U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
COMMISSION FILE NUMBER 0-20468
3NET SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 68-0195770
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
629 J Street, Sacramento, CA 95814
(Address of principal executive offices)
(916) 498-3900
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
Number of shares of common stock outstanding as of October 31, 1996:
200,000,000
3NET SYSTEMS, INC.
Condensed Balance Sheet
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 61,904
Accounts receivable, net 102,132
Other current assets 90,714
Total current assets 254,750
PROPERTY AND EQUIPMENT:
Equipment 957,127
Purchased software 233,872
Furniture and fixtures 148,445
1,339,444
Accumulated depreciation and amortization (1,261,864)
Property and equipment, net 77,580
Other assets 2,638
$ 334,968
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 1,000,000
Notes payable to stockholders 911,752
Accounts payable to stockholder 335,425
Accounts payable 653,978
Accrued payroll and related expenses 133,373
Deferred revenue 135,913
Accrued customer obligations 242,848
Accrued preferred stock dividends 275,625
Other current liabilities 75,921
Other notes payable 57,654
Obligations under capital leases 5 512
Total current liabilities 3,828,001
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $6.00 par value - 1,200,000
shares authorized, 204,167 Series D shares
issued and outstanding; liquidation preference
value of $1,500,627 1,225,002
Common stock, $0.01 par value - 200,000,000 shares
authorized, 200,000,000 shares issued and outstanding 2,000,000
Common stock to be issued 680,240
Additional paid-in capital 26,017,394
Accumulated deficit (33,415,669)
Total stockholders' deficit (3,493,033)
$ 334,968
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
3NET SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months
ENDED SEPTEMBER 30,
1996 1995
REVENUES:
Contract programming revenue $ 360,929 $ 245,653
Service revenue 93,734 109,434
System sales - 14,091
Total revenues 454,663 369,178
COSTS AND EXPENSES:
Costs of revenues:
Contract programming revenue 344,724 151,962
Service revenue 63,087 47,388
System sales - 19,937
Research and development - 274,958
Marketing and sales - 91,210
General and administrative 212,253 307,998
Settlement expense - 78,125
Total costs and expenses 620,064 971,578
Loss from operations (165,401) (602,400)
Other income (expense):
Interest expense (47,232) (30,462)
Other, net 4,663 (1,715)
(42,569) (32,177)
Net loss $(207,970) $(634,577)
Preferred stock dividends in arrears (30,625) (30,625)
Net loss applicable to common
stockholders $(238,595) $(665,202)
Net loss per share $ (0.00) $ (0.02)
Shares used in per share
calculations 252,188,868 26,867,261
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
3NET SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
Net cash used in operating activities $ (155,000) $ (65,762)
Cash flows from investing activities:
Sale (purchases) of property and equipment 6,165 (3,960)
(Increase) decrease in other assets - -
Net cash used in investing activities 6,165 (3,960)
Cash flows from financing activities:
Proceeds from exercise of warrants 1,077 -
Proceeds from notes payable to stockholders 173,000 51,000
Payments on notes payable and capital leases (15,444) (12,290)
Net cash provided by financing activities 158,633 38,710
Net increase (decrease) in cash 9,798 (31,012)
Cash at beginning of period 52,106 38,913
Cash at end of period $ 61,904 $ 7,901
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3NET SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the fiscal year
ended June 30, 1996.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments, consisting only of normal recurring adjustments,
considered necessary to present fairly the Company's financial position at
September 30, 1996, results of operations for the three month periods ended
September 30, 1996 and 1995 and cash flows for the three months ended
September 30, 1996 and 1995. The results for the period ended September
30, 1996 are not necessarily indicative of the results to be expected for
the entire fiscal year ending June 30, 1997.
NOTE 2 - FINANCING ARRANGEMENTS
The Company has a $1,000,000 revolving line of credit with a bank due in
monthly installments of interest only at the bank's reference rate plus
1.0% (9.25% at September 30, 1996). In June 1996, the maturity date of the
line of credit was extended from July 1, 1996 to January 1, 1997. The line
of credit was fully utilized as of September 30, 1996. At September 30,
1996, the Company was in default under the terms of the line of credit
because additional debt was incurred during fiscal year 1996 and during the
three months ended September 30, 1996. The Company's obligations under the
line of credit are guaranteed by shareholder James W. Cameron, Jr. See
also Part I, Item 2. Liquidity and Capital Resources.
Through September 30, 1996, the Company borrowed $911,752 from two
shareholders pursuant to seven unsecured promissory notes. All the notes
mature on December 31, 1996 and bear interest at 10.25% per annum.
Beginning in October 1996, the Company is required to make monthly interest
payments totaling $12,724 on three of the notes.
NOTE 3 - EQUITY TRANSACTIONS
On November 18, 1994, the Company entered into a series of agreements for
the purchase of Series E Convertible Preferred Stock with two existing
stockholders, one of whom is a former director. The transaction included a
debt to equity conversion of $2,232,856 and an additional aggregate
investment of $1,215,004 in exchange for the issuance of 287,322 shares of
Series E Preferred Stock. On December 1, 1995, the holders of all the
outstanding shares of the Company's Series E Preferred Stock tendered those
shares for conversion into 223,359,332 shares of the Company's Common
Stock, pursuant to the terms of the Series E Preferred Stock Purchase
Agreement. As of the conversion date, 200,000,000 common shares were
authorized; therefore, 52,200,565 shares are recorded as Common Stock to be
issued until such time as the number of authorized shares can be increased.
NOTE 4 - CONTINGENCIES
SUIT FROM FORMER CONSULTANT
In April 1994, the Company entered into a settlement agreement with a
former officer and director (the "Former Officer") and a former consultant,
officer and director (the "Former Consultant") in connection with disputes
concerning outstanding compensation, expense reimbursement, equity
entitlement issues and ownership of the Company's proprietary software. In
November 1994, the Former Officer and Former Consultant asserted that the
Company had breached certain of its obligations under the settlement
agreement. In February 1995, the Company believes it cured any alleged
default under the settlement agreement by fulfilling certain nonmaterial
obligations to the Former Officer and the Former Consultant. In addition,
the Former Consultant asserted claims against the Company and numerous
other parties under a variety of legal theories. On June 12, 1995, the
Former Consultant filed a lawsuit in Sacramento County Superior Court
against the Company, its then-current directors, James W. Cameron, Jr., the
Former Consultant's stockbroker and brokerage firm and one of the Company's
largest customers. The lawsuit set forth twenty causes of action based on
a variety of legal theories and sought in excess of $15.0 million in
damages plus punitive damages. In August 1995, the Superior Court granted
petitions to compel arbitration filed by the 3Net defendants and Mr.
Cameron which petitions were based on the arbitration provision of the
April 1994 settlement agreement. The Court also granted a similar motion
filed by the Former Consultant's stockbroker and brokerage firm. The
litigation of the case in Superior Court was stayed pending the outcome of
the arbitration of all claims set forth in the action. In February 1996
the Arbitration Panel entered its order dismissing with prejudice all of
the Former Consultant's claims made against the 3Net defendants and Mr.
Cameron and awarded 3Net recovery of a portion of its fees and costs. On
July 26, 1996, the Superior Court confirmed the Arbitration Panel's order
of dismissal and award. On September 10, 1996, the Company was notified
that the Former Consultant had filed a Notice of Appeal with the 3rd
District Appellate Court. At September 30, 1996 legal expenses and costs
of $201,550 incurred by the Company related to this litigation are
included in the balance of accounts payable to stockholder. The Company
does not believe that the outcome of this matter will have a material
adverse impact on its financial position or results of operations.
DISTRIBUTOR AND CO-DEVELOPMENT AGREEMENT
In November 1993, a dispute arose between the Company and its Canadian
distributor (the "Distributor") which was settled in April 1994. This
settlement agreement encompassed a cash payment of $50,000 for consulting
services and the issuance of 200,000 shares of the Company's Common Stock
(estimated fair market value of $325,000) as an incentive for entry into a
renewal of the Distributor and Co-Development Agreement. Accordingly, the
Company recorded $50,000 in general and administrative expense and $325,000
in marketing and sales expense during fiscal 1994.
The Company entered into discussions to renegotiate its contractual
relationship with the Distributor. These discussions led to the execution
of a letter agreement on January 27, 1995 that modified certain provisions
of the April 1994 agreement. In addition, certain minor changes were
agreed to in a letter dated March 22, 1995. These agreements called for,
among other things, issuance of an additional 200,000 shares of the
Company's Common Stock to the Distributor, if the Distributor successfully
developed a pilot site for the Canadian version of 3Net software the
Distributor was developing. Accordingly, the Company recorded $200,000 of
settlement expense in fiscal 1995 which was offset by a reduction in
reserves of approximately $170,000. On May 15, 1995, the Company
received a letter from the Distributor declaring an event of default based
on the Company's alleged failure to deliver a specified number of shares of
the Company's Common Stock pursuant to the agreement. Within approximately
sixty days, the subject stock certificates issuable to the Distributor were
delivered by the transfer agent to the Distributor. On January 5, 1996,
the Distributor sent a letter to the Company indicating that the
Distributor intended to file a lawsuit against the Company and others,
stating a number of claims. The Distributor indicated their belief that
the value of these claims exceeds $5.0 million. The Company believes that
the Distributor has breached the contract and intends to vigorously defend
itself if a lawsuit is filed. The Company has offered to settle the
dispute, but the Distributor has not responded to the Company's offer.
The expense of defending any lawsuit in connection with this agreement will
place additional strains on the Company's resources and cash position and
the Company may be required to seek protection under federal bankruptcy law
should the Distributor pursue its claims through litigation. Moreover, due
to the Company's current and projected cash positiosatisfy an adverse
verdict in this matter that obligates the Company to pay any significant
damages to the Distributor. In the event an adverse verdict is the result
of this dispute, the Company may be required to seek protection under
federal bankruptcy law.
The following is Management's Discussion and Analysis of Financial
Condition and Results of Operations for the period ended September 30,
1996.
OVERVIEW
3Net Systems, Inc. provides contract computer programming and consulting
services and acts as an intermediary in providing such services. During
fiscal years 1995 and 1996, the Company developed and implemented a program
whereby 3Net recruits qualified personnel from the former Soviet Union,
obtains necessary visas, and places them for assignment in the United
States. 3Net has chosen to emphasize this program because of the
significant growth dynamics of the high technology temporary placement
industry and to de-emphasize the laboratory software and service business
upon which it was originally founded.
The Company was founded in 1989 to focus on the design, development and
sale of integrated computer network systems primarily for use by hospitals,
commercial and insurance laboratories and physician clinics. The Company
effected a public Common Stock offering in August 1992. Fiscal 1993 and
fiscal 1994 operating results were adversely affected by significant delays
by the Company in finishing development and implementation of its
laboratory information systems ("LIS"). The delays resulted in significant
losses and severe liquidity problems. Cost cutting required by the cash
flow situation resulted in additional software development and
implementation delays. As a result, the Company recognized no material
revenue in fiscal 1993 or fiscal 1994 and significant losses in both of
those years. The Company received acceptance of LIS at one customer site
in fiscal 1995; but the Company had lost sales momentum due to the earlier
delays and now no longer devotes any dedicated resources to the marketing
or selling of this product. The Company successfully installed four of its
automated timekeeping systems ("TimeNet") in fiscal 1995; however, the
Company's continuing lack of financial strength negatively affected the
Company's ability to close new TimeNet business in fiscal 1995 and fiscal
1996. In January 1996, the Company decided to no longer devote any
dedicated resources to the marketing or selling of TimeNet. The Company
has also suspended further development of the product and is no longer
providing service support on TimeNet systems that have been sold. During
fiscal 1996, the Company wrote off the remaining net book value of TimeNet
purchased software.
The Company's inability to close new product sales business in fiscal 1995
and fiscal 1996 and the resulting lack of revenues caused the Company to
recognize significant losses in fiscal 1995 and fiscal 1996. In order to
ren steps to reduce expenses and generate revenues by focusing its
operations on providing contract programming and consulting services, and
acting as an intermediary in providing such services. These actions
substantially reduced the Company's level of cash consumption in fiscal
1996 as compared to fiscal 1995. However, the Company did not generate
sufficient cash flow in fiscal 1996 and fiscal 1997 to date to support its
operations. See Liquidity and Capital Resources for additional discussion.
RESULTS OF OPERATIONS
REVENUES
Revenues increased $85,485 or 23.2% in the quarter ended September 30,
1996, as compared to the quarter ended September 30, 1995. The higher
level of revenue in the first quarter of fiscal 1997 compared to fiscal
1996 was due to management's decision that the Company's long-term
prospects were best served by concentrating existing resources on providing
contract computer programming and consulting services in the high
technology temporary placement industry. The following is an analysis of
the Company's revenues by category:
CONTRACT PROGRAMMING REVENUE. Contract programming revenue (sales of
custom programming and software development services, and acting as an
intermediary in providing such services) in the quarter ended September 30,
1996 increased $115,276 or 46.9% over the same period of the previous year.
A $176,100 increase resulted from agreements to provide additional contract
programming personnel to two customers. This increase was primarily offset
by a decrease in providing contract system enhancements programming for an
existing LIS customer.
SERVICE REVENUE. Service revenue (sales of annually renewable maintenance
contracts for software support and hardware services) decreased $15,700 or
14.3% in the quarter ended September 30, 1996 compared to the comparable
quarter in fiscal 1996. This decrease resulted primarily from several
service customers replacing their Cortex LIS systems with systems of
competitors during fiscal 1996 causing a general decline in service
revenues. The Company expects service revenue to decrease over time as
more Cortex LIS customers choose to move to systems of competitors since
the company is not enhancing this system. Also, the Company is no longer
providing service to TimeNet customers.
SYSTEM SALES. No product sales were recorded in the first quarter of
fiscal 1997 and none are expected to be recorded during fiscal 1997 since
the Company no longer devotes any dedicated resources to marketing or
selling its LIS or TimeNet products. System sales revenues recorded in the
first quarter of fiscal 1996 were primarily enhancements to existing
systems at customer sites.
COST OF REVENUES
CONTRACT PROGRAMMING REVENUE. The gross margin on contract programming
revenue was 4.5% for the quard to 38.1% in the same quarter of fiscal
1996. This decrease is due to generating lower revenues providing contract
system enhancements for an existing LIS customer and due to start-up costs
related to immigration and placement of 9 programmers from the former
Soviet Union at two U.S. sites. In addition, in fiscal 1997, technical
staff whose costs were assigned to Research & Development in fiscal 1996
are now assigned to contract programming revenue and customer service
revenue.
SERVICE REVENUE. The gross margin on service revenue was 32.7% for the
three months ended September 30, 1996, compared to 56.7% for the same
period in fiscal 1996. The lower margin in fiscal 1997 resulted primarily
from an increase in the number of employees assigned to customer services.
In fiscal 1997, technical staff whose costs were assigned to Research &
Development in fiscal 1996 are now assigned to contract programming revenue
and customer service revenue.
SYSTEM SALES. There were no system sales costs in the first quarter of
fiscal 1997, and none are expected during the fiscal year 1997. System
sales gross margin was negative during fiscal 1996 primarily due to the
write down of the remaining net book value of purchased TimeNet system
software.
EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. There were no Research and Development
("R&D") expenses during the quarter ended September 30, 1996, and none are
expected during the fiscal year 1997. In fiscal 1997, technical staff
whose costs were assigned to R & D fiscal 1996 are now assigned to contract
programming revenue and customer service.
MARKETING AND SELLING EXPENSES. There were no marketing and selling
expenditures during the quarter ended September 30, 1996, and none are
expected during the fiscal year 1997. The fiscal 1996 expenses are related
to five sales/marketing employees who were terminated during the second
quarter of fiscal 1996.
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A"). G&A expenses decreased
$93,745 or 30.6% for the quarter ended September 30, 1996, compared to the
same quarter of fiscal 1996. This decrease is due primarily to a reduction
of approximately $52,000 in legal costs and $35,000 in personnel costs.
SETTLEMENT EXPENSE. There were no settlement expenses in the first quarter
of fiscal 1997. Expenses in fiscal 1996 were primarily settlement of a
suit by a former employee.
NET LOSS
Net loss decreased $426,607 or 67.2% for the quarter ended September 1996.
Although the Company expects losses to continue in the second quarter of
fiscal 1997, the Company expects these losses to be significantly below
prior year levels due to cost and expense reductions and contract
programming revenue increases.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
NET LOSS PER SHARE
The Company's net loss per share has been computed by dividing net loss
after deducting Preferred Stock dividends ($30,625 in each of the first
quarters of fiscal 1997 and 1996) by the weighted average number of shares
of Common Stock outstanding during the quarters presented, including Common
Stock to be issued.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109. As of June 30, 1996, the Company had a net
operating loss carryforward for federal and state income tax purposes of
approximately $23 million and $11 million, respectively. The federal net
operating loss carryforward expires in the years 2005 through 2011 and the
state net operating loss carryforward expires in 1997 through 2001. In
connection with the Company's initial public offering, a change of
ownership (as defined in Section 382 of the Internal Revenue Code of 1986,
as amended), occurred. As a result, the Company's net operating loss
carryforwards generated through August 10, 1992 are subject to an annual
limitation of approximately $300,000.
In August and September 1993, a controlling interest of the Company's stock
was purchased, resulting in a second annual limitation of approximately
$398,000 on the Company's ability to utilize net operating loss
carryforwards generated between August 11, 1992 and September 13, 1993.
The Company expects that the aforementioned annual limitations will result
in approximately $3.6 million of net operating loss carryovers which may
not be utilized prior to the expiration of the carryover period.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has used a combination of equity and debt
financing and internal cash flow to fund research and development, support
operations, obtain capital equipment, and finance inventory and accounts
receivable. The Company expects to continue to be a net user of cash for
operations in the near future. In the first quarter of fiscal 1997 the
Company used an average of approximately $52,000 per month of cash for
operating activities, as compared with an average of approximately $53,000
per month of cash for operating activities in fiscal 1996 and approximately
$22,000 per month in the first quarter of fiscal 1996. The Company expects
that the average rate at which cash is used during fiscal 1997 will
decrease as a direct result of the change in its emphasis to providing
contract computer programming and consulting services.
In fiscal 1996 and the first quarter of fiscal 1997, the Company suffered
significant losses from operations. As of September 30, 1996, the Company
had a net working capital deficit of $3,573,251 and an accumulated deficit
of $33,415,669. The Company was unable to generate adequate cash flow from
operations to meet its cash flow requirements in the quarter ended
September 30, 1996, and, as a result, the Company met its cash flow
requirements primarily through short term financing from a stockholder.
During the first quarter of fiscal 1997, the Company consumed approximately
$155,000 on operating activities, and generated approximately $159,000 from
financing activities and $6,000 from investing activities. During the
first quarter of fiscal 1996, the Company consumed approximately $66,000 on
operating activities and $4,000 on investing activities, and generated
approximately $39,000 from financing activities.
The report of the independent auditors on the Company's June 30, 1996
financial statements includes an explanatory paragraph regarding the
Company's potential inability to continue as a going concern. The
financial statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the
inability of the Company to continue as a going concern. Based on the
recent steps the Company has taken to reduce its expenses and refocus its
operations, the Company believes that it has developed a viable plan to
address the Company's ability to continue as a going concern and that this
plan will enable the Company to continue as a going concern through the end
of fiscal year 1997. However, considering, among other things, the
Company's historical operating losses, its lack of experience in the
contract computer programming industry, and anticipated negative cash flow
from operations, there can be no assurance that this plan will be
successfully implemented. The Company does not expect to generate
sufficient cash flow from operations to sustain its operations until
sometime after the first half of fiscal 1997.
Historically, the Company has relied upon cash infusions from two of its
major shareholders to fund its operations. Although the Company has not
entered into any written agreement, management believes that these two
shareholders will continue to finance the Company's operations during
fiscal 1997. There can be no assurance, however, that events may arise
which may affect these shareholders' ability to finance the Company or that
the Company may experience significant and unanticipated cash flow problems
which may cause these two shareholders to reconsider their investment.
Further, if the Company experiences significant cash flow problems, the
Company may be required to reduce the level of its operating activities or
be forced into seeking protection under federal bankruptcy laws.
EFFECTS OF INFLATION
Management does not expect inflation to have a material effect on the
Company's operations.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company was notified on March 16, 1995 by the staff of the regional
office of the Securities and Exchange Commission ("Commission") that they
intended to recommend that the Commission file a civil action against the
Company seeking injunctive and other relief. The staff indicated that the
complaint would allege violation of various disclosure provisions of the
federal securities laws in connection with the Company's registration
statement on Form S-18 that became effective in August 1992.
The Company and its attorney met with the Commission staff and the Company
proposed a settlement of the complaint. On September 30, 1996 the
Commission accepted the Company's offer of settlement whereby it has
consented, without admitting or denying liability, to a cease and desist
order that it will not commit or cause any future violation of certain
Federal securities laws.
In April 1994, the Company entered into a settlement agreement with a
former officer and director (the "Former Officer") and a former consultant,
officer and director (the "Former Consultant") in connection with disputes
concerning outstanding compensation, expense reimbursement, equity
entitlement issues and ownership of the Company's proprietary software. In
November 1994, the Former Officer and Former Consultant asserted that the
Company had breached certain of its obligations under the settlement
agreement. In February 1995, the Company believes it cured any alleged
default under the settlement agreement by fulfilling certain nonmaterial
obligations to the Former Officer and the Former Consultant. In addition,
the Former Consultant asserted claims against the Company and numerous
other parties under a variety of legal theories. On June 12, 1995, the
Former Consultant filed a lawsuit in Sacramento County Superior Court
against the Company, its then-current directors, James Cameron, Jr., the
Former Consultant's stockbroker and brokerage firm and one of the Company's
large customers. The lawsuit set forth twenty causes of action based on a
variety of legal theories and sought in excess of $15.0 million in damages,
plus punitive damages. On August 21, 1995, the Superior Court granted
petitions to compel arbitration filed by the 3Net defendants and Mr.
Cameron which petitions were based on the arbitration provision of the
April 1994 settlement agreement. The Court also granted a similar motion
filed by the Former Consultant's stockbroker and brokerage firm. The
litigation of the case in Superior Court was stayed pending the outcome of
the arbitration of all claims set forth in the action. In February 1996
the Arbitration Panel entered its order dismissing with prejudice all of
the claims made against the 3Net defendants and Mr. Cameron and awarded
3Net recovery of a portion of its fees and costs. On July 26, 1996, the
Superior Court confirmed the Arbitration Panel's order of dismissal and
award. On September 10, 1996, the Company was notified that the Former
Consultant had filed a Notice of Appeal with the 3rd District Appellate
Court. At September 30, 1996 legal expenses and costs of $201,550 incurred
by the Company related to this litigation are included in the balance of
accounts payable to stockholder. The Company does not believe that the
outcome of this matter will have a material adverse impact on its financial
position or results of operations.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit NUMBER DESCRIPTION OF DOCUMENT
10.48 Note Payable between the Registrant and the Cameron Foundation
dated July 31, 1996.
10.49 Note Payable between the Registrant and the Cameron Foundation
dated August 9, 1996.
10.50 Note Payable between the Registrant and James W. Cameron, Jr., as
an individual, dated August 16, 1996.
10.51 Note Payable between the Registrant and James W. Cameron, Jr., as
an individual, dated August 30, 1996.
(b) There were no reports on Form 8-K filed during the last quarter ended
September 30, 1996.
<PAGE>
SIGNATURES
In accordance with the requirements 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.
3NET SYSTEMS, INC.
(Registrant)
Date: November 4, 1996 /S/ GEORGE R. VAN DERVEN
George R. Van Derven
Chief Executive Officer
(Principal Executive Officer)
Date: November 4, 1996 /S/ EDWARD L. LAMMERDING
Edward L. Lammerding
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 10.48
PROMISSORY NOTE
U.S. $72,000.00 July 31, 1996
3NET SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
promises to pay to the Cameron Foundation ("Cameron"), Seventy-Two Thousand
Dollars ($72,000.00), such amount referred to herein as the "Principal".
The Principal, together with interest accrued thereon from the date the
funds are received by the Company, at an annual rate of ten and one quarter
percent (10.25%), shall be due and payable on December 31, 1996 (the
"Maturity Date").
1. No failure by Cameron to exercise, and no delay in exercising,
any right or remedy hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise by Cameron of any right or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right or remedy.
2. Time is of the essence of this Note.
3. If principal and interest shall not be received by Cameron within
ten (10) days after the Maturity Date, in addition to his other remedies,
Cameron may collect, and the Company shall pay on demand, a late charge
equal to two (2) percent of the amount overdue.
4. If the Company defaults in the performance of or compliance with
this Note, and such default shall not have been remedied within ten (10)
days after Cameron notifies the Company in writing of such default, then
Cameron, in addition to all remedies conferred upon Cameron by law, shall
have the option to declare this Note and any and all promissory notes
issued by the Company to Cameron to be due and payable, without
presentment, demand for payment, protest, or notice of any kind, all of
which are hereby expressly waived upon maturity by acceleration or
otherwise.
5. Except as otherwise provided herein, the Company waives
presentment, demand for payment, protest, or notice of any kind.
6. The Company may prepay this Note in whole or in part without a
prepayment charge. Partial payments shall first be applied to accrued
interest and the balance to principal.
7. Principal and accrued interest shall be payable only in the
lawful money of the United States.
8. The provisions of the Note shall be binding upon the Company
and its successors and assigns and the terms and provisions of this Note
shall inure to the benefit of Cameron and Cameron's successors and assigns.
This Note may be amended, supplemented, or changed, and any provision hereof
waived, only by a written instrument making specific reference to this Note
signed by the party against whom enforcement of any such amendment,
supplement, change, or waiver is sought. The Company agrees to pay all
costs of collection, including, without limitation, attorney's fees,
in the event this Note is not paid when due.
9. If any provision of this Note is held by a court of competent
jurisdiction to be void or unenforceable for any reason, the remaining
provisions of this Note shall continue with full force and effect.
10. This Note shall be governed by and constructed in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Note to be executed
and delivered on the date and year first above written.
3NET SYSTEMS, INC.
By: /S/ GEORGE VAN DERVEN
Name: George Van Derven
Title: President & CEO
EXHIBIT 10.49
PROMISSORY NOTE
U.S. $21,000.00 August 9, 1996
3NET SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
promises to pay to the Cameron Foundation ("Cameron"), Twenty-One Thousand
Dollars ($21,000.00), such amount referred to herein as the "Principal".
The Principal, together with interest accrued thereon from the date the
funds are received by the Company, at an annual rate of ten and one quarter
percent (10.25%), shall be due and payable on December 31, 1996 (the
"Maturity Date").
1. No failure by Cameron to exercise, and no delay in exercising,
any right or remedy hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise by Cameron of any right or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right or remedy.
2. Time is of the essence of this Note.
3. If principal and interest shall not be received by Cameron within
ten (10) days after the Maturity Date, in addition to his other remedies,
Cameron may collect, and the Company shall pay on demand, a late charge
equal to two (2) percent of the amount overdue.
4. If the Company defaults in the performance of or compliance with
this Note, and such default shall not have been remedied within ten (10)
days after Cameron notifies the Company in writing of such default, then
Cameron, in addition to all remedies conferred upon Cameron by law, shall
have the option to declare this Note and any and all promissory notes
issued by the Company to Cameron to be due and payable, without
presentment, demand for payment, protest, or notice of any kind, all of
which are hereby expressly waived upon maturity by acceleration or
otherwise.
5. Except as otherwise provided herein, the Company waives
presentment, demand for payment, protest, or notice of any kind.
6. The Company may prepay this Note in whole or in part without a
prepayment charge. Partial payments shall first be applied to accrued
interest and the balance to principal.
7. Principal and accrued interest shall be payable only in the
lawful money of the United States.
8. The provisions of the Note shall be binding upon the Company
and its successors and assigns and the terms and provisions of
this Note shall inure to the benefit of Cameron and
Cameron's successors and assigns. This Note may be amended, supplemented,
or changed, and any provision hereof waived, only by a written instrument
making specific reference to this Note signed by the party against whom
enforcement of any such amendment, supplement, change, or waiver is sought.
The Company agrees to pay all costs of collection, including, without
limitation, attorney's fees, in the event this Note is not paid when due.
9. If any provision of this Note is held by a court of competent
jurisdiction to be void or unenforceable for any reason, the remaining
provisions of this Note shall continue with full force and effect.
10. This Note shall be governed by and constructed in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Note to be executed
and delivered on the date and year first above written.
3NET SYSTEMS, INC.
By: /S/ GEORGE VAN DERVEN
Name: George Van Derven
Title: President & CEO
EXHIBIT 10.50
PROMISSORY NOTE
U.S. $30,000.00 August 16, 1996
3NET SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
promises to pay to James W. Cameron, Jr., as an individual ("Cameron"),
Thirty Thousand Dollars ($30,000.00), such amount referred to herein as the
"Principal". The Principal, together with interest accrued thereon from
the date the funds are received by the Company, at an annual rate of ten
and one quarter percent (10.25%), shall be due and payable on December 31,
1996 (the "Maturity Date").
1. No failure by Cameron to exercise, and no delay in exercising,
any right or remedy hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise by Cameron of any right or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right or remedy.
2. Time is of the essence of this Note.
3. If principal and interest shall not be received by Cameron within
ten (10) days after the Maturity Date, in addition to his other remedies,
Cameron may collect, and the Company shall pay on demand, a late charge
equal to two (2) percent of the amount overdue.
4. If the Company defaults in the performance of or compliance with
this Note, and such default shall not have been remedied within ten (10)
days after Cameron notifies the Company in writing of such default, then
Cameron, in addition to all remedies conferred upon Cameron by law, shall
have the option to declare this Note and any and all promissory notes
issued by the Company to Cameron to be due and payable, without
presentment, demand for payment, protest, or notice of any kind, all of
which are hereby expressly waived upon maturity by acceleration or
otherwise.
5. Except as otherwise provided herein, the Company waives
presentment, demand for payment, protest, or notice of any kind.
6. The Company may prepay this Note in whole or in part without
a prepayment charge. Partial payments shall first be applied to accrued
interest and the balance to principal.
7. Principal and accrued interest shall be payable only in the
lawful money of the United States.
8. The provisions of the Note shall be binding upon the Company and
its successors and assigns and the terms and provisions of this Note shall
inure to the benefit of Cameron and Cameron's successors and assigns. This
Note may be amended, supplemented, or changed, and any provision hereof
waived, only by a written instrument making specific reference to this Note
signed by the party against whom enforcement of any such amendment,
supplement, change, or waiver is sought. The Company agrees to pay all
costs of collection, including, without limitation, attorney's fees, in the
event this Note is not paid when due.
9. If any provision of this Note is held by a court of competent
jurisdiction to be void or unenforceable for any reason, the remaining
provisions of this Note shall continue with full force and effect.
10. This Note shall be governed by and constructed in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Note to be executed
and delivered on the date and year first above written.
3NET SYSTEMS, INC.
By: /S/ GEORGE VAN DERVEN
Name: George Van Derven
Title: President & CEO
EXHIBIT 10.51
PROMISSORY NOTE
U.S. $50,000.00 August 30, 1996
3NET SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
promises to pay to James W. Cameron, Jr., as an individual ("Cameron"),
Fifty Thousand Dollars ($50,000.00), such amount referred to herein as the
"Principal". The Principal, together with interest accrued thereon from
the date the funds are received by the Company, at an annual rate of ten
and one quarter percent (10.25%), shall be due and payable on December 31,
1996 (the "Maturity Date").
1. No failure by Cameron to exercise, and no delay in exercising,
any right or remedy hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise by Cameron of any right or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right or remedy.
2. Time is of the essence of this Note.
3. If principal and interest shall not be received by Cameron within
ten (10) days after the Maturity Date, in addition to his other remedies,
Cameron may collect, and the Company shall pay on demand, a late charge
equal to two (2) percent of the amount overdue.
4. If the Company defaults in the performance of or compliance with
this Note, and such default shall not have been remedied within ten (10)
days after Cameron notifies the Company in writing of such default, then
Cameron, in addition to all remedies conferred upon Cameron by law, shall
have the option to declare this Note and any and all promissory notes
issued by the Company to Cameron to be due and payable, without
presentment, demand for payment, protest, or notice of any kind, all of
which are hereby expressly waived upon maturity by acceleration or
otherwise.
5. Except as otherwise provided herein, the Company waives
presentment, demand for payment, protest, or notice of any kind.
6. The Company may prepay this Note in whole or in part without a
prepayment charge. Partial payments shall first be applied to accrued
interest and the balance to principal.
7. Principal and accrued interest shall be payable only in
the lawful money of the United States.
8. The provisions of the Note shall be binding upon the Company and
its successors and assigns and the terms and provisions of this Note shall
inure to the benefit of Cameron and Cameron's successors and assigns. This
Note may be amended, supplemented, or changed, and any provision hereof
waived, only by a written instrument making specific reference to this Note
signed by the party against whom enforcement of any such amendment,
supplement, change, or waiver is sought. The Company agrees to pay all
costs of collection, including, without limitation, attorney's fees, in the
event this Note is not paid when due.
9. If any provision of this Note is held by a court of competent
jurisdiction to be void or unenforceable for any reason, the remaining
provisions of this Note shall continue with full force and effect.
10. This Note shall be governed by and constructed in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Note to be executed
and delivered on the date and year first above written.
3NET SYSTEMS, INC.
By: /S/ GEORGE VAN DERVEN
Name: George R. Van Derven
Title: President & CEO
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