<PAGE> 1
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 March 31, 1996
COMMISSION FILE NUMBER 0-20468
(Exact name of small business issuer as specified in its charter)
3NET SYSTEMS, INC.
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Delaware 68-0195770
(Address of principal executive offices)
629 J Street, Sacramento, CA 95814
(Issuer's telephone number)
(916) 498-3900
(Former address
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 April 30, 1996: 200,000,000
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3NET SYSTEMS, INC.
CONDENSED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 11,804
Accounts receivable, net 247,896
Inventory 12,440
Other current assets 105,128
------------
Total current assets 377,268
PROPERTY AND EQUIPMENT:
Equipment 948,329
Purchased software 233,872
Furniture and fixtures 148,445
Leasehold improvements 90,044
------------
1,420,690
Accumulated depreciation and amortization (1,186,071)
------------
Property and equipment, net 234,619
Other assets 32,258
------------
$ 644,145
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 1,000,000
Notes payable to stockholders 494,500
Accounts payable 862,602
Accrued payroll and related expenses 194,245
Deferred revenue 220,811
Accrued customer obligations 242,848
Accrued preferred stock dividends 214,375
Current portion of long-term debt and capital lease obligations 35,764
Other current liabilities 304,981
------------
Total current liabilities 3,570,126
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 $1,408,752 1,225,002
Common stock, $0.01 par value - 200,000,000 shares
authorized, 200,000,000 shares issued and outstanding 1,490,337
Common stock to be issued 728,690
Additional paid-in capital 26,537,779
Accumulated deficit (32,907,789)
------------
Total stockholders' deficit (2,925,981)
------------
$ 644,145
============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3NET SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
---------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
System sales $ 2,525 $ 328,785 $ 20,616 $ 657,318
Contract revenue 373,885 - 950,905 -
Service revenue 119,659 416,557 335,665 1,006,456
----------- ----------- ----------- -----------
Total revenues 496,069 745,342 1,307,186 1,663,774
COSTS AND EXPENSES:
Costs of revenues:
System sales 10,473 381,823 90,412 828,349
Contract revenue 285,019 - 698,527 -
Service revenue 82,322 302,894 189,224 736,712
Research and development 84,283 420,479 624,843 1,668,076
Marketing and sales 26,663 239,010 170,210 672,081
General and administrative 294,187 509,068 901,163 2,094,602
Settlement expense - 132,732 88,125 99,447
----------- ----------- ----------- -----------
Total costs and expenses 782,947 1,986,006 2,762,504 6,099,267
----------- ----------- ----------- -----------
Loss from operations (286,878) (1,240,664) (1,455,318) (4,435,493)
Other income (expense):
Interest expense (40,196) (53,350) (106,524) (188,753)
Other, net 19,379 (4,884) 13,939 95
----------- ----------- ----------- -----------
(20,817) (58,234) (92,585) (188,658)
------------ ----------- ----------- -----------
Net loss $ (307,695) $(1,298,898) $(1,547,903) $(4,624,151)
=========== =========== =========== ===========
Preferred stock dividends in arrears (30,625) (30,625) (91,875) (91,875)
----------- ----------- ----------- -----------
Net loss applicable to
common stockholders' $ (338,320) $(1,329,523) $(1,639,778) $(4,716,026)
=========== =========== =========== ===========
Net loss per share $ (0.00) $ (0.05) $ (0.02) $ (0.19)
=========== =========== =========== ===========
Shares used in per share calculations 200,000,000 25,741,238 102,841,252 24,729,734
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3NET SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
--------------------------------
1996 1995
---------- ------------
<S> <C> <C>
Net cash used in operating activities $(433,868) $(3,570,916)
Cash flows from investing activities:
Purchases of property and equipment (3,960) (31,934)
(Increase) decrease in other assets - 13,500
--------- -----------
Net cash used in investing activities (3,960) (18,434)
Cash flows from financing activities:
Proceeds from sale of preferred stock - 1,215,004
Proceeds from sale of common stock and warrants - 1,849,727
Proceeds from exercise of warrants 239 -
Proceeds from notes payable to stockholders 494,500 1,450,000
Net decrease in line of credit - (700,000)
Payments on notes payable and capital leases (84,020) (68,786)
--------- -----------
Net cash provided by financing activities 410,719 3,745,945
--------- -----------
Net (decrease) increase in cash (27,109) 156,595
Cash at beginning of period 38,913 369,441
--------- -----------
Cash at end of period $ 11,804 $ 526,036
========= ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
<PAGE> 5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3NET SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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, 1995.
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 March
31, 1996, results of operations for the quarter and nine months ended March 31,
1996 and 1995 and cash flows for the nine months ended March 31, 1996 and 1995.
The results for the periods ended March 31, 1996 are not necessarily indicative
of the results to be expected for the entire fiscal year ending June 30, 1996.
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
March 31, 1996). In December 1995, the maturity date of the line of credit was
extended from January 1, 1996 to July 1, 1996. The line of credit was fully
utilized as of March 31, 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 March 31, 1996, the Cameron Foundation and the Negri Foundation, both
current shareholders, have advanced $494,500 to the Company, all of which is
currently outstanding. The Company has executed a series of notes payable for
the amounts advanced that include, among other requirements, a maturity date of
June 30, 1996 and an interest rate of 10.25 percent per annum.
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 which 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.
5
<PAGE> 6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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, 50,369,029 shares were 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. In
February 1995, the Former Consultant demanded payment of $1.9 million in
settlement of all outstanding claims. On June 12, 1995, the Former Consultant
filed a lawsuit in Sacramento County Superior Court against the Company, its
three current directors, James W. Cameron, Jr., the Former Consultant's
stockbroker and brokerage firm and one of the Company's largest customers. The
lawsuit sets forth twenty causes of action based on a variety of legal theories
and seeks 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 is now 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. The Company intends to file a
petition for confirmation of the order of dismissal with the Sacramento County
Superior Court. Pending any such entry, the Arbitration Panel's order is not
final. The Company is seeking an order requiring the Former Consultant to pay
the attorney's fees incurred during the pendency of the arbitration, and may
pursue counterclaims against the Former Consultant for reimbursement of certain
expenses advanced and for damages. The Company does not believe that the outcome
of this matter will have a material adverse impact on its financial position or
result of operations.
6
<PAGE> 7
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DISPUTE WITH DISTRIBUTOR
In November 1993, a dispute arose between the Company and its Canadian
distributor, Centre de Traitment I.T.I Omnitech Inc. ("Omnitech"), which was
settled in April 1994 and resulted in, among other things, a renewal of the
Company's distribution agreement with Omnitech. The Company entered into
discussions to renegotiate its contractual relationship with Omnitech. 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. The Company has
continued to discuss certain issues regarding the interpretations of provisions
of their agreement. On May 15, 1995, the Company received a letter from Omnitech
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 of the notice, the subject stock
certificates issuable to Omnitech were delivered by the transfer agent to
Omnitech. Thereafter, the Company received another letter from Omnitech
indicating that the Company was in arrears in its payment obligations to
Omnitech. The Company and Omnitech have had discussions for purposes of
arranging a meeting to discuss various issues relating to the agreement,
however, to date no meeting has been scheduled. On January 5, 1996, Omnitech
sent a letter to the Company indicating that Omnitech intended to file a lawsuit
against the Company and others, stating a number of claims. Omnitech indicated
their belief that the value of these claims exceeds $5.0 million. The Company
believes that Omnitech has breached the contract and intends to vigorously
defend itself. However, the expense of defending any lawsuit 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 Omnitech
pursue its claims through litigation. Moreover, due to the Company's current and
projected cash position, the Company may not be able to satisfy an adverse
verdict in this matter that obligates the Company to pay any significant damages
to Omnitech. In the event an adverse verdict is the result of this dispute, the
Company may be required to seek protection under federal bankruptcy law.
7
<PAGE> 8
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following is Management's Discussion and Analysis of Financial Condition and
Results of Operations for the periods ended March 31, 1996.
OVERVIEW
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 the latest version of its laboratory
information system (know as "3Net PrismCare LIS"). The delays resulted in
significant losses and severe liquidity problems. Cost cutting required by the
cash flow situation resulted in further delays in software development and
implementation. 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 3Net PrismCare LIS at one customer site in fiscal
1995, but, the Company has lost sales momentum due to the earlier delays.
Although the Company still offers 3Net PrismCare LIS, it no longer devotes any
dedicated resources to the marketing or selling of this product. The Company
successfully installed four of its automated timekeeping systems (known as
"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 in fiscal 1996 to date. 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.
The Company wrote off TimeNet purchased software with a net book value of
$36,000 at December 31, 1995. The Company's inability to close new product sales
business in fiscal years 1995 and 1996 and the resulting lack of revenues caused
the Company to recognize a significant loss in fiscal 1995, and the Company
expects this lack of product sales to continue through fiscal 1996. In order to
reduce its losses the Company has taken steps to reduce expenses and generate
revenues by providing contract programming and consulting services, and acting
as an intermediary in providing such services. These actions have substantially
reduced the Company's level of cash consumption in fiscal 1996 as compared to
fiscal 1995. However, the Company will not generate sufficient cash flow in
fiscal 1996 to support its operations. The Company had no material backlog at
December 31, 1995.
The Company's continuing losses have required it to seek private placement
financing. The Company entered into a series of agreements in fiscal 1993 and
fiscal 1994 with James W. Cameron, Jr. by which Mr. Cameron and other investors
invested approximately $2.6 million in the Company in September 1994, acquiring
a controlling interest. During the remainder of fiscal 1994 and in fiscal 1995,
Mr. Cameron and other investors have additionally invested approximately $7.1
million. Mr. Cameron is also the guarantor of the Company's line of credit with
a bank for $1.0 million. See also Liquidity and Capital Resources.
8
<PAGE> 9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
As part of the first of the agreements between the Company and Mr. Cameron, the
Company was required to bring a new team of executives and directors to the
Company. New management focused the Company in fiscal 1994 on finishing
development of the clinical module of 3Net PrismCare LIS and in April 1994 the
Company installed the clinical and communications modules in a live,
independent, commercial environment at a customer site. Marketing and sales
efforts related to 3Net PrismCare LIS, which had been suspended in December 1993
as the Company primarily worked on completing and installing the product, were
restarted in fiscal 1995. These marketing and sales efforts had been directed
primarily at large commercial and insurance laboratory applications similar to
the Company's successful installation. The Company now believes that due to its
lack of sales momentum, the long sales cycle for products such as 3Net PrismCare
LIS and the Company's lack of resources, that sales of 3Net PrismCare LIS in
fiscal 1996 are not likely to be material to the results of operations.
In fiscal 1995, significant portions of the Company's resources were devoted to
marketing TimeNet and its resource utilization management system (known as
"RUMS"). TimeNet has been sold to and installed in both health care facilities
and other organizations that maintain employee time and attendance tracking
systems. The Company had expected to derive revenues in fiscal 1996 from sales
of TimeNet and RUMS or RUMS based technology. However, due to cash flow
limitations, the Company now no longer has any dedicated resources involved in
the marketing or selling of TimeNet, RUMS or LIS products, and is no longer
providing customer service on TimeNet systems. Therefore, the Company no longer
expects significant revenues from the sale of these products in fiscal 1996.
In July 1994, the Company entered into a strategic alliance with Electronic Data
Systems, Corporation ("EDS") pursuant to which EDS will provide to 3Net product
development and other support and will cooperate in the development and
marketing of certain 3Net products. The products most recently discussed include
TimeNet and RUMS. To date 3Net has not recorded any product revenue under this
agreement, and does not expect any revenue under this agreement in fiscal 1996.
3Net is providing contract programming and consulting to EDS under a separate
services agreement.
In July 1994, the Company also entered into an interim working agreement with
Cameron & Associates, Inc. ("Cameron & Associates"), a corporation owned by
stockholder James W. Cameron, Jr., to provide computer systems design,
integration and operations in connection with existing Cameron & Associates
contracts for provision of health care information systems in Russia. In
February 1995 the project was discontinued and phased out over a period of sixty
days. The Company has been reimbursed at cost for expenditures incurred under
this agreement.
In response to its continuing negative cash flow from operations, the Company
has taken steps to reduce its expenses. In September 1994, the Company laid off
16 of its system development and related staff and moved to a smaller, less
expensive facility in November 1994. The Company has continued to reduce its
headcount and expenses in the second half of fiscal 1995 and fiscal 1996 to
9
<PAGE> 10
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
date, primarily through attrition. Additionally, the Company has assigned a
larger percentage of its technical staff to revenue producing contract
programming or consulting projects. The Company is also generating revenue by
acting as an intermediary in providing contract programming and consulting
personnel to EDS under a services agreement. These actions have substantially
reduced the Company's level of cash consumption, although the Company still has
a negative cash flow. The Company will not generate sufficient cash flow from
operations during fiscal 1996 to support its operations. As a result, the
Company's ability to continue its operations is directly dependent upon the
receipt of significant additional financing. Recently, the Company has received
short term financing for its operations from the Cameron Foundation and the
Negri Foundation. No assurance can be given that either entity will continue to
provide the Company with financing. In the event the Company is unable to obtain
additional financing, it may be forced to seek protection under federal
bankruptcy laws.
RESULTS OF OPERATIONS
Revenues
Revenues decreased $249,273 or 33.4% and $356,588 or 21.4% for the quarter and
nine months ended March 31, 1996, as compared to the same periods in fiscal
1995. No material product sales have occurred in fiscal 1996 to date. However,
revenues have been generated from contract programming and consulting work in
fiscal 1996, whereas no such revenues were recorded during the comparable
periods of fiscal 1995. Service revenues for fiscal 1995 included work for
Cameron & Associates, reimbursed at cost under the interim working agreement,
while fiscal 1996 included no such revenue. The following is an analysis of the
Company's revenues by category:
System Sales. System sales (sales of information systems including hardware,
software, installation and training) revenues decreased from $328,785 and
$657,318 during the quarter and nine months ended March 31, 1995, to $2,525 and
$20,616 during the same periods of fiscal 1996. The decrease in revenue is due
primarily to recognition of TimeNet revenues in fiscal 1995 with the acceptance
of one system in the quarter ended March 31, 1995 and two systems in the nine
months ended March 31, 1995, while no TimeNet sales have occurred during fiscal
1996 to date. The Company does not expect to record significant system sales in
fiscal 1996.
Contract Revenue. Contract revenue (sales of custom programming and software
development services, and acting as an intermediary in providing such services)
was $373,885 and $950,905 for the quarter and nine months ended March 31, 1996,
resulting from a contract to provide system enhancements for an existing
customer and from a series of agreements to provide contract programming
personnel and consulting to EDS. No contract revenue was recorded in fiscal
1995.
10
<PAGE> 11
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Service Revenue. Service revenue (sales of annually renewable maintenance
contracts for software support and hardware services) decreased from $416,557
and $1,006,456 for the quarter and nine months ended March 31, 1995, to $119,659
and $335,665 in the comparable periods in fiscal 1996. These decreases resulted
primarily from revenue related to the interim working agreement with Cameron &
Associates for systems integration and detailed design activities in connection
with the development of health care information systems in Russia. Under this
agreement, the Company recognized revenue of approximately $105,000 and $353,000
for the quarter and nine months ended March 31, 1995. This agreement was
discontinued in February 1995 and no revenue was recognized under the agreement
during fiscal 1996. The Company also recognized approximately $100,000 in
service revenue during fiscal 1995 for custom programming provided at cost for
an LIS customer prior to system acceptance. In addition, several service
customers have replaced their Cortex LIS systems (a predecessor system to 3Net
PrismCare LIS) 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.
Cost of Revenues
System Sales. System sales gross margins have been negative during fiscal 1996
primarily due to the write down of the remaining net book value of purchased
TimeNet system software, while system sales were insignificant. Gross margins on
system sales were negative during fiscal 1995 due to limited system sales
revenues in comparison to the amortization of capitalized software development
costs and purchased software. All remaining capitalized development costs were
expensed in fiscal 1995.
Contract Revenue. Gross margins on contract revenues were 23.8% and 26.5% on
contract revenue for the quarter and nine months ended March 31, 1996. The
Company expects to maintain contract revenue gross margin in this range through
the fourth quarter of fiscal 1996.
Service Revenue. Gross margins on service revenues were 31.2% and 43.6% for the
three and nine months ended March 31, 1996, compared to 27.3% and 26.8% for the
same periods in fiscal 1995. The lower margins in fiscal 1995 resulted primarily
from the agreement with Cameron & Associates for which the Company was
reimbursed at cost.
Expenses
Research and Development Expenses. Research and Development ("R&D") expenses
decreased $336,196 or 80.0% and $1,043,233 or 62.5% for the quarter and nine
months ended March 31, 1996, compared to the same periods in fiscal 1995. These
decreases are primarily due to reductions in the Company's system development
staff related to 3Net PrismCare LIS and due to using a larger
11
<PAGE> 12
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
percentage of the remaining technical staff to generate contract and service
revenues.
Marketing and Selling Expenses. Marketing and selling expenditures decreased
$212,347 or 88.8% and $501,871 or 74.7% for the quarter and nine months March
31, 1996, as compared to the same periods of fiscal 1995. These decreases
resulted primarily from reductions in the Company's sales and marketing staff
and attendant marketing activities.
General and Administrative Expenses ("G&A"). G&A expenses decreased $214,881 or
42.2% and $1,193,439 or 57.0% for the quarter and nine months ended March 31,
1996, compared to the same periods of fiscal 1995. The first quarter of fiscal
1995 included a charge of $345,000 related to the valuation of warrants to
purchase common stock to be issued in connection with the strategic alliance
entered into with EDS. Due to a reduction of headcount and moving to a less
expensive facility, the Company reduced G&A personnel and facility costs by
approximately $357,000 and $154,000 in fiscal 1996 to date as compared to the
same period in fiscal 1995. The Company also incurred approximately $375,000
less in legal, accounting and filing fees in fiscal 1996 to date as compared to
the same period in fiscal 1995.
Settlement Expense. Expenses in fiscal 1996 to date and during fiscal 1995 were
to settle various claims, including a suit by a former employee.
Net Loss
Net loss decreased $991,203 or 76.3% and $3,076,248 or 66.5% for the quarter and
nine months ended March 31, 1996 compared to the same periods in fiscal 1995.
Although the Company expects losses to continue in the fourth quarter of fiscal
1996, the Company expects these losses to continue to be significantly below
prior year levels due to cost and expense reductions and contract revenue
increases.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109. As of June 30, 1995, the Company had a net operating loss
carry forward for federal and state income tax purposes of approximately $22.3
million and $11.2 million, respectively. The federal net operating loss carry
forward expires in the years 2005 through 2010 and the state net operating loss
carry forward expires in 1997 through 2000. 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 carry forwards generated through August 10, 1992 are subject
to an annual limitation of approximately $300,000 per year.
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
12
<PAGE> 13
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
net operating loss carry forwards 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 flows 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. During the first nine months of fiscal 1996, the
Company used an average of approximately $49,000 per month of cash for operating
and investing activities as compared with an average of approximately $399,000
per month during the same period of the previous year. The Company expects that
the average rate at which cash is used during the remainder of fiscal 1996 will
continue to be significantly below fiscal 1995 usage levels as a direct result
of the steps taken to reduce its expenses and as contract revenues increase.
Through March 31, 1996, the Cameron Foundation and the Negri Foundation, both
current stockholders, have advanced $494,500 to the Company, all of which is
currently outstanding. The Company has executed a series of notes payable for
the amounts advanced that include, among other requirements, a maturity date of
June 30, 1996 and an interest rate of 10.25 percent per annum.
In February 1994, the Company entered into a revolving line of credit with Bank
of America, NT&SA (the "Bank") in the amount of $2,000,000 with a maturity date
of August 1, 1994. The maturity date has been extended several times since
inception and in December 1995 the Bank agreed to extend the maturity date of
the line of credit to July 1, 1996. As part of one extension agreement, the line
of credit was reduced to $1,000,000. The line of credit was fully utilized as of
March 31, 1996. The Company's obligations under the line of credit have been
guaranteed by James W. Cameron, Jr. ("Continuing Guaranty"). Interest under the
line of credit is payable monthly at a rate of 1 percent in excess of the Bank's
Reference Rate. There can be no assurance that the Company will be able to pay
off this debt or negotiate an extension of the due date. The line of credit is
secured by substantially all assets of the Company, including the Company's
software.
As consideration for the execution of the Continuing Guaranty, the Company
entered into a Reimbursement Agreement with Mr. Cameron pursuant to which a
designee of Mr. Cameron received a warrant to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $1.50 per share. Additionally,
pursuant to the Reimbursement Agreement, in the event that Mr. Cameron is
required to repay the Bank any moneys under the Continuing Guaranty, the Company
is required to repay Mr. Cameron the amount of each payment by either I) paying
an equal cash amount or ii) issuing to Mr. Cameron a non-convertible note (the
"Straight Note") in the principal
13
<PAGE> 14
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
amount of such payment by Mr. Cameron, bearing interest at an interest rate
equal to the interest rate of the line of credit on the date of such payment and
subject to adjustment when and to the extent that the interest rate prevailing
under the line of credit may change. Furthermore, under the terms of the
Reimbursement Agreement, upon written demand by Mr. Cameron, the Straight Note
will be replaced by a convertible note (the "Convertible Note") in a principal
amount equal to the Straight Note and bearing interest at the same rate. The
conversion price of the Convertible Note is equal to the Applicable Percentage,
as defined in the Reimbursement Agreement, of the average trading price of the
Company's Common Stock over the period of ten trading days ending on the trading
day next preceding the date of issuance of such Convertible Note. The Applicable
Percentage, which is currently 25%, will be reduced to 20% if the maturity date
of the line of credit is extended or the Bank does not demand repayment until
after July 1, 1996.
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 which 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. Through
March 31, 1995, the Company received cash proceeds of $1,215,004 and issued
287,322 shares pursuant to these agreements. 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.
In recent years, the Company has suffered significant losses from operations. As
of March 31, 1996, the Company had a net working capital deficit of
approximately $3.2 million and an accumulated deficit of approximately $32.9
million. During the first nine months of fiscal 1996 the Company was unable to
generate adequate cash flow from operations to meet its cash flow requirements
and, as a result, the Company met its cash flow requirements primarily through
slow payment of its accounts payable and advances from the Cameron Foundation
and the Negri Foundation. During the first nine months of fiscal 1996, the
Company had net proceeds of approximately $411,000 from financing activities and
consumed approximately $434,000 in operating activities. During the same period
of the previous year, the Company had net proceeds of approximately $3,746,000
from financing activities and consumed approximately $3,571,000 in operating
activities.
The report of the independent auditors on the Company's June 30, 1995 financial
statements include 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 increase its
capital resources and to 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
14
<PAGE> 15
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
of fiscal 1996. However, considering, among other things, the Company's
historical operating losses, anticipated negative cash flow from operations and
the ongoing litigation or threats of litigation against the Company, 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 fiscal 1996. The Company contemplates needing to
raise additional financing during the remainder of fiscal 1996. The Company
projects that it will need at least $140,000 of additional financing to maintain
its planned level of operating activity through June 30, 1996. There can be no
assurance that any additional proceeds will be obtained, or that if obtained,
such additional financing will be adequate to ensure the Company's viability as
a going concern through June 30, 1996. Many of the factors considered in the
evaluation of the Company's ability to continue as a going concern cannot be
quantified and, therefore, such factors may adversely affect the amount of
financing necessary for the Company to continue as a going concern. To address
its capital shortfalls, the Company is pursuing additional sources of temporary
and permanent financing. No assurance can be given that the Company will be
successful.
EFFECTS OF INFLATION
Management does not expect inflation to have a material effect on the Company's
operations.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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. In
February 1995, the Former Consultant demanded payment of $1.9 million in
settlement of all outstanding claims. On June 12, 1995, the Former Consultant
filed a lawsuit in Sacramento County Superior Court against the Company, its
three current directors, James W. Cameron, Jr., the Former Consultant's
stockbroker and brokerage firm and one of the Company's largest customers. The
lawsuit sets forth twenty causes of action based on a variety of legal theories
and seeks 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 is now 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. The Company
intends to file a petition for confirmation of the order of dismissal with the
Sacramento County Superior Court. Pending any such entry, the Arbitration
Panel's order is not final. The Company is seeking an order requiring the Former
Consultant to pay the attorney's fees incurred during the pendency of the
arbitration, and may pursue counterclaims against the Former Consultant for
reimbursement of certain expenses advanced and for damages. The Company does not
believe that the outcome of this matter will have a material adverse impact on
its financial position or result of operations.
In November 1993, a dispute arose between the Company and its Canadian
distributor, Centre de Traitment I.T.I Omnitech Inc. ("Omnitech"), which was
settled in April 1994 and resulted in, among other things, a renewal of the
Company's distribution agreement with Omnitech. The Company entered into
discussions to renegotiate its contractual relationship with Omnitech. 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. The Company has
continued to discuss certain issues regarding the interpretations of provisions
of their agreement. On May 15, 1995, the Company received a letter from Omnitech
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 of the notice, the subject stock
certificates issuable to Omnitech were delivered by the transfer
16
<PAGE> 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
agent to Omnitech. Thereafter, the Company received another letter from Omnitech
indicating that the Company was in arrears in its payment obligations to
Omnitech. The Company and Omnitech have had discussions for purposes of
arranging a meeting to discuss various issues relating to the agreement,
however, to date no meeting has been scheduled. On January 5, 1996, Omnitech
sent a letter to the Company indicating that Omnitech intended to file a lawsuit
against the Company and others, stating a number of claims. Omnitech indicated
their belief that the value of these claims exceeds $5.0 million. The Company
believes that Omnitech has breached the contract and intends to vigorously
defend itself. However, the expense of defending any lawsuit 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 Omnitech
pursue its claims through litigation. Moreover, due to the Company's current and
projected cash position, the Company may not be able to satisfy an adverse
verdict in this matter that obligates the Company to pay any significant damages
to Omnitech. 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 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 have met with the
Commission staff and the Company has proposed a settlement of the complaint
which would not involve an admission of any wrong doing nor the imposition of
any monetary penalties. That proposal in which the Company would agree to a
Cease and Desist Order has not been formally accepted by the Commission staff
and the Commission.
Items 2, 3, 4 and 5.
Items 2, 3, 4 and 5 have been omitted because the related information is not
applicable.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.75 Notes Payable between the Registrant and the Cameron
Foundation dated: January 5, 1996; January 16, 1996; and
February 1, 1996.
10.76 Note Payable between the Registrant and the Negri Foundation
dated February 29, 1996.
27 Financial Data Schedule
</TABLE>
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) The Company filed a Form 8-K on March 11, 1996 regarding an Arbitration
Panel dismissing with prejudice all of the claims made against the Company
by a former consultant, officer and director of the Company.
18
<PAGE> 19
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: May 10, 1996 /s/ George R. Van Derven
------------------------------------
George R. Van Derven
Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 1996 /s/ Edward L. Lammerding
------------------------------------
Edward L. Lammerding
Chief Financial Officer
(Principal Financial Officer)
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.75 Notes Payable between the Registrant and the Cameron
Foundation dated: January 5, 1996; January 16, 1996; and
February 1, 1996.
10.76 Note Payable between the Registrant and the Negri Foundation
dated February 29, 1996.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.75
PROMISSORY NOTE
U.S. $25,000.00 January 5, 1996
3NET SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
promises to pay to the Cameron Foundation ("Cameron"), Twenty Five Thousand
Dollars ($25,000.00), 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 June 30, 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
<PAGE> 2
Exhibit 10.75
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
----------------------------------------
George R. Van Derven
President & Chief Executive Officer
<PAGE> 3
Exhibit 10.75
PROMISSORY NOTE
U.S. $41,000.00 January 16, 1996
3NET SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
promises to pay to the Cameron Foundation ("Cameron"), Forty One Thousand
Dollars ($41,000.00), 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 June 30, 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
<PAGE> 4
Exhibit 10.75
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
----------------------------------------
George R. Van Derven
President & Chief Executive Officer
<PAGE> 5
Exhibit 10.75
PROMISSORY NOTE
U.S. $28,000.00 February 1, 1996
3NET SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
promises to pay to the Cameron Foundation ("Cameron"), Twenty Eight Thousand
Dollars ($28,000.00), 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 June 30, 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
<PAGE> 6
Exhibit 10.75
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
----------------------------------------
George R. Van Derven
President & Chief Executive Officer
<PAGE> 1
Exhibit 10.76
PROMISSORY NOTE
U.S. $50,000.00 February 29, 1996
3NET SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
promises to pay to The Negri Foundation ("Negri"), 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 June 30, 1996 (the "Maturity Date").
1. No failure by Negri 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 Negri 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 Negri within ten
(10) days after the Maturity Date, in addition to his other remedies, Negri 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 Negri notifies the Company in writing of such default, then Negri, in
addition to all remedies conferred upon Negri by law, shall have the option to
declare this Note and any and all promissory notes issued by the Company to
Negri 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 Negri and
<PAGE> 2
Exhibit 10.76
Negri'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
----------------------------------------
George R. Van Derven
President & Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 11,804
<SECURITIES> 0
<RECEIVABLES> 247,896
<ALLOWANCES> 0
<INVENTORY> 12,440
<CURRENT-ASSETS> 377,268
<PP&E> 1,420,690
<DEPRECIATION> 1,186,071
<TOTAL-ASSETS> 644,145
<CURRENT-LIABILITIES> 3,570,126
<BONDS> 0
0
1,225,002
<COMMON> 1,490,337
<OTHER-SE> 27,266,469
<TOTAL-LIABILITY-AND-EQUITY> 644,145
<SALES> 20,616
<TOTAL-REVENUES> 1,307,186
<CGS> 90,412
<TOTAL-COSTS> 2,762,504
<OTHER-EXPENSES> 92,585
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106,524
<INCOME-PRETAX> (1,547,903)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,547,903)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,547,903)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
