Item 1. DESCRIPTION OF BUSINESS
I/NET, Inc. (The "Company" or "I/NET") was organized under the laws of the state of Delaware during 1986 under the name of a predecessor corporation. The Company had its initial public offering with the Securities and Exchange Commission during 1987.
BUSINESS DEVELOPMENT
I/NET was incorporated in 1983 as a contract research and development firm specializing in software development for digital imaging and voice recognition. Systems created by I/NET are currently in service in; real estate, pharmaceutical research, government, newspapers, and information management.
During 1993 and 1994, the Company issued 1,428,571 shares of its stock for cash, a trademark, and reduction of debt totaling $4,455,000. In connection with the transactions, the Company issued warrants to the purchaser to acquire 2,039,285 shares of common stock at prices ranging from $0.25 to $2.40 per share. These warrants expire in 1997. As part of these transactions, the underwriters were also issued 1,145,714 warrants exercisable at prices ranging from $0.29 to $2.10 and expire in 1999. During 1995, the Company issued an additional 18,859,081 shares of common stock for $3,883,326. These shares were issued for the reduction of indebtedness, for a stock award program for the officers and key employees, and to raise additional capital. There were no warrants issued with these transactions. All warrants were exercisable at December 31, 1996.
BUSINESS
I/NET, in prior years, was engaged in the business of providing a wide range of contract research systems planning, development, and implementation services on a fee basis to public and private sector clients. It was founded in 1982 in response to demand for high-quality information systems services on the part of government, commercial, and not-for-profit organizations, requiring digital imaging as part of their overall solution. Since its formation, I/NET has delivered and installed microcomputer-based decision support systems for systems sold worldwide, supporting hundreds of users and employing distributed databases, sophisticated telecommunications networks, and state-of-the-art development tools. Past projects which the Company has undertaken in multi- media applications have incorporated digital imaging and voice recognition.
The Company has performed development work under contract with IBM for many years, including developing multi-media software running on the IBM system AS/400, a mid-range computer system. The Company's contracts with IBM, a minority stockholder in the Company, were completed at the end of 1995.
During 1995, I/NET brought to the marketplace its own Web Server/400 as the first commercially available product, which can connect the nearly 500,000 AS/400 midrange computers worldwide to the Internet. The "Web" lets Internet users around the world exchange information in the form of displayed text, images, sound, and video. Available since July, 1995, I/NET's Web Server/400 is currently used by businesses around the world, with installations in Hong Kong, Germany, England, the Netherlands, Italy, Korea, Japan, and Israel, in addition to Canada and the United States. Current installations include: IBM AS/400 Homepage (www.as400.ibm.com), Pacific Brokerage Services, Inc. (www.tradepbs.com), Software 2000, Inc., Marcam Corporation, Dynamic Healthcare Technologies, Inc. (www.dht.com), Automated Training Systems (www.ibmuser.com), Mattel Toys, MCI, Eli Lilly, Builders Square, Toyota of America, Caesers Palace, United Technologies Automotive, and Anheuser-Busch.
I/NET's Commerce Server/400 was made available in August, 1996. This product provides AS/400 users with the ability to conduct secured, encrypted financial and other transactions over the Internet. Current customers include IBM, Enterprise Rent-A-Car, MCI, State Bar of California, and Pacific Brokerage Services, Inc. These companies have installed the product in various locations throughout the world.
IBM AS/400 is the world's most popular multi-user business computing system, with nearly 500,000 units installed worldwide supporting from 1 to 7,000 users. IBM and its 8,000 Business Partners offer AS/400 customers 25,000 applications, including 3,000 for the client/server. Among AS/400 customers are 98 percent of the Fortune 100 Industrials.
DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES
The Company has signed exclusive worldwide marketing and distribution agreements with International Marketing Strategies, (IMS) for the distribution of its Web Server/400 products. All marketing services will be performed by IMS.
COMPETITIVE BUSINESS CONDITIONS AND THE SMALL BUSINESS ISSUER'S COMPETITIVE POSITION IN THE INDUSTRY AND METHODS OF COMPETITION
The Company's contract work performed for IBM has been competitively acquired, and usually the final selection is between I/NET and departments within IBM. As mentioned previously, the Company is currently finalizing an agreement with IBM to provide future services for IBM's AS/400 Internet products. I/NET and IBM are the only two companies with software available to connect the AS/400 to the Internet. Currently, I/NET's products are installed on over 90% of the AS/400's operating as Internet servers.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND THE NAMES OF PRINCIPAL SUPPLIERS
Developing software requires few tangible raw materials. The most important element in this process is the personnel who plan, design, and develop the software code. I/NET has consistently hired the best talent available. It recruits top-of-the-class talent from two Kalamazoo-based colleges as well as candidates from the Detroit and Chicago metropolitan areas.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
The Company provided Internet products, facilities management services, and software development services to a few major customers during 1996 and 1995 as follows: 1996 1995 -------------------- ------------------ Internet Products International Marketing Strategies (IMS) $ 346,000 $ 50,000 SUPPORT NET, INC. 158,000 - -------------------- ------------------ 504,000 $ 50,000
Facilities Management Services Greater Kalamazoo Associations of Realtors $ 120,000 $ 149,000 ================ ================== Software Development Services International Business Machines (IBM) $ - $ 978,000 ==================== ==================
IBM is also a minority stockholder in the Company and $40,000 was due from it as of December 31, 1995.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR CONTRACTS, INCLUDING DURATION
I/NET acquired the trademark "Career/NET" in prior years. This trademark was written off during 1995 as the product did not meet the market acceptance as anticipated.
NEED FOR ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTIONS OR SERVICES
The performance of services and the supply of products by the Company is not subject to governmental approval.
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
No present governmental regulations have any adverse impact on the present or contemplated business operations of the Company, and no such probable governmental regulations are anticipated to have any adverse effect.
ESTIMATE OF THE AMOUNT SPENT DURING EACH OF THE LAST TWO FISCAL YEARS ON RESEARCH AND DEVELOPMENT ACTIVITIES, AND IF APPLICABLE, THE EXTENT TO WHICH THE COST OF SUCH ACTIVITIES ARE BORNE DIRECTLY BY CUSTOMERS
There were no research and development costs incurred by the Company during the calendar years ended December 31, 1996 and 1995.
COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS (FEDERAL, STATE, AND LOCAL)
There are no foreseeable adverse effects on the present or contemplated business operations resulting from environmental laws, rules, or regulations.
NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES
As of December 31, 1996, the Company had 13 full-time and total employees.
Item 2.
Item 2. DESCRIPTION OF PROPERTY
The Company leases its principal executive and operating offices at 643 West Crosstown Parkway, Kalamazoo, Michigan, which is comprised of 5,600 square feet.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company is not the subject of any material legal proceeding, and to the knowledge of management, no proceedings are presently contemplated against the Company by any federal, state, or local governmental agency.
To the knowledge of management, no director or executive officer of the Company is party to any legal proceeding in which it may have an interest adverse to the Company.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during 1996.
PART II
Item 5.
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is listed on the "Electronic Bulletin Board" of the NASD. The stock activity for the calendar years 1996 and 1995 is summarized by quarter below:
1996 1996 1996 1996 1995 1995 1995 1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ------- ------- ------- ------- ------- ------- ------- -------
HIGH $1.13 $0.97 $0.81 $0.81 $0.71 $0.50 $0.41 $0.77 LOW $0.63 $0.60 $0.41 $0.56 $0.37 $0.18 $0.25 $0.25
These bid prices are quotations of broker-dealers that reflect inter-dealer prices, without retail mark-up, mark- down or commission any may not represent actual transactions.
HOLDERS
The number of record holders of the Company's common stock as of December 31, 1996, was 299. This number does not include an indeterminate number of stockholders whose shares are held by brokers in street name.
DIVIDENDS
There are currently present material restrictions that limit the ability of the Company to pay dividends on its common stock as it has a deficit in its stockholders' equity. The Company has not paid any dividends with respect to its common stock nor does it intend to do so in the foreseeable future.
Item 6.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CALENDAR YEARS ENDED DECEMBER 31, 1996 AND 1995
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 1996, were $724,032 as compared to $1,276,757 for the year ended December 31, 1995. When analyzed by product category, revenues of software development services to IBM were $0 in 1996, as compared to $978,000 in 1995 as the contract with IBM expired at the end of 1995. Revenues from facilities management services were $120,000 in 1996 and $149,000 in 1995 as the contract with the Greater Kalamazoo Association of Realtors expired in October 1996. The new Internet products accounted for revenues of $563,000 in 1996 and $96,000 in 1995 as new products were being introduced to the market.
Cost of revenues decreased by $101,000, as compared to 1996. The primary cause for this reduction was the closing of the Phoenix office and the termination of the employees at that location during the first quarter of 1995.
General and administrative expenses increased by $175,000 as compared to 1995. The primary cause for this increase was its accrual of a commission of $250,000 to a former exclusive distributor of the Company's Internet products to release this distributor from it's exclusive contract.
Interest expenses decreased by $92,000 due to the conversion of vendor notes payable in the amount of $597,000 into common stock during late 1995.
During the year ended December 31, 1995, it was determined that the Company would not be able to provide the additional funding necessary to develop, market, deploy and maintain its previously capitalized computer software product named Embarc. This failure to obtain financing has resulted in the write-off of the development costs of the product in the amount of $2,151,000.
In addition, the Company has determined that the carrying amount of a trademark which it acquired at a cost of $225,000 and the related inventory in the amount of approximately $107,000 for its Career/NET product could not be recovered through future operations. Accordingly, the Company wrote off these amounts.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of," the Company assessed the expected recoverability of the carrying amount of the trademark and related inventory discussed above and, due to significant changes in the extent to which these assets were anticipated to be used, it recognized an impairment loss measured as the amount by which the carrying amount of the assets exceeded the expected discounted future cash flows.
During 1995, the Company issued 12,400,000 shares of unregistered common stock to certain officers and key employees in recognition of outstanding service performed during a time of financial instability and severe hardship. Although at the time of issuance, there was no active market in the Company's common stock and there was a deficit in stockholders' equity, an accounting value of $0.20 per share was assigned based upon subsequent cash purchases of the stock. The recipients are restricted in their ability to sell or otherwise transfer the shares within a time frame of two to three years from the date of issuance.
FINANCIAL CONDITION AND LIQUIDITY
The Company's primary need for capital has been to invest in computer software development. As of December 31, 1996, the Company's working capital deficit was $1,765,000, as compared to a deficit of $897,000 at December 31, 1995. The resulting increase in working capital deficit is primarily from sales volumes failing to be reached under its distribution agreements for its Internet products, together with a lack of sales of additional products and services.
During February, 1997, the Company signed an agreement to provide development and training of enhanced internet products for HBO & Company. This customer has also committed to purchase an additional $200,000 of Internet products by the end of 1997. In addition, IMS during the first quarter of 1997 has signed non-exclusive distribution agreements with various IBM Managing Industry Remarketers ("MIR's") in the United States. These MIR's provide access to hundreds of software distributors through which I/NET's products can be sold. These agreements are in addition to worldwide agreements signed during the fourth quarter of 1996.
During February, 1997, the Company was awarded IBM's highest recognition for development of Commerce Server/400 by IBM's Partners in Development Program as The AS/400 1996 Product of the Year. This honor was bestowed at IBM's annual Business Partner's Executive Conference, which was attended by 6,000 international guests.
The Company believes that the additional sales provided by the above mentioned agreements, the continued development of new products, together with the renegotiation of its defaulted debt, should provide the Company with sufficient working capital to fund its needs for 1997. However, there can be no assurance these activities will be successful.
Item 7.
Item 7. FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants............................20 Consolidated Balance Sheets as of December 31, 1996 and 1995..................21 Consolidated Statements of Operations for the years ended December 31, 1996 and 1995......................................................................22 Consolidated Statements of Stockholders' Equity (Capital Deficit) for the years ended December 31, 1996 and 1995..............................................23 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995......................................................................24 Summary of Accounting Policies.............................................25-26 Notes to Consolidated Financial Statements.................................27-35
Item 8.
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 9.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, nature of all position, any offices held by all directors and executive officers of the Company for the calendar year ended December 31, 1996, and to the date hereof, and the period or periods during which each such director or executive officer has served in their respective positions. Position Date of Election or Name Held Designation
James C. Knapp* Chairman of the 1986 Board of Directors
Stephen J. Markee* President, CEO, 1985 Director, 1986 and CFO 1995
Paul A. Bertoldi* Vice President 1989 Systems Development
* These individuals presently serve in the capacities indicated opposite their respective names.
TERM OF OFFICE
The terms of office of the current directors shall continue until the annual meeting of stockholders, which has been scheduled by the Board of Directors to be held on the third Friday in May of each year; the annual meeting of the Board of Directors immediately follows the annual meeting of stockholders, at which executive officers for the coming year are elected.
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BUSINESS EXPERIENCE
James C. Knapp, Chairman. Mr. Knapp, one of I/NET's initial founders, is 46 years of age, and received a BBA Degree from the University of Maryland in 1972. He began his computer education at the age of 15 in a special program sponsored by IBM, and served in the United States Air Force as a teacher for missile computer guidance systems. He has been listed in the ACR Directory of Top Computer Executives since 1981, and was inducted into the "Who's Who in the Computer Industry" in 1990. His efforts in digital imaging and voice recognition have been recognized internationally. Mr. Knapp has been a featured speaker at the Massachusetts Institute of Technology and the Harvard Business School.
Stephen J. Markee, President, CEO and CFO. Mr. Markee is 51 years of age. He received a BS Degree from Ferris State University in 1970 and an MBA from Western Michigan University ("WMU") in 1971. He is a licensed certified public accountant in the state of Michigan. Mr. Markee served in the United States Army during the Vietnam conflict, and was decorated and medically retired in 1968. After completing his education, he served as assistant Auditor General for the state of Michigan before joining WMU as Director of Internal Auditing in 1976. While at WMU, he also taught accounting classes in the MBA program. He then changed directions, from public to private sector, as Vice President of Planning and Control for a division of Standex International Corporation, where he was responsible for information systems, accounting, and human relations. He joined I/NET in 1986 as President and CEO. He has guided I/NET to a successful equity partnership with IBM, and engineered the sale of intellectual property rights to IBM in 1989. Mr. Markee has served on the Board of Directors of the Kalamazoo County Chamber of Commerce, Chairman of the Kalamazoo County Convention and Visitors Bureau, Past President of the local chapter of the Institute of Management Accountants, and President of the Parchment Schools Foundation. He is a frequent speaker to civic and business groups, and has appeared on the Financial News Network ("FNN").
Paul A. Bertoldi, Vice President, Systems Development. Mr. Bertoldi is 34 years of age. He received a BBA Degree from Western Michigan University ("WMU") in 1984, and a MBA Degree from WMU in 1992. He graduated magna cum laude and was named a Presidential Scholar as one of the top undergraduates of WMU. Since becoming one of I/NET's first employees, Mr. Bertoldi has helped design the architecture of state-of-the-art imaging and voice recognition systems in the field of real estate,medical imaging, and document imaging. Mr. Bertoldi is currently involved in the development of application in multi-media and pen computing. He is an active member in both the Data Processing Management Association ("DPMA") and Association of Computer Machinery ("ACM"). In 1988, he was recognized as a Certified Data Processor by the Association for Certification for Computer Professionals.
FAMILY RELATIONSHIPS
With the exception that Mr. Knapp and Mr. Bertoldi are brother-in-laws, there are no family relationships between any directors or executive officers of the Company, either by blood or by happenstance of marriage.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Under the Delaware General Corporation Law, a corporation has the power to indemnify any person who is made a party to any civil, criminal, administrative or investigative proceeding, other than action by or any right of the corporation, by reason of the fact that such person was a director, officer, employee or agent of the corporation, against expenses, including reasonable attorney's fees, judgments, fines and amounts paid in settlement of any such actions; provided, however, in any criminal proceeding, the indemnified person shall have had no reason to believe the conduct committed was unlawful. Regardless, it is the position of the Securities and Exchange Commission that indemnification against liabilities for violation of the federal securities law, rules and regulations is against public policy.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
To the knowledge of management, during the past five years, no present or former director, executive officer or person nominated to become a director or an executive officer of the Company:
- Filed a petition under the federal bankruptcy laws or any state insolvency law, nor had a receiver, fiscal agent or any partnership in which he or she was a general partner at or within two years before the time of such filing, or any corporation or association of which he or she was an executive officer at or within two years before the time of such filing;
- Was convicted in a criminal proceeding or named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
- Was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting, the following activities:
- Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, associated person of any of the foregoing, or as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
- Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;
- Was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described above under this Item, or to be associated with person engaged in any such activity;
- Was found by a court of competent jurisdiction a civil action or by the Securities and Exchange Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Securities and Exchange Commission has not been subsequently reversed, suspended or vacated.
- Was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated.
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Item 10.
Item 10. EXECUTIVE COMPENSATION
Cash Compensation
The following table sets forth the aggregate compensation paid by the Company for services rendered during the periods indicated: ================================================================================ SUMMARY COMPENSATION TABLE ================================================================================
Annual Compensation
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (a) (b) (c) (d) (e) - -------------------------------------------------------------------------------- NAME AND ........................ Year Ended $ Salary $ Bonus Other PRINCIPAL POSITION ............. Dec. 31, Annual Compensa- tion - -------------------------------------------------------------------------------- James C. Knapp .................. 1996 $130,208 -0- -0- Chairman ...................... 1995 $ 36,458 -0- -0-
Stephen J. Markee ............... 1996 $130,208 -0- -0- President, CEO, ............... 1995 $ 36,458 -0- -0- CFO and Director
Brian W. Wood ................... 1995 $ 9,375 -0- -0- Former Vice President, Finance
Paul A. Bertoldi ................ 1996 $ 72,917 -0- -0- Vice President, ............... 1995 $ 61,250 -0- -0- Systems
- -------------------------------------------------------------------------------- Year (f)* (g) (h) (i)** ended ---- --- --- ----- NAME AND ................... Restricted Options/SAR's LTIP All other PRINCIPAL POSITION ........ Stock Award (#) Payouts Compensa- tion - --------------------------------------------------------------------------------
James C. Knapp ........1996 -0- -0- -0- $8,104 Chairman ............1995 $1,000,000 -0- -0- $5,445
Stephen J. Markee .....1996 -0- -0- -0- $6,420 President, CEO, .....1995 $1,000,000 -0- -0- $5,738 CFO and Director
Brian W. Wood .........1995 -0- -0- -0- $6,989 Former Vice President, Finance
Paul A. Bertoldi ......1996 -0- -0- -0- $5,564 Vice President, .....1995 $40,000 -0- -0- $5,254 Systems - -------------------------------------------------------------------------------- *See the caption "All Other Compensation" herin for restricted stock award **Approximate value of health, dental and life insurance paid by the Company ================================================================================
BONUSES AND DEFERRED COMPENSATION
None.
Compensation Pursuant to Plans
The Company has an Incentive Stock Option Plan ("ISOP"). All full-time employees are eligible under the plan to receive shares that vest 20% a year and must be exercised within 10 years from the award date or within three months of termination of employment. The exercise price is determined by the market price at the date of award. The ISOP reserved 582,255 shares of common stock as an incentive for directors, executive officers and employees. In January, 1994, the Company allocated 280,279 shares at $2.50 per share to current employees who were not shareholders. Six thousand (6,000) shares lapsed during 1994, 212,477 shares lapsed during 1995, and 99,936 shares lapsed during 1996. The outstanding shares total 42,500 leaving 539,755 shares available to be granted and to be exercisable at market price on the date of such grant.
PENSION TABLE
The Company has a profit-sharing and defined contribution pension plan covering substantially all employees. Under the plan, employees may make tax-deferred voluntary contributions which, at the direction of the Company's Board of Directors, may be matched within certain limits, by the Company. In addition, the Company may make additional discretionary contributions to the plan as profit-sharing contributions. All contributions to the plan are limited by applicable Internal Revenue Code regulations. There were no Company contributions charged against operations during the last two calendar years ended December 31, 1996 and 1995.
The Company does not follow a practice of paying post-retirement benefits to its former employees. Therefore, the provisions of Statement of Financial Accounting Standards No. 106 "Employers" Accounting for Post- Retirement Benefits Other Than Pensions" will have no effect on the Company
OTHER COMPENSATION
During 1995, the Company issued 12,400,000 shares of unregistered common stock to certain officers and key employees in recognition of outstanding service performed during a time of financial instability and severe hardship. Although at the time of issuance, there was not an active market in the Company's common stock and there was a deficit in stockholders' equity, an accounting value of $0.20 per share was assigned based upon subsequent cash purchases of the stock. The recipients are restricted in their ability to sell or otherwise transfer the shares within a time frame of two to three years from the date of issuance.
Of the shares awarded, Messieurs Knapp and Markee received 5,000,000 each while Mr. Bertoldi received 200,000 shares.
COMPENSATION OF DIRECTORS
See Cash Compensation of this Item.
EMPLOYMENT CONTRACTS
There are no employment contracts for any employees or officers as of December 31, 1996.
TERMINATION OF EMPLOYMENT AND CHANGES OF CONTROL ARRANGEMENT
There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person named in the Summary Compensation Table set out above which would in any way result in payments to any such person because of his or her resignation, retirement or other termination of such person's employment with the Company or its subsidiaries, or any change in control of the Company.
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Item 11.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the share holdings of the Company's directors and executive officers and those persons or entities who own more than 5% of the Company's common stock.
Amount and Nature of Name Address Beneficial Ownership Percent of Class - ------------------------------------------------------------------------------
Executive Officers and Directors
Paul A. Bertoldi Kalamazoo, MI 410,699 1.33%
James C. Knapp Kalamazoo, MI 5,692,719 18.46%
Stephen J. Markee Richland, MI 6,039,187 19.58% ------------------------------------
Total 12,142,605 39.37% ================================================================================
Owners of 5%
Steven Wallace Beverly Hills, CA 1,844,000 5.98%
================================================================================ CHANGES IN CONTROL
To the knowledge of management, there are no present arrangements or pledges of securities of the Company which may result in a change in control of the Company.
Item 12.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
Except as stated below, during the last two calendar years ended December 31, 1996 and 1995, there were no material transactions or any currently proposed transaction, or series of similar transactions, to which the Company or any of its subsidiaries was or is to be a party, in which the amount involved exceeded $60,000 and in which any director or executive officer, or any security holder who is known to the Company to own of record of beneficially more than 5% of any class of the Company's common stock, or any member of the immediate family of any of the foregoing persons, had an interest. See the caption "Dependence of One or a Few Major Customers" of the caption "Business" of Item 1, for information concerning contractual services provided to IBM, a stockholder of the Company, which services were the result of competitive bids, and Note 5 to the Consolidated Financial Statements.
CERTAIN BUSINESS RELATIONSHIPS
Except as stated below, during the last two calendar years ended December 31, 1996 and 1995, there were no material transactions or any currently proposed transactions, or series of similar transactions, to which the Company or any of its subsidiaries was or is to be a party, in which the amount involved exceeded $60,000 and in which any director or executive officer, or any security holder who is known to the Company to own of record of beneficially more than 5% of any class of the Company's common stock, or any member of the immediate family of any of the foregoing persons, had an interest. Services were provided during 1995 to IBM as outlined in Item 2, "Dependence on One or a Few Major Customers."
INDEBTEDNESS OF MANAGEMENT
James C. Knapp, Chairman of the Board of Directors and Stephen J. Markee, President, CEO and CFO, have loaned the Company funds for working capital. These funds were provided at an interest rate of prime plus 2%. The balance outstanding at December 31, 1996 was $390,500. At December 31, 1995, the Company owed $83,500 to Mr. Markee. With the exception of this transaction, there were no material transactions to which the Company or any of its subsidiaries was or is to be a party, in which the amount involved exceeded $60,000 and in which any director or executive officer, or any security holder who is known to the Company to own or record of beneficially more than 5% of any class of the Company's common stock, or any member of the immediate family of any of the foregoing persons, had an interest during the last two calendar years ended December 31, 1995 and 1994.
TRANSACTIONS WITH PROMOTERS
During the last two calendar years ended December 31, 1996 and 1995, there were no material transactions or any currently proposed transactions, or series of similar transactions, to which the Company or any of its subsidiaries was or is to be a party, in which the amount involved exceeded $60,000 and in which any promoter, founder, or member of their immediate family of any of the foregoing persons, had an interest.
Item 13.
Item 13. REPORTS ON FORM 8-K AND EXHIBITS
Reports on Form 8-K:
None
EXHIBITS:
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly authorized.
I/NET, Inc.
Date: March 28, 1997 By: /s/ Stephen J. Markee Stephen J. Markee, Director President, CEO, and CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Date: March 28, 1997 By /s/ Stephen J. Markee Stephen J. Markee, Director President, CEO, and CFO
Date: March 28, 1997 By: /s/ James C. Knapp James C. Knapp, Chairman of the Board of Directors
Date: March 28 ,1997 By: /s/ Paul A. Bertoldi Paul A. Bertoldi, Vice President Systems Development
I/NET, Inc.
Consolidated Financial Statements Years Ended December 31, 1996 and 1995 --------------------------------------
I/NET, Inc.
Report of Independent Certified Public Accountants 20
Financial Statements:
Consolidated Balance Sheets 21
Consolidated Statements of Operations 22
Consolidated Statements of Stockholders' Equity 23
Consolidated Statements of Cash Flows 24
Summary of Accounting Policies 25 & 26
Notes to Consolidated Financial Statements 27 - 35
Report of Independent Certified Public Accountants
Board of Directors I/NET, Inc. Kalamazoo, Michigan
We have audited the accompanying consolidated balance sheets of I/NET, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity (capital deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of I/NET, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 13 to the financial statements, the Company has suffered recurring losses from operations, has a significant working capital deficit and requires additional capital to continue its product development. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP Certified Public Accountants
January 17, 1997
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December 31, 1996 1995 - --------------------------------------------------------------------------------
Assets (Note 3)
Current:
Cash and cash equivalents $ 20,517 $ 682,828
Receivables:
Trade 28,982 12,300
Note - 30,000
Billed contracts (Note 5) - 40,000 - -------------------------------------------------------------------------------- Total Current Assets 49,499 765,128
Office Furniture and Equipment, less accumulated depreciation of $482,553 and $446,095 62,392 85,142
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$111,891 $850,270
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I/NET, Inc.
Consolidated Balance Sheets
December 31, 1996 1995 - --------------------------------------------------------------------------------
Liabilities and Capital Deficit
Current Liabilities: Accounts payable $ 142,605 $ 358,958 Accruals: Commissions (Note 1) 250,000 - Other 179,698 258,124 Advances from stockholders (Note 2) 119,778 119,778 Current maturities of long-term debt (Note 3) 1,122,000 925,000 - --------------------------------------------------------------------------------
Total Current Liabilities 1,814,081 1,661,860
Long-Term Debt, less current maturities (Note 3) 494,642 253,190 - --------------------------------------------------------------------------------
Total Liabilities 2,308,723 1,915,050 - --------------------------------------------------------------------------------
Commitments and Contingency (Notes 1, 8 and 11)
Capital Deficit (Notes 4 and 9):
Common stock, $.001 par value - shares authorized 50,000,000; issued and outstanding 30,837,652 in 1996 and 1995 30,838 30,838
Additional paid-in capital 11,836,874 11,836,874 Deficit (14,064,544) (12,932,492) - -------------------------------------------------------------------------------- Total Capital Deficit (2,196,832) (1,064,780) - -------------------------------------------------------------------------------- $ 111,891 $ 850,270 - --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
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I/NET, Inc.
Consolidated Statements of Operations
Year ended December 31, 1996 1995 - --------------------------------------------------------------------------------
Revenues (Note 5) $ 724,032 $ 1,276,757
Cost of Revenues 729,070 830,449 - --------------------------------------------------------------------------------
Gross profit (loss) (5,038) 446,308
Selling, General, and Administrative Expenses 1,060,402 886,057
Special Charges (Note 12) - 4,962,604 - --------------------------------------------------------------------------------
Loss from operations (1,065,440) (5,402,353)
Interest Expense - net of interest income $12,888 in 1996 and $7,084 in 1995 66,612 159,149 - --------------------------------------------------------------------------------
Net Loss $ (1,132,052) $ (5,561,502) - --------------------------------------------------------------------------------
Net Loss per Common Share $ (0.04) $ (0.37) - --------------------------------------------------------------------------------
Weighted Average Number of Common Shares Outstanding 30,837,652 15,199,191 - --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
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I/NET, Inc.
Consolidated Statements Of Stockholders' Equity (Capital Deficit)
Common Stock Additional ------------------------- Paid-in Shares Amount Capital Deficit Total - -------------------------------------------------------------------------------- Balance, January 1, 1995
11,978,571 $ 11,979 $ 7,972,407 $ (7,370,990) $ 613,396
Issuance of common stock: For accounts & notes payable
2,659,081 2,659 640,667 - 643,326
For compensation
12,400,000 12,400 2,467,600 - 2,480,000
For cash
3,800,000 3,800 756,200 - 760,000
Net loss for the year - - - (5,561,502) (5,561,502) - --------------------------------------------------------------------------------
Balance, December 31, 1995
30,837,652 30,838 11,836,874 (12,932,492) (1,064,780)
Net loss for the year
- - - (1,132,052) (1,132,052) - --------------------------------------------------------------------------------
Balance, December 31, 1996
30,837,652 $ 30,838 $ 11,836,874 $ (14,064,544) $ (2,196,832) - --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
Year ended December 31, 1996 1995 - --------------------------------------------------------------------------------
Operating Activities (Note 10): Net loss (1,132,052) $ (5,561,502) Depreciation and amortization 36,458 93,855 Provision for bad debts - 154,805 Write-down of miscellaneous other assets - 35,015 Special charges (Note 12) - 4,962,604 Changes in assets and liabilities: Receivables 23,318 62,028 Inventories - 20,787 Prepaid expenses and other assets - 47,282 Accounts payable 7,140 (64,042) Accruals 207,220 214,456
- -------------------------------------------------------------------------------- Cash Used in Operating Activities (857,916) (34,712) - --------------------------------------------------------------------------------
Investing Activities (Note 10): Proceeds from note receivable 30,000 97,600 Developed computer software - (44,564) Capital expenditures (13,708) - - --------------------------------------------------------------------------------
Cash Provided by Investing Activities 16,292 53,036 - -------------------------------------------------------------------------------- Financing Activities (Note 10): - -------------------------------------------------------------------------------- Proceeds from issuance of notes to stockholders 300,000 8,500 Proceeds from issuance of common stock - 760,000 Proceeds from issuance of notes payable - 100,000 Principal payments on long-term debt (120,687) (221,114) - --------------------------------------------------------------------------------
Cash Provided by Financing Activities 179,313 647,386 - --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (662,311) 665,710
Cash and Cash Equivalents, beginning of year 682,828 17,118 - --------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 20,517 $ 682,828 - --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
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I/NET, Inc.
Summary of Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company, I/NET, Inc., ( a Delaware Corporation) and its wholly- owned subsidiary I/NET, Inc. (a Michigan Corporation). Only the subsidiary remains an active Company and therefore the consolidated financial statements presented within are those of the subsidiary.
Description of the Business
Prior to 1996, the Company was engaged in the business of providing a wide range of contract research systems planning, development and implementation services, on a fee basis, to public and private sector clients. The Company, during 1996, further developed and began to market Internet computer software products. It's major customer was International Marketing Strategies (IMS) in 1996 and International Business Machines (IBM) in 1995. (See Note 5)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Office Furniture,Equipment,and Depreciation
Office furniture and equipment are stated at cost. Depreciation is computed principally by the straight-line method for financial reporting purposes over the estimated useful lives of the assets and by accelerated methods for tax purposes.
Taxes on Income
Deferred income taxes are recorded to reflect the future tax consequences of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts at year end.
See accompanying notes to consolidated financial statements.
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I/NET, Inc.
Summery of Accounting Policies
Developed Computer Software
Software development costs are accounted for in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Cost of Computer Software To Be Sold, Leased or Otherwise Marketed." Software development costs and certain product enhancements, when significant, are capitalized subsequent to the establishment of technological feasibility for the product and prior to the product's general release to customers. Costs incurred prior to technological feasibility or subsequent to the product's general release to customers, as well as selling, general, and administrative costs associated with the products, are expensed as incurred. See Note 12 for write-off of capitalized computer software costs in 1995.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, receivables, notes payable, accounts payable and long-term debt. Due to the short-term nature of the items, other than long-term debt and the variable interest rates on a substantial portion of the long-term debt, management estimates that the carrying amounts of the Company's financial instruments approximate their fair values at December 31, 1996.
Revenue Recognition
Revenues from the sale of the Company's Internet products are recognized when the product has been accepted by the customer. The Company records revenue for its long-term contracts on the percentage-of-completion basis. Under this method, revenues are determined by comparing costs incurred to date to the estimated total costs for the contract. The proportionate amounts of contract revenue are then recorded based on this percentage of completion of costs.
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising expenses were approximately $12,000 and $50,000 in 1996 and 1995, respectively.
Loss Per Share
Loss per share amounts have been calculated using the weighted average number of common shares outstanding, for the respective periods. The antidilutive effect of the Company's outstanding options and warrants is excluded from the loss per share calculations.
See accompanying notes to consolidated financial statements.
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I/NET, Inc.
Notes to Consolidated Financial Statements
1. Commissions
During 1996, the Company agreed to release a distributor from it's exclusive contract to distribute certain I/NET products. In exchange for this release, I/NET agreed to pay a commission to the distributor of 7.5% of sales of certain I/NET products sold through September 30, 1999 but at a minimum amount of $250,000 and a maximum amount of $500,000. A commission payable amount of $250,000 has been recorded as of December 31, 1996 as there has not been any commissionable sales of these products to date.
2. Short-Term Advances from Stockholders
Advances from stockholders consist of:
1996 1995 - -----------------------------------------------------------------------------
Non-interest bearing notes payable to stockholders, due on demand $ 29,278 $ 29,278
Stockholders' advances bearing interest at the prime rate plus 2% (effectively 10.25% at December 31, 1996), due on demand 90,500 90,500 - -----------------------------------------------------------------------------
$ 119,778 $ 119,778 - ----------------------------------------------------------------------------- 3. Long-Term Debt Long-term debt consists of:
1996 1995 - ----------------------------------------------------------------------------
Notes payable to vendors (see below) $ 1,134,304 $ 927,929
Notes payable to bank with monthly payments of $5,000, including interest at 1.5% above the bank's prime rate (effectively 9.75% at December 31, 1996), with final payment due in December, 1997. The note is collateralized by all of the Company's assets 50,375 102,261
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I/NET, Inc.
Notes to Consolidated Financial Statements
1996 1995 - --------------------------------------------------------------------------------
Note payable for a trademark, with monthly payments of $1,500 including interest at the prime rate (8.25% at December 31, 1996) with the balance due February 15, 1997 $ 131,963 $ 148,000
Notes payable to stockholders bearing interest at 8% and due in December, 2001 300,000 - - ----------------------------------------------------------------------------
1,616,642 1,178,190 Less current maturities 1,122,000 925,000 - ----------------------------------------------------------------------------
Total Long-Term Debt $ 494,642 $ 253,190 - ----------------------------------------------------------------------------
Notes payable to various vendors totaling $1,134,304 are due in various installments and at varying interest rates.
Two notes totaling $440,655 are due on demand. These notes bear interest at the prime rate plus 2% (effectively 10.25% at December 31, 1996).
The Company is in default on two notes totaling $437,974 and is renegotiating alternative repayment terms with the noteholders.
Another vendor note in the amount of $59,694 is due in monthly installments of 5% of the previous month's cash receipts (as defined) but at a minimum rate of $2,000 bi- monthly and bears interest at the prime rate plus 2%. Final payment, assuming minimum payments only, is due September 2004.
Another vendor note in the amount of $42,155 is due in monthly installments of $2,998 including interest at 11%. Final payment is due March 1998.
Another vendor note in the amount of $153,826 is due in monthly installments of 5% of the previous month's cash receipts (as defined) but at a minimum rate of $3,000 monthly and bears interest at 10%. Final payment, assuming minimum payments only, is due July 2002.
Aggregate maturities of long-term debt over the next five years assuming repayment of stockholders' advances (Note 2) and notes are as follows:
1997 $ 1,122,000 1998 $ 40,000 1999 $ 34,000 2000 $ 37,000 2001 $ 341,000
4. Stock Warrants
During prior years, the Company sold and issued approximately 6,000,000 shares of its common stock for cash, trademark, and extinguishment of debt. In connection with the issuances, the Company issued warrants to the purchasers of the common stock to acquire up to 2,039,285 shares of common stock at prices ranging from $.25 to $2.40 per share. The warrants expire in 1997. In connection with these sales, underwriters were also issued warrants for 1,145,714 shares of common stock at prices ranging from $0.29 to $2.10 and are exercisable for five years, expiring in 1999. All warrants were exercisable at December 31, 1996.
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I/NET, Inc.
Notes to Consolidated Financial Statements
5. Related Party Transactions/Major Customers The Company provided Internet products, facilities management services and software development services to a few major customers as follows:
1996 1995 - ----------------------------------------------------------------------------
Internet Products: International Marketing Strategies - (IMS) $ 346,000 $ 50,000 SUPPORT NET, INC. 158,000 - - ----------------------------------------------------------------------------
$ 504,000 $ 50,000 - ----------------------------------------------------------------------------
Facilities Management Services: Greater Kalamazoo Association of Realtors $ 120,000 $ 149,000 - ----------------------------------------------------------------------------
Software Development: International Business Machines (IBM) $ - $ 978,000 - ----------------------------------------------------------------------------
IBM is also a minority stockholder in the Company and $40,000 was due from it as of December 31, 1995.
6. Taxes on Income Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
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I/NET, Inc.
Notes to Consolidated Financial Statements
Significant components of the Company's deferred tax assets as of December 31, are as follows:
1996 1995 - ----------------------------------------------------------------------------
Deferred Tax Assets: Accruals $ 99,000 $ 15,000 Deferred revenue - 13,000 Depreciation and amortization 12,000 19,000 Trademark 66,000 100,000 Net operating loss carryforwards 3,624,000 2,332,000 Tax credit carryforwards 42,000 42,000 Capital loss carryforwards 24,000 24,000 - ----------------------------------------------------------------------------
Total Deferred Tax Assets 3,867,000 2,545,000
Valuation Allowance (3,867,000) (2,545,000) - ----------------------------------------------------------------------------
$ - $ - - ----------------------------------------------------------------------------
As of December 31, 1996, the Company had a net operating loss carryforward of approximately $10,659,000 and investment tax credit carryforwards of approximately $42,000 available to reduce future taxable income and taxes, respectively. These carryforwards expire from 1998 through 2011.
7. Employee Benefit Plan
The Company has a profit sharing and defined contribution pension plan covering substantially all employees. Under the plan, employees may make tax deferred voluntary contributions which, at the discretion of the Company's Board of Directors, may be matched within certain limits by the Company. In addition, the Company may make additional discretionary contributions to the plan as profit sharing contributions. All contributions to the plan are limited by applicable Internal Revenue Code regulations. There were no Company contributions charged against operations in 1996 or 1995.
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I/NET, Inc.
Notes to Consolidated Financial Statements
8. Operating Leases
The Company leases its facilities and certain equipment under non- cancelable operating leases. Rental expense under these leases was approximately $138,000 for the year ended December 31, 1996 and $195,000 in 1995. Future minimum annual lease payments subsequent to December 31, 1996 are as follows:
1997 $ 88,000 1998 $ 84,000 1999 $ 80,000 2000 $ 80,000 2001 $ 59,000
9. Incentive Stock Option Plan
The Company maintains an incentive stock option plan that provides for the granting of options to officers and other key employees at an exercise price not less than 100% of the fair market value on the date of the grant. Twenty percent of the options become exercisable each year following the date they are granted, and can remain outstanding for five years following the day they become fully vested. Changes in options outstanding are summarized as follows:
Option Price Shares Per Share - ----------------------------------------------------------------------------
January 1, 1995 351,913 $ 0.18-2.50 Lapsed (212,477) $ 0.18-2.50 - ----------------------------------------------------------------------------
December 31, 1995 139,436 $ 0.18-2.50 Lapsed (96,936) $ 0.18-2.50 - ----------------------------------------------------------------------------
December 31, 1996 42,500 $ 2.50 - ----------------------------------------------------------------------------
Of the 351,913 options outstanding at January 1, 1995, all but 77,634 had an exercise price of $2.50. The 77,634 had been granted to one employee, had an exercise price of $.18 and lapsed in 1996.
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I/NET, Inc.
Notes to Consolidated Financial Statements
At December 31, 1996, 582,255 shares of common stock are reserved for the incentive stock option plan and 17,000 options were vested and exercisable. The remaining contractual life of the 42,500 shares outstanding is seven years.
10. Supplemental Disclosure of Cash Flow Information
Noncash investing and financing activities are summarized as follows:
1996 1995 ---- ----
Issuance of commonstock for retirement of debt $ - $ 597,000 - -------------------------------------------------------------------------------- Conversion of accounts payable into vendor - - notes payable $ 223,000 $1,417,000 - -------------------------------------------------------------------------------- Conversion of accrued interest payable into vendor notes payable $ 36,000 $ - - --------------------------------------------------------------------------------
Interest paid for the years ended December 31, 1996 and 1995 was $78,000 and $11,000, respectively. The Company paid no income taxes during 1996 and 1995.
11. Litigation
The Company is involved in various legal actions arising from the normal course of business. Management does not anticipate any material losses as a result of these proceedings.
12. Special Charges
During the year ended December 31, 1995, it was determined that the Company would not be able to provide the additional funding necessary to develop, market, deploy and maintain its previously capitalized computer software product named Embarc. This failure to obtain financing has resulted in the write-off of the development costs of the product in the amount of $2,151,000.
In addition the Company has determined that the carrying amount of a trademark which it acquired at a cost of $225,000 and related inventory in the amount of approximately $107,000 for its Career/NET product could not be recovered through future operations. Accordingly, the Company wrote off these amounts. The product had not reached the market acceptance as anticipated.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of," the Company assessed the expected recoverability of the carrying amount of the trademark and related inventory discussed above and, due to significant changes in the extent to which those assets were anticipated to be used, it recognized an impairment loss measured as the amount by which the carrying amount of the assets exceeded the expected discounted future cash flows.
During 1995, the Company issued 12,400,000 shares of unregistered common stock to certain officers and key employees in recognition of outstanding service performed during a time of financial instability and severe hardship. Although at the time of issuance, there was not an active market in the Company's common stock and there was a deficit in stockholders' equity, an accounting value of $0.20 per share was assigned based upon subsequent cash purchases of the stock. The recipients are restricted in their ability to sell or otherwise transfer the shares within a time frame of two to three years from the date of issuance.
Special charges consist of the following for the year ended December 31, 1995:
Capitalized computer software costs $ 2,151,000 Trademark 225,000 Inventory 107,000 Stock award 2,480,000 - ----------------------------------------------------------------------------
Total $ 4,963,000 - ----------------------------------------------------------------------------
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I/NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. CONTINUED EXISTENCE
The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Although the Company has suffered recurring losses from operations, has a significant working capital deficit and requires additional capital to continue its product development, management believes the Company will continue as a going concern. Management is actively marketing its new products which would enable the Company to meet its current obligations and provide additional funds for continued new product development. In addition, management is currently negotiating several additional contracts for its services and products. However, there can be no assurance these activities will be successful.
PERIOD-TYPE 12 MONTH FISCAL-YEAR-END DEC-31-1996 PERIOD-END DEC-31-1996 CASH 20,517 SECURITIES 0 RECEIVABLES 28,982 ALLOWANCES 0 INVENTORY 0 CURRENT-ASSETS 49,499 PP&E 544,945 DEPRECIATION 482,553 TOTAL-ASSETS 111,891 CURRENT-LIABILITIES 1,814,081 BONDS 0 PREFERRED-MANDATORY 0 PREFERRED 0 COMMON 30,838 OTHERSE 11,836,874 TOTAL-LIABILITY-AND-EQUITY 111,891 SALES 724,032 TOTAL REVENUES 724,032 CGS 729,070 OTHER EXPENSES 1,060,402 LOSS-PROVISION 0 INTEREST-EXPENSE 79,500 INCOME-PRETAX (1,132,052) INCOME-TAX 0 INCOME-CONTINUING (1,132,052) DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET-INCOME (1,132,052) EPS-PRIMARY (.04) EPS-DILUTED (.04)