U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ---- to ----
Commission File number 333-5862
Net Lnnx, Inc.
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-1726390
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
324 Datura St., Suite. 303, West Palm Beach, FL 33401
(Address of principal executive office and zip code)
(561) 659-1196
(Issuer's telephone number)
(Former name, former address, and former fiscal year, if changed since last
report)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act of 1934 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 at least
the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At September 30, 1997, there
were outstanding approximately 2,058,209 shares of common stock, no par value.
<PAGE>
Transitional Small Business Disclosure Format (check one);
Yes __ No _X__
NET LNNX, INC.
Form 10-QSB Index
September 30, 1997
Page
Part I: Financial Information ..............................
Item 1. Financial Statements ..........................
Balance Sheets Unaudited at September 30, 1997....
Unaudited Statements of Operations for the
Period ended September 30, 1997...................
Unaudited Statements of Cash Flow for the
Period Ended September 30, 1997...................
Notes to Unaudited Financial Statements ..........
Item 2. Management's Discussion and Analysis or Plan
of Operation .....................................
Part II: Other Information ...............................
Item 1. Legal Proceedings ..........................
Item 2. Changes in Securities ......................
Item 3. Defaults Upon Senior Securities ............
Item 4. Submission of Matters to a Vote of
Security Holders ...........................
Item 5. Other Information ..........................
Item 6. Exhibits and Reports on Form 8-K ...........
Signatures .................................................
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
NET LNNX, INC.
CONDENSED BALANCE SHEET
September 30, 1997
(Unaudited)
ASSETS
Current assets:
Cash $ 20,433
Prepaid expenses 1,550
Total current assets 21,983
Property and equipment (net) 7,893
Investment 12,600
Note receivable - long term 430,176
$ 472,652
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 16,805
Deferred gain - installment sale 41,469
Stockholders' equity:
Common stock 1,000
Additional paid-in capital 1,096,335
Retained deficit (682,957)
Total stockholders' equity 414,378
$ 472,652
See Accompanying Notes
<PAGE>
NET LNNX, INC.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1997 1996
<S> <C> <C>
Sales, net $ - $ -
Cost of sales - -
Gross profit (loss) - -
General and administrative expenses 58,318 631,471
Loss from operations (58,318) ( 631,471)
Other income (expense)
Gain on non-monetary transactions - 558,000
Interest earned 7,724 -
Earnings on subsidiary equity - 16,327
Installment gain - sale of subsidiary 1,376 -
Depreciation (415) ( 540)
Total other income (expense) 8,685 573,787
Net loss from continuing operations ( 49,633) ( 57,684)
Discontinued operations:
Loss from operations of subsidiaries - ( 53,547)
Net loss (49,633) ( 111,231)
Retained earnings(deficit), beginning
of period (633,324) 1,164
Retained earnings(deficit), end of period $ (682,957) $( 110,067)
Net loss per share $ ( 0.02) $( 0.09)
Weighted average shares outstanding 2,058,209 1,241,435
</TABLE>
See Accompanying Notes
<PAGE>
NET LNNX, INC.
CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ ( 49,633) $
(111,231)
Adjustments for non-cash items 415
(160,912)
Changes in assets and liabilities ( 2,827) 153,950
Net cash provided (used) for operations ( 52,045)
(118,193)
Investments activities:
Acquisition of property -
(10,798)
Investment ( 12,600) -
Receipts from installment sale note 14,276 -
Cash used for investment activities 1,676
(10,798)
Financing activities:
Proceeds from sale of Preferred Stock - 170,000
Net cash provided by financing activities - 170,000
Net increase (decrease) in cash ( 50,369) 41,009
Cash, beginning of period 70,802 2,164
Cash, end of period $ 20,433 $ 43,173
Supplemental disclosure:
Cash paid for interest $ - $ -
Income taxes paid $ - $ -
</TABLE>
See Accompanying Notes
<PAGE>
NET LNNX, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements of Net Lnnx, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997.
2. Litigation
In its financial statements for the year ended December 31, 1996, the Company
reported the pending sale of one of its subsidiaries, Communications/USA, Inc.
("CUSA"). In January 1997, the Company completed the sale of CUSA.
Consideration was cash and a promissory note (the "Note"). The gain on the
sale is being reported on the installment method which amounted to $1,376
during the third quarter of 1997.
As security for the Note, 1,250,000 shares of CUSA were to be held in escrow
by a law firm. The escrow agreement stated that the shares, in addition to
being held as security, were not to be encumbered nor transferred without
written authorization from the Company. Despite this agreement, the assets of
CUSA were sold and the proceeds distributed to the shareholders of CUSA. The
Company has filed a lawsuit alleging, among other counts, a fraudulent
transfer of the stock of CUSA by the buyer and that the buyer has removed
and/or concealed its assets resulting in an inability of the buyer to continue
to meet its obligations under terms of the Note. The Company is seeking (1) an
injunction against the buyer & CUSA of further distribution of sums received
from the sale of CUSA's assets, (2) costs, and (3) damages. Litigation is in
the discovery stage. The outcome is unknown but management believes they will
recover their investment.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of
Operation.
(a) Plan of Operation
The registrant is presently a holding company conducting virtually no
business operation, other than its efforts to seek merger partners or
acquisition candidates. As disclosed in the registrant's press release dated
November 11, 1997, the registrant entered into a non-binding letter of intent
for a reverse merger with R.F. Scientific, Inc., an Orlando, Florida based
corporation ("RFS"). RFS is a satellite communications company which
specializes in preparing and constructing satellite communications vehicles
for a wide variety of commercial broadcasters, private networks and voice data
users. As of the date of this report, no definitive binding merger agreement
has been entered into between the registrant and RFS, and since the letter of
intent is non-binding, no assurances can be made that such a merger agreement
will be entered into and that a merger will close.
The registrant receives a cash flow from a 7% note receivable (the "Note
Receivable") made to the registrant. The Note Receivable is a 7% interest
promissory note in the amount of $475,000 with 5 monthly payments of $4,000
per month, 7 monthly payments of $9,000 per month, 12 monthly payments of
$12,000 per month, and a balloon payment of the balance due on March 1, 1999.
As of September 30, 1997, the underlying value of the Note Payable is
approximately $430,176.
During June, 1997, the registrant instituted legal proceeding against the
maker of the Note Receivable in connection with the purchase contract for
which the Note Receivable was issued. See Part II, Item 1 herein, "Legal
Proceedings". During the period covered by this report, the registrant has
expended a significant amount of its cash reserves, in addition to a
significant amount of the cash flow received by the registrant from the Note
Receivable, on professional fees and costs in connection with this and other
litigation matters in which the registrant has been a party to. No assurances
can be made that the registrant, or its assigns, will continue to receive its
monthly payments, or the balloon payment, on the Note Receivable when due in
light of the circumstances which prompted the registrant to institute
litigation proceedings against the Note Receivable maker. As of September 30,
1997, the registrant maintains cash reserves in the amount of approximately
$20,433.
Pursuant to an Agreement dated June 6, 1997 between the registrant and
Harbor Town Holding Group I, Inc. ("Harbor Town"), a former wholly owned
subsidiary of the registrant, upon the termination of the abovementioned
litigation, the Note Receivable was to be transferred from the registrant to
Harbor Town. The Note Receivable constituted the consideration paid by the
registrant for Harbor Town's stock. The transfer contemplated by the June 6,
1997 agreement described above was cancelled pursuant to an agreement dated
November 6, 1997 between the registrant and Harbor Town. Consequently, the
registrant shall continue to hold Note Receivable and receive the cash flow
therefrom. See Part II, Item 5 herein, "Other Information". Notwithstanding
the abovementioned litigation, or any other litigation, until such time as the
registrant closes a merger or acquisition transaction, with the exception of
professional fees and costs for such a transaction, the registrant expects
that it will incur only minor operating costs in 1997.
<PAGE>
The registrant has been operated by new management since January 1997.
To the best of such new management's knowledge, the registrant's past
liabilities have been paid to the satisfaction of all creditors, with the
exception of one creditor which has brought suit against the registrant in the
approximate amount of $25,645 as of the date of this report. See Part II, Item
1 herein, "Legal Proceedings". In the event this creditor is successful in
such action against the registrant, depending upon the costs involved and the
monetary damage awards obtained against the registrant, the registrant might
have difficulty meeting its cash requirements. Also, although the
registrant's management has conducted what they consider a thorough
investigation of all potential liabilities of the registrant, management may
not be aware of all the registrant's outstanding liabilities; therefore, in
the event present, material, unknown liabilities exist, the registrant might
have difficulties meeting its cash flow requirements in the event it is
required to pay such liabilities.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
CommGroup, Inc. Litigation
On April 15, 1997, CommGroup, Inc. d/b/a Communications Group, a Florida
corporation ("CommGroup"), filed suit against the registrant in the Circuit
Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida.
CommGroup is a company which provides marketing support and public
relations services ("Services"). CommGroup alleges that it performed Services
for the registrant valued at approximately $25,645 pursuant to an oral
contract between the registrant and CommGroup. CommGroup brought this suit
for breach of contract, account stated and quantum meruit relief against the
registrant. As of the date hereof, the lawsuit is in the "discovery stage".
Palm Capital, Inc. et. al Litigation
Previous to June, 1997, questionable circumstances arose with respect to
the Note Payable, Communications/USA, Inc., Palm Capital, Inc. and the
viability of continued payment on the Note Payable and the possibility of its
default, either in whole or in part. Based on this, the registrant considered
it likely that the value of the Note Payable was in jeopardy and that certain
action, including litigation, would be required and appropriate in order to
salvage the greatest amount of value for the Note Payable. As of September 30,
1997, the underlying value of the Note Payable is approximately $430,176. On
June 27, 1997, a representative of Palm Capital, Inc. and Communications\USA,
Inc. offered to pay Net Lnnx a lump sum payment of $213,256 as payment in full
on the Note Payable in exchange for a release from liability for any
additional payments under the Note Payable. The registrant rejected the
offer as payment in full for the Note Payable.
On June 27, 1997, the registrant, filed suit against Palm Capital, Inc.,
a Florida corporation ("Palm"), Communications/USA, Inc., a Florida
corporation ("Comm/USA"), Robert Feiman, an individual ("Feiman") Raul
Balsera, an individual ("Balsera") and Gibbs and Runyan, P.A , a Florida
professional corporation ("Gibbs") in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida in connection with the purchase
contract for which the Note Receivable was issued.
The registrant commenced suit against the abovenamed defendants
collectively and/or individually alleging/seeking Fraudulent Transfer; Fraud
In The Inducement; Injunctive Relief (pursuant to Florida's Fraudulent
Conveyance Statute and common law); Fraud In the Purchase Of Securities;
Breach of Contract; and Breach of Fiduciary Duty. Upon a motion to dismiss
all counts brought by the defendants, the court denied the motion as to all
counts except for the common law injunctive relief sought. The court,
however, sustained and refused to dismiss the registrant's claim for
injunctive relief based upon Florida's
<PAGE>
Fraudulent Conveyance Statute. At a preliminary hearing, the court did not
grant the preliminary injunctive relief the registrant sought; however, the
lawsuit is continuing forward and is presently in the "discovery stage". A
jury trial has been requested. The registrant is seeking compensatory damages
and punitive damages, in addition to any and all other relief the court may
grant.
Item 2. Change in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
On June 5, 1997, the registrant agreed to assign the Note Payable to
Harbor Town. See Part I, Item 2 herein "Management's Discussion and Analysis
or Plan of Operation". The assignment was made for the payment of the
transfer to registrant by Harbor Town of Two Million Fifty Eight Thousand Two
Hundred and Nine (2,058,209) shares of Harbor Town's capital stock, which on
May 23, 1997, pursuant to a shareholder and director's meeting, the registrant
was authorized to issue such Harbor Town stock to record shareholders of Net
Lnnx.
Previous to June, 1997, questionable circumstances arose with respect to
the Note Payable, Comm/USA, Palm, and the viability of continued payment on
the Note Payable or the possibility of its default, either in whole or in
part. See Part II, Item 1 herein, "Legal Proceedings". Based on this, both
the registrant and Harbor Town considered it likely that the value of the Note
Payable was in jeopardy and that certain action, including litigation, would
be required and appropriate in order to salvage the greatest amount of value
for the Note Payable.
On June 6, 1997, the registrant and Harbor Town agreed that in exchange
for the registrant utilizing its resources to collect the greatest amount of
value for the Note Payable, Harbor Town will suspend, and shall not effectuate
the assignment of the Note Payable to Harbor Town until such date that the
registrant can collect the greatest amount of value for the Note Payable, with
such value to be determined by the registrant. The registrant shall continue
to have full right of ownership in all Two Million Fifty Eight Thousand Two
Hundred and Nine (2,058,209) shares of Harbor Town's capital stock, which now
belongs to the registrant's shareholders of record date. As of the date of
this report, the registrant and the opposing parties to this litigation are in
the discovery process of the lawsuit.
<PAGE>
On November 6, 1997, Harbor Town entered into a subscription agreement
with an investor which required Harbor Town to cancel entirely the above
described transfer of the Note Receivable. On November 6, 1997, the transfer
of the Note Receivable was cancelled in its entirety. The registrant
continues to maintain full ownership of the Note Receivable and all principal
and interest payments received from the Note Receivable.
The June 5, 1997 assignment of the Note Receivable served as
consideration for the 2,058,209 shares of Harbor's capital stock issued to the
registrant. As substitute consideration therefore, the registrant canceled a
$12,600 promissory note dated June 2, 1997 made by Harbor to the registrant so
that Harbor shall have no obligation whatsoever to pay to Harbor either the
$12,600 principal sum of the promissory note or the interest accumulated
thereon.
Item 6. Exhibits and Reports on Form 8-K
(a) Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
SIGNATURES
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 duly authorized.
NET LNNX, INC.
Registrant
/s/ Ronald W. Hayes, Jr.
Ronald W. Hayes, Jr.
President.
/s/ Ronald W. Hayes, Jr.
Ronald W. Hayes, Jr.
President.
/s/William R. Colucci
William R. Colucci,
Vice President and
Secretary
Date: November 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Balance
Sheet, Statement of Operations, Statements of Cash Flows and Notes thereto
incoporated in Part I, Item 1. of this Form 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,433
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,983
<PP&E> 10,798
<DEPRECIATION> 2,905
<TOTAL-ASSETS> 472,652
<CURRENT-LIABILITIES> 16,805
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 1,096,335
<TOTAL-LIABILITY-AND-EQUITY> 472,652
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 58,733
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (49,633)
<INCOME-TAX> 0
<INCOME-CONTINUING> (49,633)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,633)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
