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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-28065
ISNI.NET, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 58-2489419
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
204 EAST MCKENZIE STREET, UNIT D
PUNTA GORDA, FLORIDA 33950
(Address of principal executive offices)
(941)575-7878
Issuer's telephone number
As of September 30, 2000, there were 26,661,000 shares of common stock
outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
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ISNI.NET, INC.
Table of Contents
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Balance Sheet as of September 30, 2000 (unaudited)
and June 30, 2000 (audited) 3
Statements of Operations for the three-months
ended September 30, 2000 and 1999 (unaudited) 4
Statements of Cash Flows for the three-months
ended September 30, 2000 and 1999 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
(a) Exhibits
(b) Reports on Form 8-K
Signatures 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISNI.NET, INC.
BALANCE SHEET
SEPTEMBER 30, 2000 JUNE 30, 2000
ASSETS (UNAUDITED) (AUDITED)
--------- ---------
Cash $ 3,461 $ 0
Prepaid expenses 15,750 18,750
Deferred offering costs 42,247 0
--------- ---------
Total current assets 61,458 18,750
Premises and equipment, net 84,488 83,131
Deferred tax assets 28,100 23,260
--------- ---------
Total assets $ 174,046 $ 125,141
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Line of credit $ 69,587 $ 18,821
Bank overdraft 0 19,830
Accounts payable 79,810 64,043
Accrued liabilities 2,785 1,840
Deferred revenue 13,033 8,997
Due to shareholder 153,200 143,750
Due to affiliates 23,343 15,842
Current portion of long-term debt 11,593 15,858
--------- ---------
Total current liabilities 353,351 288,981
Long-term debt less current portion due within one year 14,231 17,726
Shareholders' equity:
Preferred stock, par value
$.0001 per share, 20,000,000
shares authorized; no shares
issued and outstanding 0 0
Common stock, par value $.0001 per share,
100,000,000 shares authorized;
26,661,000 shares issued and outstanding 2,666 2,666
Additional paid-in capital 0 0
Accumulated deficit (196,202) (184,232)
Unrealized loss on securities available for sale 0 0
--------- ---------
Total shareholders' equity (193,536) (181,566)
--------- ---------
Total liabilities and shareholders' equity $ 174,046 $ 125,141
========= =========
See accompanying notes to financial statements.
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ISNI.NET, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30
2000 1999
------------ ------------
INCOME
Internet service fees $ 111,395 $ 77,954
Other revenue 48 4,045
------------ ------------
Total revenue 111,443 81,999
------------ ------------
OPERATING EXPENSES
Cost of revenues 37,043 26,552
Advertising 1,127 6,901
Bank and service charges 3,214 2,671
Consulting fees 6,138 0
Depreciation 5,469 5,000
Employee leasing costs 488 13,606
Employee salaries 26,310 0
Rent 2,647 2,546
Other occupancy and office expenses 17,444 4,959
Other expenses 26,366 8,335
------------ ------------
Total operating expenses 126,246 70,570
------------ ------------
Income (loss) from operations (14,803) 11,429
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OTHER DEDUCTIONS
Interest expense 2,007 0
------------ ------------
Income (loss) before taxes (16,810) 11,429
------------ ------------
INCOME TAXES (CREDIT) (4,840) 0
------------ ------------
Net income $ (11,970) $ 11,429
============ ============
INCOME (LOSS) PER SHARES $ 0 $ 0
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 26,661,000 24,844,022
============ ============
See accompanying notes to financial statements.
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ISNI.NET, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net income (loss) $(11,970) $ 11,429
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 5,469 5,000
Deferred income taxes (4,840) 0
Decrease in prepaid expenses 3,000 0
Increase in other assets (42,247) 0
Increase (decrease) in accounts payable
and other liabilities 918 (3,821)
-------- --------
Total adjustments (37,700) 1,180
-------- --------
Net cash provided by (used in) operating activities (49,670) 12,608
-------- --------
Cash flow from investing activities:
Purchase of premises and equipment (6,826) 0
-------- --------
Net cash used in investing activities (6,826) 0
-------- --------
Cash flow from financing activities:
Net borrowings on short-term debt 50,766 0
Net borrowings from (repayments to) affiliates and
stockholders 16,951 (18,424)
Principal payments on capital lease obligations (7,760) 0
Proceeds from issuance of common stock and additional
paid in capital 0 660
-------- --------
Net cash provided by (used in) financing activities 59,957 (17,764)
-------- --------
Increase (Decrease) in cash and cash equivalents 3,461 (5,156)
Cash and cash equivalents, beginning of period 0 5,922
-------- --------
Cash and cash equivalents, end of period $ 3,461 $ 766
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,007 $ 0
======== ========
Capital lease obligation incurred for the
acquisition of new equipment $ 30,923 $ 10,931
======== ========
See accompanying notes to financial statements.
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ISNI.NET, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with instructions to Form 10-QSB. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary have
been made for the fair presentation of the Company's results for the three-month
period ended September 30, 2000, are not necessarily indicative of the results
that may be expected for the year ended June 30, 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
the federal securities laws with respect to our operations, industry, financial
condition, and liquidity. These statements typically include words or phrases
such as " believe," ""will likely result," "expect," "will continue,"
"anticipate," "estimate," "intend," "plan," "project," or similar expressions.
We have based our forward-looking statements on current plans,
expectations, goals, and projections that are subject to numerous assumptions,
risks, and uncertainties. Actual results could differ materially from those
contained in or implied by our statements due to a variety of factors including:
- we may fail to be competitive with existing and new
competitors,
- we may not retain or grow our subscriber base,
- we may or may not be able to adequately respond to
technological developments impacting the Internet,
- financing may not be available to us when needed,
- our largest shareholder may reduce or eliminate his financial
support,
- a significant adverse change in the growth rate of the overall
U.S. economy may occur, such that consumer and corporate
spending are materially impacted and the number of subscribers
who return to our service area during the winter season may
decrease thereby decreasing our potential subscriber base,
- a significant reversal in the trend toward increased usage of
the Internet may occur.
THUS, FORWARD-LOOKING STATEMENTS SHOULD BE VIEWED AS STRATEGIC OBJECTIVES RATHER
THAN ABSOLUTE TARGETS OF FUTURE PERFORMANCE.
OVERVIEW
We are an Internet service provider currently serving individuals and
small businesses primarily in Charlotte County, Florida. We also provide Web
hosting services, a complement to our Internet access business. We offer up to
56K modem access and ISDN (Integrated Digital Service Network) connectivity. As
of September 30, 2000, we served approximately 1,950 subscribers, including
approximately 75 complementary accounts held primarily by employees and
businesses that have generated customers for us and including 24 Web hosting
subscribers. In addition to dial-up Internet access and Web hosting, we provide
other value-added services such as Web page design and Web-server co-location.
The Company's dial-up Internet access and Web hosting are offered in various
price and usage plans designed to meet the needs of our customers.
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STATEMENT OF OPERATIONS
We derive revenue primarily from monthly subscriptions from individuals
for dial-up access to the Internet. Subscription fees vary by billing plan.
Under our current pricing plans, subscribers have a choice of "monthly" billing
if they pay by credit card or "quarterly" billing if they pay by cash or check.
Either plan gives them "unlimited access" to the internet. For the three months
ended September 30, 2000 and 1999, the average monthly recurring revenue per
dial-up subscriber was approximately $20. There are no "start-up" fees for new
subscribers although new customers are required to pay in advance either one
month or three months depending on the billing plan.
Beginning in October 1999, we instituted a prepayment plan available to
all dial-up subscribers. Under the plan, subscribers may prepay their access
fees for either one or two years at a discounted rate. Subscribers prepaying for
one year receive a discount equivalent to two months of service and subscribers
prepaying for two years receive a discount equivalent to three months. In the
first year of this program, we had less then 0.1% of our customers prepaying for
two years and less then 1% prepaying for one year.
In addition, we earn a small portion of our revenue by providing Web
hosting, domain registration, Web page design services, Web-server co-location,
and full-time dedicated access connections to the Internet. These services have
been classified as "Other revenue" on our Statements of Operations.
Our Web-hosting services allow a business or individual to post
information on the World Wide Web so that the information is available to anyone
who has access to the Internet. We currently offer two pricing plans for Web
hosting subscribers: $15.95 per month for "Silver," which offers the customer a
storage space of 15 megabytes on their Web page, and $19.95 per month for
"Gold," which offers up to 50 megabytes of storage space. We also charge a
one-time set-up fee of $19.95 for both plans. We had 24 Web hosting subscribers
as of September 30, 2000.
Domain registration involves the reservation on behalf of a customer of
a Web address with a organization such as Network Solutions. This service is
typically, but not always, coupled with our Web page design service. We have
offered our Web page design services for $100 per page, including graphics, but
also from time to time package this service with other Internet-related services
at a discount. Other services available to our customers include (a) Web-server
co-location, where the customer uses our Internet T-1 access and facilities to
store the customer's computer and Web page, and (b) full-time dedicated access
connections to the Internet for customers who need uninterrupted Internet
connection. These additional services do not currently contribute significantly
to our total revenues.
Operating Expenses generally consist of (a) costs of revenue and cost
of subscriber start-up that are primarily related to the number of subscribers;
(b) overhead expenses that are associated more generally with operations; and
(c) depreciation, which is related to our network equipment costs.
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Costs of revenue are recurring telecommunication costs that are
primarily related to the number of subscribers and are necessary to provide
service to those subscribers. Telecommunication costs include the costs
associated with local telephone lines into our facilities, leased lines
connecting our dial-in locations, and T-1 lines connecting our main switch to
the Internet backbone. Start-up expenses for each subscriber include our
software, cost of diskettes and other product media, manuals, and packaging, as
well as mailing costs associated with the materials provided to new subscribers.
We do not defer any such subscriber start-up expenses.
Other operating expenses are incurred in the areas of advertising,
banking and credit card service fees, consulting fees, employee leasing costs,
employee salaries, rent, other occupancy and office expenses, and other
expenses. Operating expenses will increase over time as our scope of operations
increases. However, we expect that such costs will be offset by anticipated
increases in revenue attributable to overall subscriber growth.
We advertise using paid newspaper, radio, and television advertisements
as well as flyers and postcards mailed to potential subscribers in our service
area. We have experienced some customer defection to providers of free internet
services; however, a portion of these customers return to us in order to obtain
the high level of service provided by us. Higher levels of advertising and
marketing may be necessary in order for us to enter new markets or increase our
subscriber base in our existing market to a size large enough to generate
sufficient revenue to offset such marketing expenses. We may determine to
significantly increase the level of marketing activity in order to increase the
rate of subscription growth and retention of existing customers. Any such
increase would have a short-term negative impact on earnings. We do not defer
any start-up expenses related to entering new markets.
We are planning to add subscribers by purchasing customer bases from
other Internet service providers initially in the Southwest Florida area.
We have incurred significant credit card service charges due to the
billing method of payment offered to our customers. At the quarter ended
September 30, 2000, we were paying a fee of approximately 1.69% of the amount of
transactions being processed monthly through credit card services.
We have used the services of an outside payroll and employee leasing
company in the past in order to keep our costs of staffing to a minimum.
Commencing in July of 2000, we are no longer leasing the employees, but we are
still using the services of a payroll company. At the quarter ended September
30, 2000, we had five full time employees and one part-time employee. These
employees were in the areas of customer support and maintenance, accounting, and
administration.
We lease approximately 2,500 square feet of office and classroom space
from a corporation that is wholly owned by our largest shareholder at a below
market rent. We anticipate entering into a long-term lease with the building
owner which is expected to result in a
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rent increase. Other occupancy and office expenses consist of the cost of
utilities and general office supplies.
Other expenses include costs of insurance, accounting services, dues
and subscriptions, travel related to the education and training of employees,
and reimbursed employee expenses.
We expect to continue to focus on increasing its subscriber base, which
will cause our operating expenses and capital expenditures to increase in
addition to our revenues. There can be no assurance, however, that growth in our
revenue or subscriber base will continue or that we will be able to achieve
profitability or positive cash flows.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Income. Internet service fees for the three months ended September 30,
2000, were $111,395, as compared to $77,954 for the comparable quarter in 1999.
This increase of 30% was the result of an increase in total subscribers from
approximately 1,500 subscribers at September 30, 1999, to approximately 1,900
subscribers at September 30, 2000. This increase in subscribers is due primarily
to print advertising directed toward potential dial up customers. Other revenue
decreased from $4,045 to $48 during the three months ended September 30, 2000,
as compared to the comparable quarter in 1999 because we curtailed adverting for
our ancillary services such as Web page hosting and design. We intend to grow
revenue in this area by directing additional advertising to potential customers
of these services commencing in January 2001.
Cost of revenues. Cost of revenues for the three months ended September
30, 2000, was $37,043, as compared to $26,552 for the comparable quarter in
1999. This increase of 28% was mainly due to the acquisition of additional phone
lines and leasing of new equipment connected with the increase in total
subscribers. However, the cost per subscriber has actually decreased as
economies of scale are realized.
Advertising. Advertising for the three months ended September 30, 2000,
was $1,127, as compared to $6,901 for the comparable quarter in 1999. This
decrease in advertising was due to a temporary hold on new advertising during
the summer months, traditionally a slow period due to the fact that many of our
subscribers reside out of state during this period. As a result of the decreased
advertising, Other revenues such as Web hosting and designing also had decreased
significantly.
Bank and service charges. Bank and service charges for the three months
ended September 30, 2000, were $3,214, as compared to $2,671 for the comparable
quarter in 1999. This increase of 17% was a result of the increase in our total
subscribers, most of whom pay us monthly using credit cards.
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Consulting fees. Consulting fees for the three months ended September
30, 2000, were $6,138. We did not pay any consulting fees in the comparable
quarter of 1999. Consulting fees paid in the most recent quarter were paid to a
corporation affiliated with our chief operating officer for management services.
Employee leasing costs. Employee leasing costs for the three months
ended September 30, 2000, were $488, as compared to $13,606 for the comparable
quarter in 1999. This significant decrease was a result of the employment of our
employees directly rather than through a leasing company.
Employee salaries. Employee salaries for the three months ended
September 30, 2000, were $26,310. This represents a significant increase from
the cost of leasing our employees as we had in the past primarily because we
have two additional technical support and accounting employees from the year ago
period. In addition, we paid only a nominal salary to our chief financial
officer during the quarter ended September 30, 1999. The most recent quarter
reflects payment of this officer's full salary.
Rent expenses. Rent expenses for the three months ended September 30,
2000, were $2,647, as compared to $2,546 for the comparable quarter in 1999. We
lease approximately 2,500 square feet of office and classroom space, which
increases 4% every year.
Other occupancy and office expenses. Other occupancy and office
expenses for the three months ended September 30, 2000, were $17,444, as
compared to $4,959 for the comparable quarter in 1999. Other occupancy and
office expenses increased 72% primarily due to employee education and training,
automobile lease and other automobile-related expenses, financial printer costs
relating to our SEC filings, and health insurance expenses.
Other expenses. Other expenses for the three months ended September 30,
2000, were $26,366 as compared to $8,335 for the comparable quarter in 1999.
This increase of 68% is due primarily to accounting and legal services expenses
relating primarily to our SEC filings and organizational matters as a new public
company. We did not have accounting and legal services cost in the previous year
when we were a private company.
LIQUIDITY AND CAPITAL RESOURCES
In the quarter ended September 30, 1999, we financed our operations
primarily through cash generated from operations. Due to the expenses incurred
in connection with the merger of Internet Services, Inc. in March 2000 and
ongoing legal and accounting expenses incurred in connection with filings
required by the SEC, we had to finance our operations primarily through advances
from our principal stockholder and his affiliated corporations and, to a lesser
extent, bank borrowings.
We currently have two lines of credit in the amounts of $50,000 and
$25,000 from two financial institutions. We are currently seeking an increase in
one of our bank lines of credit so
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that the aggregate amount of all lines of credit would be $250,000 in order to
relieve our principal stockholder of the necessity of making further advances
associated with our SEC filings. We also intend to finance our operations in the
next fiscal year by increasing the number of our subscribers to take further
advantage of the economies of scale offered by a larger subscriber base and by
selling up to 500,000 shares of common stock to the public. To that end, we have
filed a registration statement on Form SB-2 to the SEC on September 8, 2000,
which can be viewed at: http://www.freeedgar.com. As of November 13, 2000, this
registration statement has not been declared effective.
We anticipate that the cash provided by operations, supplemented by our
financing activities, if necessary, will be sufficient to fund our existing
operations during our current fiscal year.
We also hope to make a significant investment in a wireless broadband
system manufactured by IQ-Wireless GmbH during fiscal 2001; however, we do not
believe that we will be able to make the necessary financial investment in this
system unless we successfully complete the contemplated sale of our common
stock. Additional information about this broadband system is found in our Annual
Report on Form 10-KSB.
From time to time, we engage in discussions involving potential
acquisitions of other Internet service providers in or around the Southwest
Florida area. If we are able to successfully negotiate agreements to acquire one
or more Internet service providers, we may need to raise additional debt or
equity capital to finance such acquisitions. There is no assurance that we will
be able to successfully complete any such acquisition transaction. Any
significant acquisition could materially affect our operating and financial
expectations and results, liquidity, and capital resources.
SEASONAL ASPECTS OF BUSINESS
There is a strong seasonal influence which is associated with our
location in Southwest Florida, a popular winter holiday destination for retirees
of northern States. As a consequence, during the winter months, subscriber
numbers increase rapidly and, during the summer months, they decrease
significantly. We offer our customers who are part-time Southwest Florida
residents the ability to maintain their e-mail account with us and forward their
e-mails to their summer residences' accounts during periods when they are not in
residence in Southwest Florida. We charge a monthly fee of $5.00 for this
service. We believe that this new service will help to recapture these
individuals as full-paying subscribers when they return to our service area
during the winter months.
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PART II. OTHER INFORMATION
In accordance with the instructions to Part II, the other specified
items in this Part have been omitted because they are not applicable or the
information has been previously reported.
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to 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.
ISNI.NET, INC.
(Registrant)
Date: November 10, 2000 /s/ Lesly Benoit
-----------------------------------
Lesly Benoit, Chief Financial Officer
(Principal Financial Officer)
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