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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended January 31, 2000
Commission File Number 33-20783-D
H-NET.COM INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1064958
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
345 THIRD STREET, SUITE 645, NIAGARA FALLS, NEW YORK 14303
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 905-475-3249 and 716-284-
2465 Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) had been subject to such filing
requirements for the past 90 days YES XX
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The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $25,424,756 on or about JANUARY 31, 2000.
There were 7,823,002 shares of common stock outstanding having a NO par value
per share as of JANUARY 31, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE:
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Current Report on Form 8-K, filed on January 6, 1995.
First Amendment to Report on Form 8-K filed on January 16, 1995.
Second Amendment to Report on Form-8K, filed on February 16, 1995.
Articles of Incorporation of Registrant dated May 16, 1996
Bylaws of Registrant, Warrant Agreement, and Underwriter's
Warrant, previously filed as an exhibit to the Company's Form S-18 Registration
Statement, No. 33-20733-D, made effective August 3, 1988. The underwriter's
warrants are no longer valid.
PART I
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This report contains certain forward looking statements, which may involve known
and unknown material risks, uncertainties and other factors not under H-NET 's
control including without limitation its ability to operate as a going concern,
the need for additional financing, the impact of competition, the management of
growth, compliance with regulatory requirements, H-NET `s ability to implement
its long term business plan for acquiring complementary businesses and H-NET `s
ability to enter into agreements with marketing or distribution partners, which
may cause actual results, performance and achievements of H-NET to be materially
different form H-NET `s expectations.
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Item 1 General Development of Business.
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H-NET.COM Inc. (H-NET Canada) organised under the laws of the Canadian
Province of Ontario in September 1999, and Alphabytes Computer Corporation (AB
Canada), organized under the laws of the Canadian Province of Ontario in 1983,
is a software and Internet based applications development company to the health
care industry in North America, the United Kingdom and European Community.
H-NET.COM, Inc ( H-NET New York ) was organised under the law of New
York in September 1999, and Alpha Bytes Computer Corporation (AB New York),
organized under the law of the State of New York in 1988, is engaged in
marketing and supporting software products developed by H-NET.COM (H-NET Canada)
its Canadian affiliate.
All companies are owned by H-NET.COM, Inc formally known as Alpha Bytes
Inc. a publicly held Colorado Corporation. Alpha Bytes Inc. changed its name to
H-NET.COM, Inc in December 1999.
H-NET is building up to a position where it will instigate an
acquisition strategy within the highly fragmented Internet Optical industry with
a view to expand through acquisitions. With this strategy, as well as internal
expansion H-NET intends to become the leading applications software developer
with a multi-service Internet portal and Internet driven transaction processing
services. H-NET `s B2B model is intended to help eye care providers retain their
customers, create ordering efficiencies and assist in training of staff. In
addition the electronic transaction processing services will assist in deriving
quantifiable savings in the processing of managed care claims using the Internet
as a conduit.
H-NET.COM, Inc. currently has an installed base of over 6,500 sites
(equivalent to more than 40,000 users) in the vision care industry, which it
provides an integrated software product line and a newly developed multi-service
Internet portal which provides transaction services and B2B e-commerce
services. It has generated operating profits during fourteen of the last
fifteen years.
The United States optical product market is estimated at $16 billion in
1999. H-NET believes that current demographic trends, technological innovation,
medical advances and relatively attractive profit margins are fuelling the
optical industries growth. H-NET believes that as the U.S. population ages and
grows in size, the demand for vision correction and eyewear products will
increase. Neither corporation has ever been a party to any material
reclassification, merger, consolidated, or purchase or sale of a significant
amount of assets not in the ordinary course of business.
N.B. Any references in this document to H-NET.COM, Inc prior to the date of the
above mentioned name change refer to the copany doing business under the
previous name of Alpha Bytes Inc.
Background Information
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H-NET.COM, Inc. began business in the Canadian City of Toronto, Ontario
in 1983 with the objective of capitalizing on business opportunity provided by
the evolving personal computer market in the area of easy to learn and operate
applications software.
H-NET.COM, Inc elected to specialise in the health care market because
of management's perception that it afforded substantial sales volume and because
the health care business was (and is) a stable, essential, growing and
prospering industry. After two years of producing specialized software, H-
NET.COM, Inc decided to further narrow its niche to the vision care industry.
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H-NET.COM, Inc has become a leading software applications vendor in the
international vision care business supporting its clients with offices in
Toronto, Ontario and Niagara Falls, New York. Management believes that H-
NET.COM, Inc has more contracts among the top 100 North American vision care
chains than any other vendor. A partial list of its clients includes: Pearle
Vision (Texas); Cole Vision (Cleveland); Eye Care Centers of America (San
Antonio); LensCrafters (Cincinnati); Standard Optical (Toronto); D.O.C.
(Detroit); Bensons (Minneapolis); Family Vision and Wal Mart' Sams stores
(Fayetteville, Arkansas); the Bay Group (Toronto); Optica Lee Borinquen (Puerto
Rico) and Scrivens Optical (Great Britain).
Management believes that H-NET.COM, Inc was the first vendor to offer a
full line of integrated software products for retail corporate chains and
independents using the Internet for electronic communications, (the Alpha POS
system); home office management (the Alpha H.O. system); independent
optometrists (the Alpha PM system); small labs & superstores (the Alpha Lab
system); and, large wholesale labs (the Alpha Lab system).
H-NET.COM, Inc has an informal corporate development understanding with
Merrill Lynch, Pierce, Fenner & Smith, including a commitment to participate in
the funding of provider receivables. H-NET.COM, Inc has enjoyed a long standing
successful working relationship with Unisys and IBM in the joint marketing and
technical support of vision care chain clients in North America and the United
Kingdom. In addition, Microsoft, Compaq, UUNET (a leading network company),
Quantum Optical (a leading provider of Vision care continuing education) and
Integrated ECOMM (a leading supplier of Telephony applications) are parties to
strategic alliances (expected to commence in the first quarter of 2000) with H-
NET.COM, Inc for marketing of the H-NET Healthcare Internet Based Network.
Business Development
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In 1983, personal computer software technology was being introduced in
vision care industry laboratories to assist the mathematics of lens grinding and
job tracking. H-NET.COM, Inc introduced what management believes was the first
commercially successful designed developments for personal computer based
practice management systems for optometrists.
During the period from 1984 to 1986, H-NET.COM, Inc created the software
and trained the staff to operate 450 stores throughout Canada (using two
languages) for Standard Optical, the retail division of Imperial Optical.
Between 1985 and 1986, H-NET INC developed medical billing applications allowing
health care providers to electronically process claims to government agencies
such as OHIP (the Ontario Govt. Health Care Ministry) & other Canadian
provinces.
In 1986, IBM selected H-NET.COM, Inc as its vision care software vendor
for joint marketing of software, hardware and support, with the target market
being chains and independent health care providers in North America and the
United Kingdom. During the 1986 through 1987 period, H-NET.COM, Inc won chain
contracts with Detroit Optical, Sterling, Bensons and others.
In 1989, Price Waterhouse, working for LensCrafters, chose H-NET.COM,
Inc to automate the chain's more than 700 locations. H-NET.COM, Inc developed a
point of sale system to work on IBM's RISC 6000 computer. Its Alpha Lab II
software program was the first to provide a software platform for use with the
IBM RISC 6000 in large wholesale laboratories.
Because clients required and demanded technology connecting their
retail, laboratory and home office administrative operations in a compatible
electronic environment, in 1990 H-NET.COM, Inc developed and became the first
vendor to offer an "off-the-shelf price" for full product lines. They included
the Alpha POS (point of sale) program for retail operations; the Alpha PM
program for practice management; the Alpha Lab I & II programs for Laboratories;
and the Alpha H.O. program for home office management.
In 1993, Family Vision Centers of Fayetteville (which operates the
optical departments for Walmart and Sam Stores), retained H-NET.COM to train its
staff in 172 locations on the Alpha POS program running on IBM personal
computers with prescriptions electronically transferred to the laboratory
facilities. Optica Lee Borinquen, a leading vision care chain in Puerto Rico
(with 42 stores), retained H-NET.COM, Inc technology to set up and connect its
retail, laboratory and home operations. H-NET.COM, Inc also began to automate
one of the world's largest chains by providing software services to the
Carribean operation of Pearle Vision Group. In addition to its vision care
developments, in 1993, H-NET.COM, Inc developed a full point of sale and home
office system for the hearing aid industry and won a contract with one of the
largest chains in the U.S., HEARx, and H-NET.COM, Inc penetrated the British
market by beginning automation of Specialeyes.
In 1995, H-NET.COM, Inc began the initial investigations for the
software necessary to offer transaction network processing services in real-time
or batch mode to the United States vision care business, wherein no such
services exist. H-NET.COM, Inc has initiated product development for a service
to be called H-NET for order processing and claims processing between health
care providers and their suppliers including the government agencies.
In 1996, development began of the cross-platform, Windows (Registered
Trade Mark of Microsoft, INC.) compatible version of Point of Sale Software
(POS2), Laboratory Management Software (LAB2), and its Home Office Software
System (HO2) was released. Additionally, the company completed development of
the Point of Sale Software for the Hearing Aid Retail Sales Industry (POSH).
Late 1997, the Windows based Point Of Sale/Practice Management System
(POS2), Home Office System (HO2) and Lab Management System (LAB2) products were
completed and active marketing began.
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In 1998, the company concentrated in marketing the new "Windows" driven systems
plus accumulating all required material for the design of the H-NET system. In
the 4th Qtr the company hired several software specialists, and an Internet
specialist to embark on creating H-NET and the company purchased several high
power Compaq computers to house the networks. Additionally, the over all
Internet based network, the digital link and the network communications of a
cross platform were created in this quarter.
In 1999, the company concentrated in development of an Internet portal
for Vision care providers. With a view to positioning itself as the global
provider of internet based services for the vision care industry, the company
developed its central hub with multiple levels of services, products and
Internet based transaction services. In addition, the company formed strategic
alliances with Microsoft, Compaq, UUNET (a leading network company), Quantum
Optical (a leading provider of Vision care continuing education) and Integrated
ECOMM (a leading supplier of Telephony applications).
BUSINESS
Principal Products or Services and Their Market
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Management believes that there are intrinsically linked opportunities in
North America, the United Kingdom and the EEC. They involve the possible
increase of H-NET. 's share of applications software business among corporate
chains; the possible establishment within the vision care industry of real-time
transaction processing services; and the establishment of an interactive real-
time processing and ordering system for the medical community, coupled with
general third party claims processing. The software products connecting retail,
laboratory and home office are available from H-NET.COM, Inc, and each can be
customized to meet a customer's unique ways of doing business, while interfacing
into H-NET `s real-time transaction network.
"Alpha POS2" is a cross-platform, Windows (Registered Trade Mark of
Microsoft, INC.) compatible version of its Point of Sale Software for the
ophthalmic industry and is used in operating a retail location. It keeps track
of patient data, Rx information and inventory; automatically prices
prescriptions; manages all financial information; and keeps track of staff
performance. It also includes special features for optometrists.
"Alpha HO2" is a cross-platform, Windows (Registered Trade Mark of
Microsoft, INC.) compatible version of its administrative package for home
office use. It keeps track of and consolidates information from all stores,
most notably the "day sheet" data on financials and inventory, providing
management with a complete and accurate business picture on a daily basis. HO2
is a flexible package, capable of handling the administration of small and
multi-national chains.
"Alpha LAB2" is a cross-platform, Windows (Registered Trade Mark of
Microsoft, INC.) compatible version of its Laboratory Management Software System
and is designed to accept electronic orders coming in from the Alpha POS2
system. The software automatically makes the calculations required for grinding
prescription lenses, keeps track of inventory, manages financials, and has a job
tracking features as prescriptions are processed through the laboratory. Alpha
LAB2 is designed for either small laboratories, superstore/wholesale
laboratories.
The Internet based "H-NET Transaction Network" is a software product
that allows the user to process payment claims and order goods and services with
access to electronic communications networks. H-NET has multiple services that
will be actively market in 2000. These services include the acceptance of
spectacle insurance and government claims; eligibility checking on a limited
basis, healthcare provider claims; prescription ordering, lens ordering and
frame ordering contact lens ordering from suppliers. In addition, the company
can assist in the building of web-sites, provides continuing education and hosts
a Virtual trade show for suppliers with the capability of displaying products in
3D.
The next phase involves factoring services on receivables, expanding the
ability to communicate to Insurance companies, expanding the capability to
electronically verify eligibility, provide e-mail promotions and expand its
electronic banking capabilities. In addition to software sales, many clients
prefer a single source purchase wherein H-NET.COM, Inc supplies hardware
requirements and all service support (e.g., training, telephone support and
updates).
New Client Sources
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Using programs available through H-NET.COM, Inc, health care providers
can easily check product availability or inquire as to the status of existing
orders. Suppliers are able to transmit price list, product data, statements or
other provider specific information, facilitating direct communication between
the two parties. E-mail features available through H-NET.COM, Inc programs
provide a direct advertising medium for suppliers permitting instant reaction to
new trends, styles and promotions that are characteristic in the industry. As
the user base grows H-NET will support electronic catalogues used either through
access by modem or on discs or CD ROMS.
Since the H-NET system can determine the value and validity of third
party claims, a service is offered for immediate payment to the health care
provider of valid claims, at a discount, electronically. The network and
applications software is also designed to transmit insurance claims to Third
Party payers, to permit providers to authorize credit/debit card transactions
and supports financial services such as paying bills.
The term "suppliers" (as used in this section) refers to retail and
wholesale laboratories and lens/frame manufacturers. The OMA (Optical
Manufacturers Association) has completed development of the general supplier
interface. H-NET.COM, Inc, as part of the H-NET services, has already developed
the PC interface allowing messaging over the UUNET networks.
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Currently, H-NET can communicate on a real time-basis through the
Internet to Vision Services Plan, Medicaid, Medicare and various Blue Cross and
Blue Shield plans and over 400 payors. H-NET plans to bring other payors on line
as soon as practicable. Management knows of no entity other than H-NET.COM, Inc
that is attempting to interface directly through the Internet with insurance
companies for the direct transmission of vision care non-medical claims (e.g.
claims involving frames, lenses, add-on's and accessories).
Using the Virtual Lab service, users can electronically submit their lab
orders to any lab that is registered with H-NET. These orders are verified upon
submission. Users also have the ability to check the status of any submitted
orders.
The Continuing Education services houses many web enabled courses where
users can obtain credits required to retain their licenses.
Suppliers have the opportunity, through the virtual trade show to
feature their product s in 3D. Through the e-commerce capabilities this section
provides the suppliers have the ability to sell their products. All web based
services accept credit cards and debit cards.
The overall services also include the ability to design web sites, e-
commerce sites and a variety of other web and communications related services.
H-NET also has the ability of housing all web related applications on behalf of
the customer and reporting on transactions on a periodic basis.
Competition And Demand for services
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The marketing of applications software is related to the benefits of
real-time network transaction processing. In the opinion of management, H-
NET.COM, Inc enjoys an advantage over R.L.I., Marchon, EYE-COM and B.R.C., its
major competitors, as a result of its ability to offer prospective corporate
chain clients a complimentary service not available from such sources. H-NET `s
chain clients enjoy a significant financial advantage, since not only is their
order processing info automatically integrated into their applications software
but their product order service is paid for by "suppliers".
Health care providers risk fraudulent third party claims unless they are
willing to verify claims by telephone prior to dispensing products or services.
Claims processing in a hard copy environment is costly and time consuming,
requiring a number of steps including data entry, data transmission, processing
time, reconciliation and depositing. As a rule of thumb, electronic processing
reduces health care provider costs in the order of 75%. It is therefore in the
health care provider's interest to pay for electronic transaction eligibility
checking/processing.
In the vision care industry, opticians, optometrists and ophthalmology
assistants need to accredited on an annualized basis. H-NET now presents
accredited courses on the web.
Health care providers do not generally pay transaction fees for
placement of product orders to frame, lens, medical goods or laboratory
suppliers. Those service fees are paid by the suppliers, not only because it is
good customer service, but also because receiving an order electronically is
less costly (by about 60%). Electronic claims processing appears to be perceived
as more productive than hard copy claims processing by governments at all
levels, which are requiring such procedures as exclusive methods for payment.
Some governments contribute to the costs of transactions processing. Management
believes that such trend will become pervasive on an on-going basis as the
Internet continues to increase the part it plays.
Strategic Alliances
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H-NET services are made possible through the joint efforts of industry
leaders in areas that make up the H-NET communications superhighway. Strategic
alliance partners and their roles in H-NET are as follows: H-NET Computer
Corporation, the H-NET co-ordinator, software development and support services;
Microsoft for Operating Systems/Databases/Application software, Envoy and
Claimsnet for Claims processing and UUNET is responsible for general H-NET
communication services. Merrill Lynch, Pierce Fenner & Smith, responsible for
financial services and receivables factoring. In addition, H-NET has partnered
with Quantum Optical for continuing education content and Integrated ECOMM for
providing an integrated telephony hook-up interfaces to the POS software system.
Envoy and Claimsnet are large, independent real-time claims processors.
With years of experience and links to many national insurance agencies, these
real time clearinghouses annually processes in excess of 1 billion health claims
and another 2 billion transactions per year for credit cards, financial, and
other commercial services.
UUNET, through its worldwide communications capability, handles all the
communication needs of H-NET. Through UUNET, H-NET offers a "local network" that
spans the globe and provides worldwide access.
Quantum Optical has been serving the vision care community in providing
lectures and course material for many years. Most of these courses are approved
by the national accreditation authorities.
Integrated ECOMM has been in the communication business for many years
and are serving many industries in supplying integrated telephone connections to
clients vi their practice management systems. Using the IBM technology, these
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solutions have been refined sufficiently to provide a service that replaces the
human element in many mundane areas of running a practice.
Merrill Lynch, Pierce Fenner & Smith, one of the major financial
services organizations in the world, through its offices in Washington, offers
H-NET clients a full range of factoring and financial services.
Anticipated Developments
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In conjunction with Microsoft, Compaq, UUNET, Quantum Optical and
Integrated ECOMM, H-NET.COM, Inc is presenting products introducing the
"Internet Based Vision Care Superhighway", which management believes will be
actively marketed fiscal in 2000. H-NET.COM, Inc re-designed and re-programmed
its entire line of software, using what management believes to be the most
technologically advanced features in the industry. The re-designed line was
released in the last quarter of 1998.
H-NET.COM, Inc plans to aggressively market its application products
world-wide and to seek out other opportunities in the health care industry, with
the goal of expanding its business into other market niches and expanding the
limits of its present niche. In the immediate future, H-NET.COM, Inc plans to
aggressively market third party processing packages and to market practice
management systems.
H-NET.COM, Inc will continue marketing its applications software,
hardware services and Internet services in traditional fashion by availing
itself of opportunities to demonstrate products and their effect on a client's
return on investment. This is accomplished through personal interview obtained
through introductory letters, telephone calls, referrals and trade shows. Sales
will be under the supervision of H-NET.COM, Inc's current management, working
with on-staff and commissioned sales staff. Presently, H-NET.COM, Inc plans to
attend seven trade shows during this year.
H-NET.COM, Inc's expertise in the vision care industry is expected by
management to provide the credibility, experience and products, under the H-NET
Internet based umbrella, to market a third party processing package and other
non-vision care specific services through H-NET to general health care
providers, including hospitals, clinics, homes for the aged, medical and dental
practitioners. Marketing of H-NET to the general health care marketplace is
expected to be through a brokerage system on straight commissioned salesmen.
H-NET.COM, Inc is able to offer health care providers a package offering
seven distinct money and time saving advantages, transaction prices and free
software as well as financing of receivables. The typical existing transaction
price for services starts at $0.50. Billing companies typically charge between
4% and 10% of a claims value for their services. The POS2 software is priced
between $3,000 - $3500, the HO2 software is priced between $15,000 - $100,000
and the LAB2 software is priced between $5,000 - $25,000.
H-NET.COM, Inc is able to offer the health care providers claims
processing at a minimum baseline per transaction charge of less than $0.50, in
concert with a more competitive percentage charge based on value levels of
claims, each of which is tracked in the network administrative software. H-NET
INC's strategy is to earn its revenue from transaction processing pre-billed to
the health care provider. H-NET.COM, Inc will provide the software (H-NET only)
at no cost other than minimum telephone support expenses and annual update fees
of approximately $50 - $100. The software also offers extra features, such as a
payment reconciliation module and patient recall service. Thus, H-NET's.
technology delivers more competitive prices and greater savings.
H-NET.COM, Inc also offers health care providers a program for financing
their electronic claims receivables to assist in their cash flow management.
Claims processing on a real time basis is possible to over 400 insurance
companies, and standard transmission of claims is being expanded to include
major carriers such as Blue Cross and Blue Shield. Medical claims can currently
be transmitted to all major insurance carriers. Management anticipates that
insurance carriers will be added throughout fiscal 2000 as the required
interfaces are developed for vision care and non-medical claims.
Through H-NET `s offering of continuing education courses to Web-Design and a
supplier based Virtual Trade show, H-NET is well positioned to emerge as the
central hub with its one stop multi-level Internet portal. However, to
accomplish its plans in completing development of marketing H-NET over the next
fiscal year, management feels that H-NET.COM, Inc will require about $5,000,000
in debt or equity financing.
Factoring services
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Many health care providers are interested in selling their account
receivables in order to alleviate the monthly cash flow requirements. This
practice has grown because health care providers such as physicians, clinics,
hospitals, etc., rely on compensation from third party sources, which result in
administrative costs and slow payment. Vision care providers are expected to be
slower to avail themselves of receivable financing opportunities because
financing receivables involves a new concept. Management believes that H-NET's
ability to assist in arranging for receivables financing provides it with a
competitive edge over other electronic service providers in the health care
business. In addition, it generates significant profits with minimum risks due
to verified/guaranteed eligibility.
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Distribution Methods of the Products or Services
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Market Analysis
The vast majority of the United States population requires some form of
vision correction at some point in their lifetimes. In 1999, the median age for
eyewear buyers was 36 years. After age 65, an estimated 96 percent of the
population requires vision correction, and the population will be aging at a
considerable rate well into the next century.
In 1999, over 89 million people in the United States bought eyewear,
spending 13 billion dollars. Sales growth, even during the soft economy of
previous years, was a typical five percent. The vision-care market is a mature
market where structural changes require long periods of time. Steady
incremental growth has been the characteristic of the industry, and this trend
is expected to continue. Although dwarfed in size by the 800 billion-dollar
healthcare market in the United States, the vision care sector is huge,
estimated at 15 billion dollars yearly.
Health care expenditures represent a large and growing percentage of the
gross national product of most developed countries. Seeking to contain health
care expenditures while maintaining and improving the quality of care, many
government agencies and third party insurers are issuing regulations and
revising their health care expenditure payment practices. As new reimbursement
systems limit payments for various illnesses, hospitals and long-term care
facilities must find ways to deliver services more efficiently by controlling
costs and monitoring care practices and treatment outcomes. In order to do so,
the facilities' managers must have access to accurate, up-to-date clinical and
financial information and to decision support tools to assist in the analysis of
this information.
As a result of the foregoing, the demand for information management
technology among health care facilities is growing. Health care facilities
increasingly require information systems that (i) allows various departments
within a facility to share information, (ii) improve operating efficiencies
through greater automation, (iii) provides more complete information actual
costs of providing services, enabling facilities to manage the pricing and
delivery of those services more effectively, (iv) assures adherence to
government regulations and third party payor billing and reimbursement
procedures, (v) improves access to clinical information, supporting better
decision-making by medical personnel and (vi) measures, traces and reports
patient outcomes, allowing facilities to demonstrate cost-effectiveness and
quality to payors and potential patients.
As populations age the vision care niche is an ever-growing industry. As
this long-term health care market segment grows, the Company believes that
demand for information systems to service this market will also increase. The
company believes that optician, optometrist and Ophthalmology practice owners
recognize that effective and efficient information management can assist them to
control and standardize their operations, as well as comply with government
regulations.
In the past, computer systems servicing health care facilities were
primarily used for billing, general ledger and other financial/administrative
functions. Many institutions relied on outside system vendors for their
processing requirements; therefore, it was difficult to tailor systems to such
facilities' specific needs. Other institutions purchased mainframe computers,
which were expensive to install and maintain. As computer technology developed,
various departments within health care institutions began to purchase stand-
alone systems to support their respective functions. This created "islands of
automation" within health care facilities. Currently, most health care
facilities operate multiple stand-alone systems with minimal integration between
these systems. As a result of this lack of integration, the same information is
entered repeatedly, data is often inconsistent, information does not flow freely
between departments and management cannot obtain up-to-date information of the
facilities' activities. Attempting to build interfaces between these disparate
systems is expensive, inefficient and, in some cases, impossible to achieve.
Furthermore, information systems that are not designed to work together prevent
users from realizing the full benefits of computerization.
The Company believes that integrated computerization is increasingly
being seen as a way to both reduce costs and facilitate the delivery of high
quality patient care. By instituting computerized information systems, health
care facilities can increase productivity, gain rapid access to accurate
clinical data, track patient progress and comply with the increasing demands for
information from government and private insurers.
Business Strategy
The companies principal strategy is to design, develop, market and
support integrated computer software management systems for the vision care
sector of healthcare and to develop revenue-generating services to be offered
through its Internet portal.
Further Market penetration. The company will continue to develop and
offer a wide range of software modules for patient care, patient management,
financial and inventory control and to market such modules either as a complete
solution or as part of the H-NET(R) portal. The company intends to seek to
increase its share of the healthcare information systems market by utilizing the
H-NET(R) model and by expanding its sales and marketing personnel in an effort
to penetrate other healthcare markets in the U.S. The company is actively
seeking strategic alliances and partners that are active in target markets.
These alliances may include distribution, joint marketing or licensing
arrangements. The company believes that multiple revenue streams generated by
the software products and the portals services will provide the company with a
consistent and stable revenue stream. Therefore, with a portion of the proceeds
from the offering, the company plans to expand its maintenance, customer support
and web based activities.
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Continuing Research and Development. The company will continue to work
closely with its customer base to meet the evolving needs of health care
providers. In an effort to increase its research and product development, the
company intends to take advantage of a large number of the highly qualified
locally based analysts, programmers and web designers available at the present
time, to develop new modules, additional web services and enhance existing
modules.
Continuing Analysis of the market. Upon conducting further analysis of
the vision care market, H-NET(R) deemed an Application Service Provider (ASP)
solution, a software application and a Web Portal, offering a group of products
and services, the best solution for filling the vision care industry's needs.
Anchored by the H-NET(R) transaction-processing network, the services have been
built and tested through client release sites.
With the ability to process payments and electronically move funds, the
basic building blocks for e-commerce and electronic health care are in place.
The added ability to process electronic vision care claims means that H-NET(R)
is poised to connect all the delivery systems in vision care through the supply
chain. This means substantial recurring revenues from transaction flows.
The study also focused on an on-line "dashboard" giving providers a
large umbrella of products and services. The user interface is a Web browser or
H-NET(R) software and it will access an ever growing number of services built
over time from the main core of the now phase one roll out.
By implementing an ASP solution, the H-NET(R) group will place itself in
an advantageous position with regards to implementing technical innovations
about to be released and realizing recurring revenue streams. The advent of hand
held devices and the interface to the Internet fits well into the sales model of
industry members. By including contact management and increased efficiencies
between contacts, sales and lead tracking we have an opportunity to offer a
world-class service.
Provide Solutions to Other Markets. The company is seeking to capitalize
on the acceptance, adaptability and similarity of the existing software and H-
NET(R) portal services by increasing its marketing and product development
efforts to develop solutions for other healthcare segments that are not
saturated. Leverage Global Presence; The company believes that its international
base of installations and its ability to provide customers with world wide
technical support, training and consulting services constitute important factors
in selling to international customers.
Emphasize Superior Customer Support. The company seeks to differentiate
itself from its competitors by offering superior customer training, technical
support and consulting services. The company believes a high level of customer
support is critical to customer satisfaction. The company believes that its
approach to customer support has been and will continue to be a significant
factor in the market acceptance of its products and services.
Take Advantage of the Benefits of Doing Business in a "Paperless"
Environment. Vision care providers today are seeking to operate their business
in an electronic communications environment, restricting hard copy records to
mandatory documentation such as a patient or shipping receipt and prescription.
Doing business in a "paperless environment" delivers management unprecedented
information access and finite control to profitably run the business.
Integration also supports a very rapid total return on the investment, typically
within 12 to 18 months. This type of environment creates many major daily
financial savings and an improved patient.
General Marketing Strategy. The H-NET(R) marketing strategy is to
enhance, promote and support the fact that its products, connecting retail, lab
and home office, deliver the most productive return on investment, and none of
their competitors reportedly have achieved that level of performance. In
addition, to the best of management's knowledge, no other vendor has entered
into a strategic alliance with a major player, such as UUNET, to offer a single
source service such as H-NET(R), or has as many software products that perform
at either end of the network.
This strategy will be directed at exploiting the synergism between the
marketing of applications software, which is the core of the Company's present
business, and the benefits of real time network transaction processing through
H-NET(R). It is a major advantage over the Company's competitors to be able to
market to a corporate chain client a "complimentary" service.
Competitive Advantages for Growth and Profitability
[ ] Two to three year lead over competitors. No other company currently offer
a single source comprehensive Internet based portal, vision care claims
processing capabilities and product order processing service currently in
the market.
[ ] Credibility, expertise and quality products under the H-NET(R) umbrella to
market third-party processing package to vision care and other segments of
healthcare industry.
[ ] Strategic partnerships with major players in communication,
telecommunications and financial services.
[ ] Retail arena poses high barriers to entry.
[ ] Strong operating income margins and low debt-to-equity ratio.
8
<PAGE>
Marketing Sales and Distribution
Marketing Plans and Distribution
- --------------------------------
H-NET.COM, Inc has targeted 100 of the top chains in North America, the
United Kingdom and the European Community as qualified prospects for
applications software, hardware and services. Management believes that the
business potential for H-NET Transaction Network billable Internet transactions
is a very large and untapped market as is evident from the following estimates.
<TABLE>
<CAPTION>
Total Annual Gross
Service Type Transactions Profit
- ------------------------------------------------ ------------- ---------
<S> <C> <C> <C>
1. Spectacle Insurance and Government Claims 27,200,000 $ 0.25
2. Health Care Provider Claims 9,000,000,000 $ 0.25
3. Third Party Eligibility Checking 27,200,000 $ 0.25
4. Prescription Orders to Laboratories 80,000,000 $ 0.25
5. Lens Orders to Supplier 16,200,000 $ 0.25
6. Frame Ordering 54,700,000 $ 0.25
7. Contact Lens Ordering 16,200,000 $ 0.25
8. Credit Card Authorization 56,200,000 $0.005
9. Electronic Product Catalogues 22,000,000 $0.005
10. E-Mail Promotions 8,000,000 $ 1.18
11. Factoring Services on Receivables 27,200,000 (Note 10)
12. Electronic Banking 27,200,000 $0.005
- --------------------------------------------------------------------------
</TABLE>
Notes and Sources of Data:
1. 35% of spectacle sales are estimated to be third party. Source, survey of
H-NET.COM, Inc chain clients.
This estimate came from Towers Corp., the United States' largest health
care insurance billing agency.
2. Every spectacle order goes to a laboratory and there were 80 million
customers in 1997. Source: 20 and 20.
3. The typical laboratory places 125 orders to suppliers per month. 2,500
laboratories x 125 orders x 12 months (assuming the market to be 80% of all
labs).
4. Chain bulk buying accounts for 33% of the 80 million customers and the
result is divided by 10% since chains order a frame in lots of 10.
(80,000,000 x 33% x 10%)
5. The total number of transactions are reduced by 60% of 10.6 million
customers in 1997 since most patients are served from health care providers
inventory. Source, survey of H-NET.COM, Inc's clients.
6. As in 1., every third party claim could be electronically checked for
eligibility.
7. About 60% of the total 80 million customers in 1997 paid by credit card.
This also includes balances not included in third party claims. Source:
NDC.
8. The 600 suppliers issue a product catalogue once a year to the 75,000
professionals who work in an estimated 40,000 locations or (550 x 40,000).
Estimates by H-NET.COM, Inc from data from OOA and AOA.
9. The typical supplier runs 4 promotions per year. 550 x 40,000.
10. The potential is 1.8% of the total dollar volume of 4.63 $billion (35% of
13.22 $Billion total sales) or $800M.
11. All third party customers are treated as potential banking transactions.
12 The cost of an average transaction is between $0.25 and 0.30 and the
average selling price is $0.40. The average cost of a financial transaction
is between $0.02 to $0.04 and the average selling price is between $0.03
and $0.05
H-NET.COM, Inc intends to introduce the first 3 services immediately in Qtr
1 of 2000, followed by introduction of more value added services over a one year
period as warranted by market responses and the number of health care providers
using the service.
H-NET(R)'s marketing strategy is to enhance, promote and support the fact
that its products, connecting retail, lab and home office, delivers the most
productive return on investment, and none of its competitors reportedly have
achieved that level of performance. In addition, the Company has entered into a
strategic alliance with major players such as Bell Network Solutions Inc,
Roanoke Technology, Top 10.Com, Lifelearn Inc to offer a single source service
such as H-NET(R), or has as many software products that perform at either end of
the network.
This strategy will be directed at exploiting the synergism between the
marketing of applications software, which is the core of the Company's present
business, and the benefits of real time network transaction processing through
H-NET(R). It is a major advantage over its competitors to be able to
market to a corporate chain client a "complimentary" service that they cannot
offer.
Applications Software
H-NET(R) products can be used by Opticians, Optometrists, Ophthalmologists
and assistants across the vision care industry. The POS2, HO2 and LAB2 systems
are installed in many of the countries largest and prominent vision care chains
such as Walmart's Sam stores, Lenscrafters, Cole Vision and Pearle Vision.
There are many wholesale labs and independents also utilizing the software. The
Company predominantly markets its software through its own sales force
comprising of six marketing
9
<PAGE>
people by attending major conventions and by word of mouth. The company also
utilizes Medinformatics and Millbrook by using their sales force to market the
POS2/HO2/LAB2 software that is integrated into medical systems providing a
seamless operation. A telephony system that is also integrated into the
Company's POS2system is marketed by Integrated ECOM.
It is important to note that H-NET(R)'s business in this sector has
traditionally been focused upon the top one hundred corporate chains in North
America and the United Kingdom as well as 2,500 laboratories. The Company will
continue marketing these products and services in the traditional fashion of
obtaining the opportunity to demonstrate the products and return on investment
to prospective clients. This is accomplished by personal contact generated by
letters, telephone, referrals and trade shows. The Company will attend five
major trade shows in the United States this year. The Company commenced
operations in Great Britain in 1999 through a license agreement with a British
company that will be set up solely to market H-NET(R)'s products to the British
(and later European) vision care industry.
H-NET(R) Transaction Network (R)
Long-term success is based upon the ability to establish the FIRST and
largest user base among the providers. H-NET(R) is working closely with OMA
Manufacturers Associations to create any de facto standards that may be
necessary to implement order processing. The Company, together with
representatives of the major lens, frame and contact lens manufacturers, has
made significant strides towards the goal of finalizing the required formats. H-
NET(R) is an integral part of the decision-making process due to its superior
technology and large client base. These pioneering achievements will be
highlighted throughout our promotional material as well as the trade journals
and periodicals of the major lens, frame and contact lens industry.
Since every provider eyewear sale needs a lab, labs are being marshalled as
one of the sales forces to distribute H-NET(R) software to customers. In return
the lab receives, free of charge, the order acceptance module of Alpha Lab2. The
lab then pays a transaction fee for each prescription sent in by the provider.
A similar co-operative program is being offered to the frame and lens suppliers.
While the Company is actively pursuing its own user base to bring them "on
line", the prominent Web site developed by the company which is linked to over
24 search engines is one of the tools used for the marketing of the transaction
network and its portal. The company has executed alliance agreements with
several prominent players in the vision care arena who assist in the marketing
process. This will serve to motivate suppliers to join the network or be
superseded by their competitors. It is anticipated that H-NET(R) marketing
activity will enhance the marketing of other H-NET(R) products and increase
sales.
H-NET(R) Marketing Strategy
[ ] Update existing client base and encourage them to use electronic
communications.
[ ] Encourage other software suppliers to join in and provide incentives.
[ ] Provide "free" H-NET(R) software that encompasses electronic
communications.
[ ] Perform seminars strategically around the country to promote H-NET(R).
[ ] Use a company funded marketing force to promote and market H-NET(R).
[ ] Use independent representatives.
[ ] Attend conventions under H-NET(R) banner.
[ ] Use chains to market to their company owned or affiliated providers.
[ ] Leverage the POS2 system price and trade transactions for up-front software
fee.
Key Personnel
Mr. Stephens, President of H-NET(R), whose background includes management
and development of the nation-wide MIS system used by Morguard Investments and
development of the CBS Records financial computer systems. Mr. Stephens has
also been involved with the co-ordination and development of the first computer
software system for complete control of a large auto-dealership. Mr. Stephens
has over 20 years experience in computers.
Mr. Coty, H-NET(R)'s Vice President of Operations, has over 16 years of
experience in communications, network management and various other development
projects.
Mr. Winter, H-NET(R)'s Systems Manager has over 12 years experience with H-
NET(R). and is an expert in the management of computer systems and development
projects. Mr. Winter also provides marketing support.
Mr. Pecora, the H-NET(R) Web marketing Manager has extensive experience in
the marketing of communications and related hardware and software.
Mr. Walker, H-NET(R)'s National Sales & Marketing Manager, is a licensed
optician and has managed his own retail locations.
In total H-NET(R) employs 22 people, consisting of Executive Management,
systems and Marketing Personnel, Web programmers, sales personnel and
administrative staff.
10
<PAGE>
Proprietary and Intellectual Rights
H-NET(R) uses the service mark " H-NET(R)" registered with the United
States Patent Office (Number 85884) on October 18, 1994. The service mark has a
term of six years and is renewable for an additional five-year period.
Other than for the trademark of "H-NET(R)", the Company relies primarily on
a combination of copyright law and trade secret law to protect its proprietary
technology. The Company has internal policies and systems to ensure limited
access to and the confidential treatment of its trade secrets. The Company
distributes its products with software license agreements, which grants
customers licenses to use the Companies products (rather than ownership) and
contain various provisions to protect the Companies ownership and the
confidentiality of the underlying technology. The Company uses software
encryption and "Software Dongels" keyed to the software serial numbers to
protect unauthorized use or duplication of its software. Additionally, the
Company also requires its employees and other parties with access to its
confidential information to execute confidentiality agreements prohibiting the
unauthorized use or disclosure of the Companies technology.
Despite these precautions, it may be possible for a third party to
misappropriate the Company's technology or to independently develop similar
technology. In addition, effective copyright and trade secret protection may not
be available in every foreign country in which the Company's products are sold.
Certain laws may not be enforceable in certain jurisdictions. The Company
believes that, due to the rapid pace of technological innovation for desktop and
web based applications, the Company's ability to establish and maintain a
position of technology leadership in the industry is dependent more upon the
skills of its development staff rather than upon the legal protections afforded
its existing technology. The Company is not engaged in any material disputes
with other parties with respect to ownership or copyright infringement with
respect to the Company's current technology.
Competition
H-NET(R) was the first company to offer corporate chains compatible
products connecting retail, lab and home office. It is this combination that
delivers the most productive return on investment and none of the Company's
competitors reportedly have achieved this level of performance. To the best of
management's knowledge, competition for this market is limited to in-house
systems and two other companies: Compulink Business System, Inc., Westlake CA,
who cater to the optometric side of the business and thus do not provide direct
competition, and RLI, Peoria IL, who operate with a small base of chain clients.
Competition for laboratory business has become a replacement business to
modernize old systems. There are no competitors offering single-source
comprehensive vision-care claims and product order processing service. The
concept is well understood and discussed in the trade journals, but no
enterprise has yet been able to assemble the software and resources necessary to
accomplish the task. Competitors in the third-party medical processing industry
offer similar services, but at higher prices and without the ability to transmit
vision care information, product data or orders to suppliers. H-NET(R) believes
it has a preparatory advantage over suppliers of systems in other healthcare
sectors.
Status of any Publicly Announced New Products or Services
- ---------------------------------------------------------
H-NET Healthcare Network
- ------------------------
Anticipating that regulatory authorities would move towards requiring
health care providers to submit health care claims electronically in order to
save money and control costs, during the past two years H-NET.COM, Inc developed
software product technology allowing health care providers and related customers
to communicate electronically with suppliers, to process private insurance and
government third party claims and to order goods and services over a real-time
network. The program is called H-NET Healthcare Network and it will allow a
health care provider to select any one of the following transaction services
from a single menu; eligibility checks for third party claims; payment
processing for insurance and government claims; order processing frames, lens
accessories, contact lenses; prescription laboratory orders; electronic product
catalogues; e-mail service (promotions from suppliers); factoring services for
verified receivables; financial services and electronic banking; and, debit card
transactions.
H-NET.COM, Inc is unaware of any competitor offering similar programming
for the vision care business and anticipates that success will depend on its
ability to establish the first and largest user base among health care
providers. Since every health care provider spectacle sale needs a laboratory,
laboratories will be targeted as a sales force to distribute H-NET software in
by the health care provider. A similar co-operative program will be offered to
frame/Lens and contact lens suppliers. A direct mail, trade journal
advertising, trade show promotion program will also target health care
providers.
H-NET.COM, Inc's marketing plans for H-NET have been enhanced by the active
marketing support available from its alliance partners who have recently agreed
to actively get involved in marketing H-NET to their customers and to use it as
an enticement to increase the growth of their own businesses. H-NET.COM, Inc
will also directly approach its own user base and bring as many as possible on
line in the first year. The currently available user base is expected to cause
suppliers to either join the network or be left behind by their competitors.
H-NET will be sold and serviced by a group of strategically located agents
who will buy transaction services from H-NET.COM, Inc, typically $0.50 per
transaction. Working with a spread of $0.25, they re-sell the service to the
health care provider at a price up to the competitive level of $0.75 as well as
a percentage rate keyed to set claim dollar-value levels. The key
11
<PAGE>
candidates as Agents are the many local billing services. Multiple sales and
service executives will be assigned the tasks of locating, training and
supporting the network of agents. Sales development materials will principally
rely upon direct mailings, trade shows, advertising in professional trade
publications and seminars.
Second Generation Point Of Sale, Home Office, and Laboratory Management Software
- --------------------------------------------------------------------------------
H-NET.COM, Inc has completed development of, and is actively marketing, its
cross-platform, Windows (Registered Trade Mark of Microsoft, INC.) compatible
versions of its previous line of products for the ophthalmic industry. The main
objective in the development, incorporating a state of the art Graphical User
Interface, was to enhance the usability of the software and to develop an
industry standard database that would allow users more complete access to the
wealth of information that is accumulated in the databases.
In addition, as more users of the existing H-NET.COM software were
expressing an interest in taking a more active role in the development of unique
features for the software, it was necessary to develop software packages that
could be enhanced directly by users with the desire and ability to do so.
A third consideration was the desire of most users to take a more "visual"
approach to the data analysis process as a means to facilitate the extraction of
useful information from the large amounts of data accumulated at a POS site.
This desire was expressed most frequently as a concern that existing software
solutions had a tendency to generate a great deal of paper output from which the
user was expected to determine, on their own, which information would prove most
useful. The objective of the project in this area was to provide the user with
information at the level of detail desired by the user, with the ability to
"drill down" to details where required. This was to be presented in the form of
easily accessible visual displays, with hard copy provided only at the user's
request.
There has been an increase in pressure from users to provide a solution
optimised for their own business practices, without having to suffer the
increased cost in both time and money that arise from the development of custom
software solutions. A major objective of this project was to allow as much
built-in customization of the package as possible, without overwhelming the user
with a package that was too complicated and cumbersome to be used in the
environment for which it was intended.
Finally, there has been an increased desire on the part of users to have
options as to the particular hardware/operating system platform on which they
can implement the solution of choice. The objective of the project was to
create an environment in which the same software and database could be operated
on a number of platforms, with the opportunity for the user to "mix and match"
as desired, to meet aesthetic and financial considerations.
In response to these market pressures, H-NET.COM, Inc developed POS2, HO2
and LAB2, each of which has generated a tremendous amount of market enthusiasm.
The products were introduced to the market, commencing in 1998, and the impact
in fiscal 1999 was significant. Management anticipates that, as this product is
better known throughout the ophthalmic community, its impact on income in fiscal
2000 will be even greater than in fiscal 1999.
Competitive Business Conditions and Competitive Position in the Industry and
- ----------------------------------------------------------------------------
Methods of Competition
- ----------------------
H-NET.COM, Inc's business has traditionally been targeted to the top 100
corporate chains in North America and the United Kingdom and to approximately
2,500 laboratories. Competition comes from two sources, in-house systems
operated by large accounts and other providers of services to retail chains. In-
house systems appear to be dwindling as a result of the maintenance costs, lack
of efficiency (personal and resources must be maintained on a full time basis,
whether or not used), and an inability to keep pace both technically and in
product development. As a result of such decline, Price Waterhouse recommended
that LensCrafters replace its in house system with a specialized third party
solution by H-NET.COM, Inc, now encompassing over 800 sites.
Material competition for corporate chain business is, to the best of
management's knowledge, limited to H-NET.COM, Inc and two other companies. It
is most significantly impacted by product efficacy, the availability of a full
product line capable of connecting operations, price and terms information, on-
going support and updates capabilities and prior operating history. H-NET.COM,
Inc's major competitor is R.L.I., a company based in Peoria, Illinois, with a
limited base of chain clients.
Competition for laboratory business centres on the ability to modernize old
systems. There are four major competitors, B.R.C., DVI, Marchon and CC Systems,
which have a combined customer base of approximately 500 clients. H-NET.COM,
Inc. is not aware of any material competitors offering single source
comprehensive vision care claims and product order processing service. The
concept is well understood and discussed in a futuristic sense in trade journals
but no other enterprise has, to management's knowledge, yet been able to
assemble the software technology and resources necessary to successfully compete
with H-NET.COM, Inc.
Current transaction processing operates on a proprietary and fragmented
basis. For example: Lens manufacturers, such as Sola or American Optical, have
provided a proprietary order entry software package to their largest customers.
Some laboratories have offered similar services. There are no frame ordering
services and, if there were, they would probably be proprietary. Some vendors
give health care providers the ability to capture the government claims (HCFA
form) electronically and send it to the payer via modem.
12
<PAGE>
H-NET.COM, Inc's competitors in the third party medical processing industry
offer similar services but at higher prices and generally do not have the
ability to transmit electronic orders to suppliers.
Management believes that H-NET.COM, Inc has certain competitive advantages
that will permit it to retain a leadership position in its industry niche. The
retail arena poses difficult start-up challenges because profitability is tied
to success in retail sales, an area in which H-NET.COM, Inc has a two to three
year lead over competitors. H-NET.COM, Inc was the first vendor to offer
corporate chains compatible products connecting retail establishments,
laboratory and home offices. Management believes that this combination delivers
the most productive return on investment and no competitors have reported a
comparable level of performance.
Management is not aware of any other vendor in its niche market that has
entered into strategic alliances with major companies offering single source
services comparable to H-NET.COM, Inc's H-NET, that have as many software
products performing at either end of the network, that have as many retail chain
and independent market customers; or that operates in North America, the United
Kingdom, the European Community, Latin American and the Caribbean.
Management believes that H-NET.COM, Inc's leadership in the introduction of
software systems and products has made its customers reliant thereon, with
little material likelihood that they will change product and service sources
unless a competitor provided dramatic price and performance superiority. Such
opinion is based on the observations that the average health care provider deals
with between 15 to 25 suppliers and would not normally change to multiple
supplier proprietary directories. In management's opinion, H-NET.COM, Inc's
customers require a single directory system like H-NET for all services and, to
the best of management's knowledge, no other such services are reasonably
available.
Sources and Availability of Raw Materials and the Names of Principal Suppliers
- ------------------------------------------------------------------------------
The Company's services are not reliant on the availability of raw materials
but rather involve development of software computer applications, advice on
selection of computer hardware and operation of interactive data networks.
Sources from all materials required in conjunction with the foregoing are
readily available from a large number of suppliers, none of which would be
difficult to replace.
Dependence on One or Few Major Customers
- ----------------------------------------
No customer, except Scrivens of the U.K. accounts for more than 5% of its
continuing business.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or
- -----------------------------------------------------------------------------
Labor Contracts, Including Duration
- -----------------------------------
None.
Service Mark and Copyrights
- ---------------------------
H-NET.COM, Inc (subsidiaries of the Company) use the service mark "H-NET"
registered with the United States Patent Office (Number 185884) on October 18,
1994. The service mark has a term of six years and is renewable for an
additional five-year period. All of H-NET.COM, Inc's software is believed
subject to common law but unregistered copyrights.
Licenses
- --------
H-NET.COM, Inc grants its customers licenses to use its software program on
a non-transferable but permanent basis. Licenses granted by H-NET.COM, Inc
provide for a limited 90 day warranty period, after which H-NET.COM, Inc has no
further liability, unless the license has entered into a separate maintenance
agreement. There are no outstanding claims under any license or maintenance
agreements, or, to the best of H-NET.COM, Inc's management's knowledge, any
likely claims. Copies of H-NET.COM, Inc's material license and maintenance
agreements are included as exhibits to the report on Form 8-K filed on January
6, 1995.
Other Intellectual Rights
- -------------------------
No other patents, trademarks, licenses, franchises, concessions, royalty
agreements or labor contracts are used by the Company.
Need for Any Government Approval of Principal Products or Services
- ------------------------------------------------------------------
To the best of the Company's knowledge, there are no special requirements
for government approval of its principal products or services, not generally
applicable to normal business operations.
Effect of existing or Probable Governmental Regulations on the Business
- -----------------------------------------------------------------------
The Company is unaware of any probable regulation of its business, other
than as will apply in general.
13
<PAGE>
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
- -------------------------------------------------------
H-NET.COM, Inc has revamped its product line and made inroads into the
British vision care software applications industry. Management believes that
the keys to H-NET.COM, Inc's success are a focused effort in our niche market; a
superior product line that is constantly upgraded; hands on sales and support by
H-NET.COM, Inc's top executives, so they are never far from the marketplace; a
positive return on investment by its clients; and financial stability to develop
new products and strategies to meet market challenges.
During the past two years, management believes that H-NET.COM, Inc has
spent approximately $850,000 on research and development activities, none of
which has been borne directly by its customers, although all of it will be
amortized as a portion of the goods and services sold as a result of
developments derived from such research. In Fiscal 2000 alone the company spent
over $330,000 in R&D for the H-NET project.
Costs and Effects of Compliance with Federal, State and Local Environmental Laws
- --------------------------------------------------------------------------------
The Company, a service business, is not aware of any expenses directly
attributable to compliance with federal, state or local environment laws or
regulations.
Number of Total Employees and Number of Full Time Employees
- -----------------------------------------------------------
The Company has twenty-one full time employees, all of whom are employed
through its subsidiaries. The Company and its subsidiaries use part time
employees and consultants on occasion, as required; however, no fixed number can
be provided except that no part time employees are being currently used and
generally, the range of part time personnel is between three and four persons.
Equipment
- ---------
The capital assets of the Company, as valued for accounting purposes, have
a depreciated book value of $73,914. Furniture consists of two sets of
boardroom furniture, two sets of waiting room furniture, six sets of executive
office furniture, desks, filing cabinets, bookcases and occasional furniture for
the staff.
The key equipment consists of an multiple Compaq servers, IBM RISC 6000
computer; 30 Pentium computers, 1 486/DX4/166 computers, 8 dot matrix printers,
2 color ink-jet printers, and 7 laser printers; three photocopiers, three fax
machines; communications equipment and modems; tape storage equipment; Novell
4.0, LANTASTIC, Windows NT, CITRIX networks; and both a 24 station phone system
(Toronto), and a 6 station phone system (NF).
Investment Policies
- -------------------
The Company has no investment policies with respect to investments.
Item 2 Properties
- ------ ----------
The Company shares office space with H-Net.COM (New York), its wholly owned
New York subsidiary. Its address is 345 Third Street, Suite 645; Niagara Falls,
New York 14303. Its phone number is (716) 284-2465 and its fax number is (716)
284-2478. The Company's other subsidiary, H-NET.COM (Canada) is headquartered
at 205-7050 Woodbine Avenue, Markham, Ontario L3R 4G8. Its phone number is
(905) 475-3249 and its fax number is (905) 475-8629.
The Niagara Falls facility is a suite within a large 6 story office
building complex comprising of approximately 2,000 square feet. The annual
rental, on a triple net basis, is approximately $7,500. The lease expires on
December 01, 2001. The building is leased. The Ontario facility has been leased
from V & A Properties Limited since October of 1982 under five year leases. The
annual base rental was $23,500 for the year ending in January 31 2001 and the
rent is expected to be the same for fiscal 2001. The premises comprise of 5000
sq. feet. Management is of the opinion that its current facilities are adequate
for its immediate needs. As the Company's business increases, additional
facilities may be required, after August 31, 2000.
Item 3 Legal Proceedings
- ------ -----------------
AlphaBytes Computer Corporation (AB), the Canadian subsidiary of H-NET.COM, Inc,
is a party to a litigation against Guther Slaton, Sally Engle and Profitable
Packaging Concepts (PPC) Inc. stemming from perpetrated agreements relating to
the operations of Systems By Design Inc (SDI), a company in the packaging
business. In April 1997, an arbitrator in NY issued an award in favor of Slaton,
Engle and PPC, against AB, Anton Stephens, SDI and Peter Markus jointly and
severally. This award totals approximately $405,000, including interest.
A motion to vacate the award of the arbitrator has been granted by the New York
Supreme Court in part, with reference by the Court to the Arbitrator to consider
whether a previously undisclosed judgement held by Slaton against Peter Markus,
who was to have represented Alpha Bytes and Stephens at the original
arbitration, prejudiced their defence in that proceeding. Mr. Markus, purporting
to be a New York attorney, failed to submit any documents in the defence of the
claim and failed to put forth any
14
<PAGE>
counterclaim on behalf of Alpha Bytes or Stephens even though there was strong
evidence available of losses sustained in this transaction which had been
brokered by Markus.
In the event the order is not vacated, according to Canadian Law any order
against a Canadian company will need to be re-heard in a Canadian Court prior to
enforcement. In the opinion of Management, the ultimate disposition of these
matters will have no material adverse effect on the company's financial
position, results of operations or liquidity.
This case is in a state of limbo within the New York court system.
Item 4 Submission of Matters to a Vote of Security Holders.
- ------ ----------------------------------------------------
NONE.
PART II
-------
Item 5 Market for the Registrant's Common Equity and Related Stockholder
- ------ -----------------------------------------------------------------
Matters
-------
Price Range of Common stock and Dividends
- -----------------------------------------
The Common Stock of the Company commenced trading in the May 1994. The
following table sets forth for the periods indicated the range of high and low
representative bid quotations for the Company's Common Stock which were obtained
from market makers.
<TABLE>
<CAPTION>
Ask Bid
------ -----
Quarter Ended High Low
----------------- ------ -----
<S> <C> <C>
April 30, 1999 $ 5.87 $5.06
July 31, 1999 $10.00 $9.50
October 31, 1999 $ 6.12 $6.00
January 31,2000 $ 3.25 $3.00
</TABLE>
The number of record holders of Common Stock of the Company as of January
31, 2000, were 162. Additional holders of the Company's Common Stock hold such
stock in street name with various brokerage firms. The Company has reason to
believe that such additional shareholders total approximately 92.
Item 6 Selected Financial Data
- ------ -----------------------
The following table summarizes selected historical financial information of
H-NET.COM, Inc. as of January 31,1998, and 1999, and for the fiscal years ended
January 31, 1998, 1999, and 2000.
Condensed Balance Sheet Information:
- ------------------------------------
<TABLE>
<CAPTION>
Years Ended January 31,
<S> <C> <C>
2000 1999
---------- ----------
Current Assets $1,153,375 $1,486,573
Capital Assets 73,914 95,538
Total Assets 1,310,289 1,582,111
Total Liabilities 114,675 302,299
Stockholders' Equity 1,310,289 1,334,248
- ----------------------- ---------- ----------
Condensed Statement of Operations Information:
- ------------------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenue $ 853,904 $1,644,821 $1,779,133
Expenses 1,119,231 1,014,208* 973,414
Gross Profit (265,327) 630,613 805,719
Net Gain (Loss) (206,288) 300,886 500,768
Net Earnings (Loss) Per Share (0.027) 0.040 0.067
- ----------------------------- ---------- ---------- ----------
* Includes H-NET R&D expense of $300,000
</TABLE>
15
<PAGE>
Item 7 Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis relate to factors which have affected the
financial condition and results of operations of the Company for its years ended
January 31, 1998 and January 31, 1999.
H-NET.COM, Inc (Canada) and H-Net.Com, Inc (New York), together called H-
NET)work in conjunction with each other in producing, marketing, installing and
supporting the software produced by these companies. H-NET.COm, Inc. has no
active income save for the activities of the H-NET Group. Therefore, the
financial information regarding the parent company and its two subsidiaries are
presented on a consolidated basis.
Revenues were $ 853,904 for the fiscal year ended Jan 31, 2000 generating a
gross loss of $265,327 as compared to revenues of $1,644,821 for the fiscal year
ended Jan 31, 2000 which generated a gross profit of $630,613.
Expenses were $1,119,231 for the fiscal year ended Jan 31,2000 as compared to
$1,1014,208 for the period ending on Jan 31, 2000. Earnings were $ (206,288) for
the fiscal year ended Jan 31,2000 as compared to $300,886 for the period ending
Jan 31, 1999.
Overall, the major costs were R&D for the H-NET project, which began in the 1st
Qtr, wages and commissions, management fees, office and general, and rents for
both periods. Despite investing over $330,000 in R&D and through careful cost
tracking, the company only made a small loss. The Revenue figures were lower in
the all the quarters due to product implementation held back until the Phase I
H-NET components are incorporated. The company to-date has invested its own cash
for the development of H-NET.
The cash position of the company decreased to $926,926 from $1,242,908 in the
previous fiscal year, providing a healthy cash reserve. Retained earnings
decreased from $1,648,779 to $1,442,491 on Jan 31, 2000 reflecting a very
successful year for the company. Current assets as a whole changed from
$1,486,573 to $1,310,289.
The overall declines in the Revenue and Earnings are directly attributed to the
company's R&D ($330,298) investment into H-NET and its holdback on the release
of the new versions of the systems till Phase I of H-NET is incorporated into
these products. The other integrated components of the Internet portal too had
to be completed prior to the release of the software.
In order to achieve state-of-the-art communications and power, the company
started building its infrastructure by hiring four software specialists and and
four Internet specialists. In addition, the company also purchased several high
power, scalable Compaq computers to house the networks. A high speed digital
ISDN Centrex micro-link was also installed as a carrier and the overall network
infrastructure and platform, as well as the digital link, was activated.
In addition, a value added network with multiple web sites, an Intra net, an
Extra net, a certificate site, multiple file transfer sites, a secure fund
transfer site, a random cryptology key generator and a virtual data
mapping/translating sites were created.
In the central hub, a powerful engine driven by two data base servers, a gateway
between processor engine and H-NET's software and various trading partners was
also created.
The company expects to be back on track from the 1st Qtr of the year 2000, the
H-NET components incorporated and the portal in operation. It is expected that
these products will be marketed aggressively through fiscal 2000, where the
impact will be even greater. It is also expected that this will produce
significant financial improvement with positive results on both the top and
bottom line from growing revenue streams from the transaction network and the
Internet portal services.
As expected, the "Year 2000" issues did not cause any problems to the company's
operating software or to the end-users of the software.
16
<PAGE>
Material Events
- ---------------
Acquisition of H-NET.COM, Inc
- -----------------------------
We adopt all previous disclosures from prior filings.
Liquidity
- ---------
Management believes that H-NET, Inc. ("the Company") has the cash funds and
necessary liquidity to meet the needs of the company over the next year,
assuming sales and development efforts conform to the standards historically
set. However, to fully maximize the potential presented by the key events
presented below, management believes that approximately $5,000,000 will need to
be raised. The funds will be primarily used to complete development of the later
phases of H-NET, increase the marketing effort and for the production of
marketing material, as well seeking entry to NASDAQ small caps. Marketing effort
would be increased by hiring a sales staff of six salesmen, and increasing the
number of national/regional trade shows and conferences attended. It is
anticipated that the funds will be raised through private placement of funds.
Current Plans
- -------------
The key events that are anticipated by management to occur over the next year
are the aggressive marketing of the H-NET Internet based, transaction driven
system in conjunction with the cross-platform, Windows (Windows is a trademark
of Microsoft, INC.) compatible version of its Point of Sale Software (POS2),
Laboratory Software (LAB2), and Home Office Software (HO2). The aggressive
marketing of H-NET portal with Web site and e-commerce site design
capabilities, Virtual Trade Show, Continuing education courses, Virtual Lab,
and with on-line real-time third party claims processing capabilities.
The Company also plans to increase its share of the ophthalmic software market
by actively seeking the acquisition of one or more of its competitors.
Additionally, the Company plans to utilize its technology to expand into Medical
information processing field through possible acquisition or merger.
During Fiscal 2000, the company expects to start updating existing users with
new versions of the systems, containing Phase I H-NET components that provides
Internet based technology with electronic eligibility checking, claim
submission, Lab Order submission and various credit card/debit card
functionality.
The company will continue to identify and develop many other web based
services, locate suitable partners and form strategic relationships with as many
key players as necessary to assist in the marketing process.
Item 8 Financial Statements and Supplementary Data
- ------ -------------------------------------------
Included from Pages 22 onwards.
Item 9 Changes in and Disagreements With Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
- ---------------------
The Company has not had any reported or material disagreement with its
accountants on any matter of accounting principals, practices or financial
statement disclosure.
PART III
--------
Item 10 Directors and Executive Officers of the Registrant.
- ------- ---------------------------------------------------
The following sets forth the names and ages of all the Directors and Executive
Officers of the Company, positions held by such person, length of service, when
first elected or appointed and term of office.
<TABLE>
<CAPTION>
First Elected
Name Age or Appointed/Term Position
- -------------------- --- ----------------- ----------------------
<S> <C> <C> <C>
Anton Stephens 48 * Chairman and CEO
Christine Stephens 45 ** Secretary and Director
Dr . Ying 38 Aug 99/12M Director
Mr. Lewis 32 Aug 99/12M Director
- --------------------------------------------------------------------
</TABLE>
Notes to table:
* Elected on December 3, 1994, by the board of directors of the Company, to
serve as a director until the next annual meeting of the Company's stockholders,
and until his successors are elected, qualified and assume their offices.
Service as an officer is at the pleasure of the board of directors.
** Elected on December 18, 1994, by the board of directors at the
recommendation of the Company's stockholders, to serve as a director until the
next annual meeting of the Company's stockholders, and until her successors are
elected, qualified and assume their offices. Service as an officer is at the
pleasure of the board of directors.
17
<PAGE>
Biographies of Directors, Officers and Director Nominees
- --------------------------------------------------------
Anton Stephens
- --------------
Mr. Stephens, age 48, has been President of H-Net.COM, Inc, a corporation
organized under the laws of the Canadian Province of Ontario, since 1983, and
has been the President of H-Net.Com, Inc, a New York Corporation, since its
organization in 1988. development and marketing, specializing in the dental,
medical and vision care industries. The consolidated Alphabytes companies have
been accepted as business partners by IBM, Unisys and NCR, and are believed by
management to be the world's largest supplier of POS related applications to the
vision care industry. Both companies develop, market, service and enhance
software for the health care industry, with a high degree of specialization and
expertise in the vision care industry. Mr. Stephens is responsible for the
overall management of both entities, and along with the management team, all key
decisions with respect to strategic planning, product development, marketing,
and finances. Mr. Stephens is responsible for the overall strategic planning
and Mrs. Stephens is responsible for the day to day operations. Mr. Stephens
graduated from Brunel University (United Kingdom) in 1974 with a Bachelor of
Science degree in computer sciences. Prior to 1984, Mr. Stephens was employed
as a systems analyst at the Kent County Council (United Kingdom) and at Molins
Manufacturing; he served as a computer industry consultant in Canada, where his
clients included the Ontario Provincial Government (part of the design and
implementation team which developed the Ontario health care system), General
Motors (developed leasing and sales systems) and CBS (development of royalty
payment system). He thereafter served as the director of data processing for
Morgard Property Investments (Canada's second largest property management
company).
Christine Stephens
- ------------------
Mrs. Stephens has, during the past 6 years, consecutively and without
interruption, performed internal accounting for H-NET.COM, Inc (New York) and h-
NET.COM, Inc (New York), and served as a director and secretary of Alphabytes
Management INC. From 1980 to 1984 Mrs. Stephens was a customer service
representative at the Bank of Montreal in Toronto, Canada, prior to which, from
1971 to 1978 she was an assistant accountant at Barclays Bank (Stock Exchange
Branch) in London, England. Mrs. Stephens' educational background consists of
both an "O" and "A" level G.C.E. obtained at Bognor Regis Grammar School in
Sussex, England (1971). Mrs. Stephens has also successfully passed the British
Banking Exams in Economics, English, Business and accounting.
Mr Ying and Mr. Lewis
- ---------------------
Both Mr. Ying and Mr. Lewis are business people.
Item 11 Executive Compensation.
- ------- -----------------------
General
- -------
<TABLE>
<CAPTION>
SUMMARY, COMPENSATION TABLE
---------------------------
Annual Compensation Awards Payouts
------------------- ------- -------
Stock Rest- Aw-
Name sation ricted ards SUOP SARS LTIP Ot
Position Year Salary ($) Bonus ($) ($) ($) (#) ($) ($)
- --------------------- ------------------- ------- ------- -------- ----- ---- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Anton Stephens* 1999 *** ** *** *** *** *** *** *** ***
Christine Stephens+ 1999 *** ** *** *** *** *** *** *** ***
Doug Winter (1) 1999 $68,000 *** (4) (4) *** *** *** *** ***
Alex Nobre(2) 1999 $55,000 *** (4) (4) *** *** *** *** ***
Ray Coty(3) 1999 $75,000 *** (4) (4) *** *** *** *** ***
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
LEGEND: SOUP is Securities Underlying Options/Payouts; Other is all other
Compensation
Notes:
* Chief Executive Officer, President and Chairman of the Board of Directors.
+ Secretary and Director
** H-NET paid an annual management fee of $230,000 to Alphabytes Management,
INC., a corporation organized under the laws of the Canadian Province of
Ontario and wholly owned by the Stephens Family.
Mr. Stephens is provided with use of a vehicle on which the H-NET.COM, Inc
spent $4,000.
*** None.
(1) Mr. Winter is a Systems Manager
(2) Mr. Nobre is a Project Manager
(3) Mr. Coty is the Vice President of Operations
(4) Expected to be among the persons to whom a 500,000 share from a reserved
block will be awarded, when the Board of Directors develops criteria for
awards.
________________________________________________________________________________
Long-Term Incentive Plan ("LTIP)
- --------------------------------
Neither the Company nor any subsidiary thereof has any long-term incentive
plans. However, the Company's Board of Directors has authorized the reservation
of 500,000 shares of its common stock for use in compensating professional
advisors,
18
<PAGE>
consultants and employees of the H-NET.COM, Inc To date, 275,000 such
shares have been reserved and options thereto issued to employees. The options
are valid from May 1, 1996 to October 31, 2001 at a price of $.01 per share.
Compensation of Directors
- -------------------------
Standard Arrangements
- ---------------------
All members of the Company's board of directors are paid a per diem fee of
$300 for attendance at meetings of the board of directors and committees
thereof. In addition, if required, they are reimbursed for travel expenses and
lodging is arranged for them, at the Company's expense. At such time as
adequate funds are available, all director (and officers) of the Company will be
covered by liability insurance. Outside directors (those who are not officers
or employees of the Company) will generally be issued 2500 shares of the
Company's common stock as an inducement to become directors; however, the stock
is subject to total forfeiture in the event that the director does not serve in
such role for a least 365 days. Directors are reimbursed for all out of pocket
expenses incurred in the performance of their roles, subject to provision of
receipts in form and substance adequate to satisfy Internal Revenue Service
audit requirements (e.g., long distance telephone, postage, etc.).
Other Arrangements
- ------------------
Neither the Company nor any of its subsidiaries have any other arrangements
to compensate its directors, other than the management agreement pursuant to
which the H-NET.COM, Inc paid an annual management fee during the 1999 fiscal
year of $230,000 (Total compensation taken by Mr. And Mrs Stephens for full
time employment), to Alphabytes Management INC., a corporation organized under
the laws of the Canadian Province of Ontario. Alphabytes Management, INC., one
of the Company's principal stockholders, is wholly owned by the Stephens family.
Item 12 Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
Parents of the Company
- ----------------------
The following table discloses all persons who are parent of the Company (as
such term is defined in Securities and Exchange Commission Regulation C),
showing the basis of control and as to each parent, the percentage of voting
securities owned or other basis of control by its immediate parent if any.
<TABLE>
<CAPTION>
Percentage Other
of Voting Basis
Basis for Securities For
Name Control Owned Control
- -------------------------------------------------- --------------- ---------- -------
<S> <C> <C> <C>
Pinewood Resources Stock Ownership 72% * None
* Majority owned by Anton and Christine Stephens
</TABLE>
Transaction with Promoters, if Organized Within the Past Five Years
- -------------------------------------------------------------------
Neither the Company nor its subsidiaries were organized within the past
five years.
PRINCIPAL STOCKHOLDERS
The following sets forth the security ownership of Management of the
Company and any holders of the Company's common stock known to own 5% or more of
the Company's issued and outstanding common stock, as of January 31, 1999.
As of the date of this Current Report, the following persons (including any
"group" are, based on information available to the Company, beneficial owners of
more than five percent of the Company's common stock (its only class of voting
securities):
<TABLE>
<CAPTION>
Name and Amount and
Title Address of Nature of Percent
of Beneficial Beneficial of
Class Owner Owner Class
- --------- -------------------- ------------------ ---------
<S> <C> <C> <C>
Common Pinewood Resources Record & 72%
Stock c/o Merill Lynch Beneficial
2 Raffles Link, 5,850,000 shares
Marina Bayfront
Singapore 039392
</TABLE>
The major stockholders of Pinewood Resources are Anton Stephens and Christine
Stephens.
Security Ownership of Management
- ---------------------------------
As of the date of this Current Report, the following table discloses as to
each class of equity securities of the registrant or any of its parents or
subsidiaries other than directors' qualifying shares, beneficially owned by all
directors and nominees, the names of each executive officer (as defined in Item
402[a] [2] of Securities and Exchange Commission regulation S-B), and directors
and executive officers of the registrant as a group, the total number of shares
beneficially owned and the percent of class so owned. Of the number of shares
shown, the associated footnotes indicate the amount of shares with respect to
which such
19
<PAGE>
persons have the right to acquire beneficial ownership as specified
as specified in Securities and Exchange Commission Rule (13) (d) (1).
<TABLE>
<CAPTION>
Name and Amount and
Title Address of Nature of Percent
of Beneficial Beneficial of
Class Owner Owner Class
- ----------- ---------------------------------- ------------------- ---------
<S> <C> <C> <C>
Common Anton & Christine Stephens Beneficial 72%
Stock c/o H-NET.COM 5,850,000 Shares
205-7050 Woodbine Avenue
Markham, Ontario, Canada L3R 4G8
</TABLE>
Owned of record by Pinewood Resources.
Item 13 Certain Relationships and Related Transactions.
- ------- -----------------------------------------------
The following information pertains to all transaction during the last two
years, or proposed transactions, to which the Company was or is to be a part, in
which any of the following persons had or is to have a direct or indirect
material interest: any director or executive officer of the Company: any nominee
for election as a director; any principal security holder listed above; and, any
member of the immediate family (including spouse, parents, children, siblings,
and in-laws) of any of the foregoing persons.
<TABLE>
<CAPTION>
Relationship Nature of Interest Amount of
Name to Company in the Company Interest Year
- --------------------------------- ----------------------- ------------------ ------------- ----
<S> <C> <C> <C> <C>
Anton Stephens Officer, Director + $ 4,000 1998
& Principal Stockholder + $ 4,000 1999
- ---------------------------------------------------------------------------------------------------
+ Mr. Stephens is provided with use of a vehicle for which H-NET.COM pays.
</TABLE>
PART IV
-------
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- --------- -----------------------------------------------------------------
(a) The following documents are filed as a part of this Report:
(1) Financial Statement. The following Financial Statements are
--------------------
filed as part of this Report:
<TABLE>
<CAPTION>
Page
------
<S> <C>
Report of Independent Public Accountants F-1
Balance Sheets, July 31, 2000 and January 31, 1999 F-2
Statements of Operations, Year Ended January 31,
1998 F-3
Year Ended January 31, 1999 and
Year Ended January 31, 2000.
Statement of Stockholders' equity F-4
Statement of Cash Flows, Year Ended January 31,
1998 F-5
Year Ended January 31, 1999 and Year Ended
January 31, 2000.
Notes to Financial Statements F-6
(2) Exhibits. The following exhibits are filed as part of this Report:
---------
</TABLE>
Exhibit No. Item
- ----------- ----
2.0 + Current Report on Form 8-K
2.1 ++ First Amendment to Report on Form 8-K
2.2 +++ Second Amendment to Report on Form 8-K
3.1 *Articles of Incorporation of Registrant dated
May 16, 1986
4.0 + Resolution of the Shareholders of H-NET.COM, INC.
3.2 **Bylaws of Registrant.
4.1 *Warrant Agreement
4.2 *Underwriter's Warrant
Notes:
+ Filed on January 6, 1995, and Incorporated by reference
++ Filed on January 16, 1995, and Incorporated by reference.
+++ Filed on February 16, 1995, and Incorporated by reference.
* Previously filed as an exhibit to the Company's Form S-18
Registration Statement, No.33-20733-D, made effective August 3, 1988.
The underwriter's warrants are no longer valid.
** Filed on May 15, 1995, in the Report on Form 10-K at page 38, and
Incorporated by
20
<PAGE>
H-NET.COM INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2000
(Expressed in U.S. Dollars)
H-NET.COM INC.
JANUARY 31, 2000
21
<PAGE>
INDEX
PAGE Description
1 AUDITORS' REPORT
2 CONSOLIDATED BALANCE SHEET
3 CONSOLIDATED STATEMENT OF LOSS
4 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
5 CONSOLIDATED STATEMENT OF CASH FLOW
6-11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22
<PAGE>
AUDITORS' REPORT
To the Board of Directors and Stockholders of
H-Net.Com Inc.:
We have audited the accompanying consolidated balance sheet of H-Net.Com Inc. as
at January 31, 2000 and January 31, 1999 and the consolidated statements of
loss, stockholders' equity and cash flow 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 United States generally accepted
auditing standards. Those standards require that we plan and perform an 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, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at January 31, 2000
and January 31, 1999 and the results of its operations and its cash flow for the
years then ended in conformity with United States generally accepted accounting
principles.
Shimmerman Penn Burns Becker, LLP
Chartered Accountants
Toronto, Canada
March 7, 2000
1
<PAGE>
H-NET.COM INC.
CONSOLIDATED BALANCE SHEET
AS AT JANUARY 31, 2000
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Note 2000 1999
--------- ---------- ----------
ASSETS
Current:
Cash $ 270,193 $ 283,722
Available-for-sale securities 3 656,733 959,186
Accounts receivable 58,783 217,084
Income taxes recoverable 146,042 -
Prepaid expenses and sundry assets 21,624 26,581
---------- ----------
1,153,375 1,486,573
---------- ----------
Long term:
Deferred stock issuance costs 4 83,000 -
Capital assets 5 73,914 95,538
---------- ----------
156,914 95,538
---------- ----------
TOTAL ASSETS $1,310,289 $1,582,111
========== ==========
LIABILITIES
Current:
Accounts payable and accrued liabilities $ 52,413 $ 45,118
Income taxes payable - 134,565
Deferred income taxes payable 62,262 66,180
---------- ----------
TOTAL LIABILITIES 114,675 245,863
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock 6 427,082 250,968
Employee share options 1,090 18,000
Retained earnings 1,442,491 1,648,779
Unrealized holding loss on available-for-sale securities (323,982) (293,458)
Foreign exchange adjustment (158,542) (161,265)
--------- ----------
1,388,139 1,463,024
Less treasury stock at cost 7 (192,525) (126,776)
---------- ----------
1,195,614 1,336,248
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,310,289 $1,582,111
========== ==========
On Behalf of the Board:
_____________________________________Director _________________________________Director
See accompanying notes
</TABLE>
2
<PAGE>
H-NET.COM INC.
CONSOLIDATED STATEMENT OF LOSS
YEAR ENDED JANUARY 31, 2000
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Note 2000 1999 1998
------ ---------- ---------- ----------
REVENUE
Sales $ 834,845 $1,602,107 $1,761,402
Investment income 19,059 42,714 17,731
---------- ---------- ----------
853,904 1,644,821 1,779,133
---------- ---------- ----------
EXPENSES
Research and development 8 330,298 364,363 237,342
Wages, management and consulting fees 249,359 216,898 181,760
General and administrative 228,153 154,670 155,842
Travel and promotion 206,782 141,440 144,013
Professional fees 48,200 104,199 230,900
Amortization 30,529 28,851 21,205
Interest and bank charges 25,910 3,787 2,352
---------- ---------- ----------
1,119,231 1,014,208 973,414
---------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES (265,327) 630,613 805,719
---------- ---------- ----------
Provision for (recovery of) income taxes:
Current (55,121) 318,137 293,121
Deferred (3,918) 11,590 11,830
---------- ---------- ----------
(59,039) 329,727 304,951
---------- ---------- ----------
NET EARNINGS (LOSS) $ (206,288) $ 300,886 $ 500,768
========== ========== ==========
EARNINGS (LOSS) PER SHARE 9 $ (0.027) $ 0.040 $ 0.067
========== ========== ==========
</TABLE>
See accompanying notes
3
<PAGE>
H-NET.COM INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998 (In U.S. Dollars)
<TABLE>
<CAPTION>
Unrealized Holding
Loss On
Capital Stock Options Treasury Stock
------------------- ------------------- --------------------
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
---------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS AT JANUARY 31,
1997 7,413,002 $245,468 164,000 $ 16,000 - $ -
Net earnings for 1998 - - - - - -
Foreign exchange
adjustment for 1998 - - - - - -
Unrealized holding gain on
restricted marketable
securities - - - - - -
Employee share options
issued as compensation for
services received - net - - 100,000 1,000 - -
Shares issued as
compensation for services
received 55,000 5,500 - - - -
Purchase of stock on open
market - - - - 145,000 (112,332)
Dividend Paid - - - - - -
---------- -------- -------- -------- ------- ---------
BALANCE AS AT JANUARY 31,
1998 7,468,002 250,968 264,000 17,000 145,000 (112,332)
Net earnings for 1999 - - - - - -
Foreign exchange
adjustment for 1999 - - - - - -
Unrealized holding gain on
restricted marketable
securities - - - - - -
Employee share options
issued as compensation for
services received - net - - 100,000 1,000 - -
Purchase of stock on open
market - - - - 27,500 (14,444)
---------- -------- -------- -------- ------- ---------
BALANCE AS AT JANUARY 31,
1999 7,468,002 250,968 264,000 18,000 172,500 (126,776)
Net earnings for 2000 - - - - - -
Foreign exchange
adjustment for 2000 - - - - - -
Unrealized loss on
available for sale
securities - - - - - -
Employee share options
issued as compensation for
services received - net - - 100,000 1,000 - -
Exercise of employee share
options 355,000 17,910 (355,000) (17,910) - -
Sale of stock on open
market - 158,204 - - (32,195) 22,764
Purchase of stock on open
market - - - - 16,900 (88,513)
---------- -------- -------- -------- ------- ---------
BALANCE AS AT JANUARY 31,
2000 7,823,002 $427,082 109,000 $ 1,090 157,205 $(192,525)
========== ======== ======== ======== ======= =========
<CAPTION>
Unrealized Available- Foreign
Retained Gain on For-Sale Exchange
Earnings Investment Securities Adjustments Total
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AS AT JANUARY 31,
1997 $ 872,125 $ 343,267 $ - $ (64,418) $1,412,442
Net earnings for 1998 500,768 - - - 500,768
Foreign exchange
adjustment for 1998 - - - (63,389) (63,389)
Unrealized holding gain on
restricted marketable
securities - (343,267) - - (343,267)
Employee share options
issued as compensation for
services received - net - - - - 1,000
Shares issued as
compensation for services
received - - - - 5,500
Purchase of stock on open
market - - - - (112,332)
Dividend Paid (25,000) - - - (25,000)
---------- ---------- ---------- --------- ----------
BALANCE AS AT JANUARY 31,
1998 1,347,893 - - (127,807) 1,375,248
Net earnings for 1999 300,886 - - - 300,886
Foreign exchange
adjustment for 1999 - - - (33,458) (33,458)
Unrealized holding gain on
restricted marketable
securities - - (293,458) - (293,458)
Employee share options
issued as compensation for
services received - net - - - - 1,000
Purchase of stock on open
market - - - - 14,444
---------- ---------- ---------- --------- ----------
BALANCE AS AT JANUARY 31,
1999 1,648,779 - (293,458) (161,265) 1,336,248
Net earnings for 2000 (206,288) - - - (206,288)
Foreign exchange
adjustment for 2000 - - - 2,723 2,723
Unrealized loss on
available for sale
securities - - (30,524) - (30,524)
Employee share options
issued as compensation for
services received - net - - - - 1,000
Exercise of employee share
options - - - - -
Sale of stock on open
market - - - - 180,968
Purchase of stock on open
market - - - - (88,513)
---------- ---------- ---------- --------- ----------
BALANCE AS AT JANUARY 31,
2000 $1,442,491 $ - $(323,982) $(158,542) $1,195,614
========== ========== ========== ========= ==========
See accompanying ntoes
</TABLE>
4
<PAGE>
H-NET.COM INC.
CONSOLIDATED STATEMENT OF CASH FLOW
YEAR ENDED JANUARY 31, 2000
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
CASH WAS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net earnings (loss) $ (206,288) $ 300,886 $ 500,768
Items not affecting cash:
Amortization 30,529 28,851 21,205
Deferred income taxes (3,918) 11,590 11,830
---------- ---------- ---------
(179,677) 341,327 533,803
---------- ---------- ---------
Changes in non-cash working capital items relating
to operations:
Accounts receivable 158,301 449,150 (587,162)
Income taxes recoverable (146,042) - -
Prepaid expenses and sundry assets 4,957 (7,964) 4,153
Accounts payable and accrued liabilities 7,295 (47,306) (91,262)
Income taxes payable (134,565) (20,720) 186,969
Unearned revenue - - (24,707)
---------- ---------- ---------
(110,054) 373,160 (512,009)
---------- ---------- ---------
(289,731) 714,487 21,794
---------- ---------- ---------
FINANCING ACTIVITIES
Issue of shares - - 5,500
Issue of employee share options 1,000 1,000 1,000
Purchase of stock for treasury (88,513) (14,444) (112,332)
Sale of treasury stock 180,968 - -
Foreign exchange adjustment 2,723 (33,458) (63,389)
Deferred stock issuance costs (83,000) - -
Dividend paid - - (25,000)
---------- ---------- ---------
13,178 (46,902) (194,221)
---------- ---------- ---------
INVESTING ACTIVITIES
Long term accounts receivable and work in process - - 352,334
Unrealized holding loss on available-for-sale securities (30,524) (293,458) -
Purchase of capital assets (8,905) (52,410) (29,884)
Marketable securities - restricted - - 161,026
---------- ---------- ---------
(39,429) (345,868) 483,476
---------- ---------- ---------
INCREASE (DECREASE) IN CASH AND
AVAILABLE-FOR-SALE SECURITIES (315,982) 321,717 311,049
Cash and available-for-sale securities at the beginning of
the year 1,242,908 921,191 610,142
---------- ---------- ---------
CASH AND AVAILABLE-FOR-SALE SECURITIES
AT THE END OF THE YEAR $ 926,926 $1,242,908 $ 921,191
========== ========== =========
ADDITIONAL INFORMATION
Interest paid $ 25,910 $ 3,787 $ 2,352
========== ========== =========
Income taxes paid $ 153,248 $ 235,071 $ 1,135
========== ========== =========
</TABLE>
See accompanying notes
5
<PAGE>
1. CHANGE OF NAME
The corporation changed its name from Alpha Bytes, INC. to H-Net.Com Inc. by
Articles of Amendment dated November 1, 1999.
2. ACCOUNTING POLICIES
(a) Principles of consolidation
All subsidiaries have been included in the consolidated financial
statements. The consolidated wholly-owned subsidiaries at January 31,
2000, were as follows:
H-Net.Com Inc. (Canada) ("H-Net Canada")
H-Net.Com Inc. (New York) ("H-Net New York")
Alphabytes Computer Corporation (Canada) ("Alphabytes Canada")
Alpha Bytes Computer Corporation (U.S.A.) ("Alpha Bytes U.S.")
(b) Capital assets
Capital assets are stated at cost less accumulated amortization.
Amortization is calculated at the following annual rates:
Furniture and equipment 20% declining balance
Vehicles 30% declining balance
Computer hardware 30% declining balance
Computer software 100% declining balance
(c) Foreign currency
The financial statements are expressed in U.S. dollars.
Current assets and liabilities denominated in Canadian dollars at year
end are translated into U.S. dollars at the rates of exchange prevailing
on that date. Transactions in foreign currencies are recorded in U.S.
dollars at the rates of exchange prevailing on the date of transactions.
Exchange gains and losses are reflected in income.
Exchange gains and losses resulting from the consolidation of the
Canadian subsidiary are reflected as an adjustment to stockholders'
equity.
(d) Investment tax credits
Investment tax credits are accounted for as a reduction of research and
development costs in the year the credits become available, provided
there is reasonable assurance that they will be realized.
3. AVAILABLE-FOR-SALE SECURITIES
<TABLE>
<S> <C> <C>
2000 1999
-------- ----------
Cost $980,715 $1,252,644
Less unrealized holding loss 323,982 293,458
-------- ----------
$656,733 $ 959,186
======== ==========
</TABLE>
4. DEFERRED STOCK ISSUANCE COSTS
The company has arranged for a private placement of $6,000,000 of common
shares pursuant to an offering document which expires May 31, 2000. The
company has incurred a total of $83,000 in costs related to the offering
which have been deferred and will be deducted from the proceeds of the stock
issue.
5. CAPITAL ASSETS
<TABLE> Accumulated Balance
Cos Amortization 2000 1999
----------- ------------ ------- -------
<S> <C> <C> <C> <C>
Furniture and equipment $ 59,372 $ 41,505 $17,867 $22,450
Vehicles 38,315 35,879 2,436 3,480
Computer hardware 117,290 64,424 52,866 66,520
Computer software 21,467 20,722 745 3,088
-------- -------- ------- -------
$236,444 $162,530 $73,914 $95,538
======== ======== ======= =======
</TABLE>
6
<PAGE>
6. CAPITAL STOCK
The company is authorized to issue 30,000,000 common shares.
The company issued 55,000 shares during 1999 as compensation for services
rendered to the company. In the year ended January 31, 2000, 355,000 common
shares were issued as a result of exercise of stock options by the company's
employees.
The company has granted outstanding options to purchase shares as follows:
9,000 employee share options with an exercise price of $0.01 per share
expiring October 31, 2003 100,000 employee share options with an exercise
price of $0.01 per share expiring October 31, 2004
7. SHARES HELD IN TREASURY
The Board of Directors has authorized a stock repurchase plan whereby the
company will purchase up to 500,000 shares of the company's common stock to
be used for reissuance upon the exercise of stock options, in future
acquisitions for stock or for other corporate purposes. During 2000, the
company purchased 16,900 common shares for treasury at a cost of $88,513 and
sold 32,195 treasury shares for proceeds of $174,773.
8. RESEARCH AND DEVELOPMENT 2000 1999
---- ----
Cost $418,814 $ 465,028
Less investment tax credits (88,516) (100,665)
-------- ---------
$330,298 $ 364,363
======== =========
9. EARNINGS PER SHARE
In February 1999, the Financial Accounting Standards Board issued Statement
No. 128 Earnings Per Share which required the company to change the method
used for computing earnings per share. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
is excluded.
Earnings (loss) per share has been calculated using the weighted average
number of common shares outstanding excluding the dilutive effect of stock
options and all prior periods have been restated. The average number of
shares outstanding under this assumption would be as follows:
<TABLE>
<S> <C> <C> <C>
Year ended January 31, 2000 - $7,702,187
1999 - 7,468,002
1998 - 7,434,276
</TABLE>
10. RELATED PARTY TRANSACTION
During the year, the company was charged $204,000 (1999 - $272,000) for
management and financial services of the president and secretary provided by
a related company.
11. COMMITMENTS
Leases of premises
The company is committed under existing leases for premises to the
following minimum annual rents:
<TABLE>
<S> <C> <C> <C>
Year ending January 31, 2000 - $30,000
2001 - 24,000
2002 - 4,000
</TABLE>
12. SEGMENTED INFORMATION
<TABLE>
<CAPTION>
Canada U.S. Total
----------- ----------- -----------
<S> <C> <C> <C>
For 2000
Identifiable assets:
Current $ 298,625 $ 854,750 $1,153,375
Long term 56,885 100,029 156,914
---------- ---------- ----------
$ 355,510 $ 954,779 $1,310,289
========== ========== ==========
Revenue $ 684,974 $ 168,930 $ 853,904
Cost of sales and expenses 838,879 221,313 1,060,192
---------- ---------- ----------
Net earnings (loss) $ (153,905) $ (52,383) $ (206,288)
========== ========== ==========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
For 1999
Identifiable assets:
<S> <C> <C> <C>
Current $ 292,586 $1,193,987 $1,486,573
Long term 75,114 20,424 95,538
---------- ---------- ----------
$ 367,700 $1,214,411 $1,582,111
========== ========== ==========
Revenue $1,237,084 $ 407,737 $1,644,821
Cost of sales and expenses 1,035,875 308,060 1,343,935
---------- ---------- ----------
Net earnings $ 201,209 $ 99,677 $ 300,886
========== ========== ==========
</TABLE>
13. CONTINGENCY
Alphabytes Computer Corporation ("Alphabytes Canada"), the Canadian
subsidiary of H-Net.Com Inc., is a party to a litigation against Guther
Slaton, Sally Engle and Profitable Packaging Concepts Inc. ("PPC") stemming
from purported agreements relating to the operations of Systems By Design
Inc. ("SDI"), a company in the packaging business. In April 1997, an
arbitrator in New York issued an award in favour of Slaton, Engle and PPC,
against Alphabytes Canada, Anton Stephens, SDI and Peter Markus jointly and
severally. This award totals approximately $405,000, including interest.
A motion to vacate the award of the arbitrator has been granted by the New
York Supreme Court in part, with reference by the Court to the arbitrator to
consider whether a previously undisclosed judgement held by Slaton against
Peter Markus, who was to have represented Alphabytes Canada and Stephens at
the original arbitration, prejudiced their defence in that proceeding. Mr.
Markus, purporting to be a New York attorney, failed to submit any documents
in the defence of the claim and failed to put forth any counterclaim on
behalf of Alphabytes Canada or Stephens even though there was strong
evidence available of losses sustained in this transaction which had been
brokered by Markus.
In the event the order is not vacated, according to Canadian Law any order
against a Canadian company will need to be re-heard in a Canadian Court
prior to enforcement. In the opinion of management, the ultimate disposition
of these matters will have no material adverse effect on the company's
financial position, results of operations or liquidity.
14. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. Although the change in date has
occurred, it is not possible to conclude that all aspects of the Year 2000
Issue that may affect the entity, including those related to customers,
suppliers, or other third parties, have been fully resolved.
8
<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, thereunto duly authorized.
H-NET.COM, Inc.
/s/ Anton Stephens
By __________________________________________
Anton Stephens, President and Director
(Principal Executive Officer)
Date: April 28, 2000
/s/ Christine Stephens
By __________________________________________
Christine Stephens
Secretary and Director
Date: April 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, This report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Anton Stephens
By __________________________________________
Anton Stephens, President and Director
(Principal Executive Officer)
Date: April 28, 2000
/s/ Christine Stephens
By __________________________________________
Christine Stephens
Secretary and Director
Date: April 28, 2000
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 270,193
<SECURITIES> 656,733
<RECEIVABLES> 58,783
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,153,375
<PP&E> 236,444
<DEPRECIATION> 162,530
<TOTAL-ASSETS> 1,310,289
<CURRENT-LIABILITIES> 114,675
<BONDS> 0
0
0
<COMMON> 427,082
<OTHER-SE> 768,532
<TOTAL-LIABILITY-AND-EQUITY> 1,310,289
<SALES> 834,845
<TOTAL-REVENUES> 853,904
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,119,231
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,910
<INCOME-PRETAX> (265,327)
<INCOME-TAX> (59,039)
<INCOME-CONTINUING> (206,288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (206,288)
<EPS-BASIC> (0.027)
<EPS-DILUTED> (0.027)
</TABLE>
