 8% and due in December, 2001,
secured by all the Company's assets 294,448
--------
927,598
Less current maturities 491,000
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Total Long-term Debt $436,598
========
8
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I/NET, Inc.
Notes to Consolidated Financial Statements
Notes Payable to Unsecured notes payable to various vendors totaling
Vendors $633,150 are due in various installments and at
varying interest rates.
A note in the amount of $374,023 is due on demand. This
note bears interest at the prime rate plus 2%
(effectively 11.50% at September 30, 2000).
Another note in the amount of $54,686 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, 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 $185,135 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 $19,306 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 March l, 2001.
Aggregate maturities of long-term debt over the next
five years assuming repayment of stockholders' advances
(Note 2) and notes are as follows:
2001 $587,000
2002 $343,000
2003 $ 53,000
2004 $ 41,000
During April 2000, the Company reached an agreement
with a note holder, whereby the Company exchanged
25,000 of its common shares of stock for forgiveness of
$74,000 of indebtedness less an income tax benefit of
$25,000. This transaction has been treated as an
extraordinary item for financial statement purposes.
9
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I/NET, Inc.
Notes to Consolidated Financial Statements
4. Major Customers The Company provided Internet products, website
consulting services and support services to three major
customers totaling $1,035,000 and $1,077,000 for the
nine months ending September 30, 2000 and 1999,
respectively. These three customers in the aggregate
accounted for 91% and 53% of the Company's revenue for
these periods, respectively.
5. 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 September 30, 2000 are as follows:
Accruals $ 88,000
Net operating loss carryforwards 3,289,000
Tax credit carryforwards 22,000
Capital loss carryforwards 24,000
-----------
Total Deferred Tax Assets $ 3,423,000
Valuation Allowance (3,423,000)
-----------
$ -
-----------
As of September 30, 2000, the Company had a net
operating loss carryforward of approximately $9,674,000
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.
6. 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'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 during the three months and
nine months ended September 30, 2000 or 1999.
10
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I/NET, Inc.
Notes to Consolidated Financial Statements
7. 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 $78,000
and $84,000 for the nine months ended September 30,
2000 and 1999, respectively. Future minimum annual
lease payments subsequent to September 30, 2000 are as
follows:
2001 $93,000
2002 $ 8,000
2003 $ 8,000
2004 $ 2,000
8. Incentive Stock The Company maintains an incentive stock option plan
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:
<TABLE>
<CAPTION>
Option Price Weighted Average
Shares Per Share Price Per Share
--------- ------------ ----------------
<S> <C> <C> <C>
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 65,000 $029-2.50 $.80
Granted September
2000 250,000 .24 $.24
-------- --------- ----
September 30, 2000 315,000 $.24-2.50 $.36
======== ========= ====
</TABLE>
11
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I/NET, Inc.
Notes to Consolidated Financial Statements
At September 30, 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 remaining 300,000 options
are not vested and have a remaining contractual life of
ten years.
9. Investments During August 2000, the Company discharged a customer
from $209,000 of indebtedness and also assigned that
customer certain proprietary computer technology and
software for the products known as Career/NET and HR
Department. In exchange for this discharge and
assignment, the Company received 2,000,000 shares (18%
interest) each in the common stock or units in two
privately held entities. These entities provide web-
based resume tracking solutions and career boards and
were working towards raising additional capital of fund
expansion of their growth. During the third quarter of
2000, the raising of additional capital was suspended
due to deteriorating market conditions for such fund
raising. The Company determined that it was appropriate
to writedown these investments to their net realizable
value at this time.
In addition, the Company holds a minority equity stake
in SEGOES, Ltd. which offers offshore trading on the
Web.
10. Supplemental Interest paid for the nine months ended September 30,
Disclosure of Cash 2000 and 1999 was $21,000 and $17,000 respectively. The
Flow Information Company paid no income taxes during 2000 and 1999.
Non-cash investing and financing activities are
summarized as follows:
Forgiveness of indebtedness in the amount of $74,000 in
exchange for 25,000 shares of common stock in April
2000.
11. 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
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I/NET, Inc.
Notes to Consolidated Financial Statements
12. Earnings (Loss) A reconciliation of shares used in calculating basic
Per Share and diluted earnings (loss) per share follows:
Three months ended September 30, 2000 1999
---------- ----------
Basic 31,142,652 31,037,652
Effect of assumed conversion
of options and warrants 27,778 680,572
---------- ----------
Diluted 31,170,430 31,718,224
========== ==========
Nine months ended September 30, 2000 1999
---------- ----------
Basic 31,050,152 31,037,652
Effect of assumed conversion
of Options and warrants 141,489 680,572
---------- ----------
Diluted 31,191,641 31,718,224
========== ==========
For the three months and nine months ended September
30, 2000, options to purchase 15,000 shares of common
stock at $2.50 per share and options to purchase 50,000
shares of common stock at $.29 were not included in the
computation of the diluted earnings (loss) per share as
they were anti-dilutive.
For the three months and nine months ended September 30
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.
13
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I/NET, Inc.
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
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 to
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.
Item 2. Management's
Discussion and Analysis
or Plan of Operation
Results of Operations First Nine months of 2000 Compared to the First Nine
months of 1999
Revenues for the nine months ended September 30, 2000
were $1,149,000 compared to $1,382,000 for the nine
months ended September 30, 1999. Sales of Internet
software products accounted for revenues of $350,000 in
2000 and $434,000 in 1999. The decrease in software
sales was due primarily to lower European sales, as the
Company's primary distributor in that region underwent
a change in marketing and sales personnel. This
decrease was offset, in part, by sales from the
Company's new distributor in the Pacific Rim. Revenues
from website and related consulting totaled $789,000
for the nine-month period of 2000, compared with
$938,000 for the same period of 1999. The decrease was
due primarily to the absence of $209,000 in revenue
from the termination of a support services agreement
with Career/NET L.L.C. in 1999. Exclusive of this item,
revenues from website and related consulting were
$729,000 in 1999.
Cost of revenues increased by approximately $12,000 to
$648,000 in 2000, as compared to $636,000 in 1999. The
cause for this increase was primarily increased
personnel costs related to the Company's contract with
IBM.
General and administrative expenses decreased by
approximately $45,000 to $414,000 in 2000 as compared
to $459,000 in 1999. The cause for this decrease was
lower executive employee costs.
14
<PAGE>
I/NET, Inc.
During the third quarter of 2000, the Company
determined that it should adjust the carrying amount of
the minority investments it held in two privately held
companies. The effect of this writedown was to reduce
the cost of the investments to zero by taking a charge
of $209,000 against them.
Other income (expense) increased by $40,000 primarily
due to the gain on the sale by Stek Ltd. of SEGOES,
Ltd. stock in the amount of $29,000 and increased
interest income of $9,000.
During April 2000, the Company exchanged 25,000 of its
common shares for the forgiveness of $74,000 less an
income tax benefit of $25,000 of indebtedness to a note
holder. This exchange has been treated as an
extraordinary item.
Third Quarter of 2000 Compared to Third Quarter of 1999
For the three month period ended September 30, 2000,
revenues decreased by $97,000 as compared to the same
period of 1999, reflecting lower software sales in
Europe that were offset, in part, by higher consulting
revenues and software sales by the Company's new
distributor in the Pacific Rim.
Cost of revenues increased during the third quarter of
2000 compared with the same period in 1999, reflecting
increased use of contract employees for the Company's
website development consulting business.
Financial Condition The Company's primary need for capital will be to
and Liquidity invest in computer software development. The Company
has reduced its working capital deficit from a year
ago. As of September 30, 2000, the Company's working
capital deficit was $736,000, as compared to a deficit
of $834,000 at September 30, 1999. Cash provided by
operating activities and continued debt reductions have
provided the resulting decrease in working capital
deficit in 2000 and 1999.
In March 2000, the Company signed an extension to its
current website consulting agreement with IBM through
the end of March 2001. The Company has begun
preliminary discussions with IBM on an extension of
this contract.
15
<PAGE>
I/NET, Inc.
In addition, the Company has exclusive worldwide
marketing and distribution agreements for the
distribution of its Webserver products. Appsmall.com
has the exclusive right through December 2000 to market
and distribute the Company's products in the United
States, Canada, Europe and the Middle East and Africa.
Discussions are underway regarding an extension of this
agreement. General Business Services Co. LTD (GBS) of
Tokyo, Japan has the exclusive territory of Japan
through March 2001.
The Company believes that the additional sales provided
by these 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 Statements in this filing that are not historical facts
Under the Private are forward-looking statements, which involve risks and
Securities Litigation uncertainties that could affect the Company's results
Reform Act of 1995 of operations, financial position and cash flows.
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: November 17, 2000
By: /s/Stephen J. Markee
---------------------
Stephen J. Markee
Director, President, CEO and CFO
16
