UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended December 31, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-20865
e-Net, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1929282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12800 Middlebrook Road, Suite 200,
Germantown, MD 20874 (Address of principal
executive offices) (Zip Code)
(301) 601-8700
(Issuer's telephone number, including area code)
Not Applicable
(Former name, former address and
former fiscal year, if
changed since last
report.)
Check whether the issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of
1934 during the preceding 12 months (or for such
shorter periods 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 ______
The Number Of Shares Of The Regristrant's Common
Stock, $.01 Par Value Per Share, Outstanding
As Of February 5, 1999 Was 8,284,717.
Transitional Small Business Disclosure Format (check one):
Yes ____ No X
The Exhibit Index Appears in Sequentially Numbered Page 18
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Accountants' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Balance Sheets as of December 31 and March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Statements of Operations for the three months ended December 31, 1998 and 1997. . . . . . . . . . . . . .5
Statements of Operations for the nine months ended December 31, 1998 and 1997. . . . . . . . . . . . . .6
Statements of Cash Flows for the nine months ended December 31, 1998 and 1997. . . . . . . . . . . . . . 7
Statements of Stockholders' Equity as of December 31, 1998. . . . . . . . . . . . . . . . . . . . . . . .8
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis or Plan of Operation. . . . . . . . . . . . . . . . . . . . . . . .11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission Of Matters To A Vote Of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . .15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
- 2 -
Board of Directors
e-Net, Inc.
We have reviewed the accompanying balance sheet of e-Net, Inc. (a Delaware
Corporation), as of December 31, 1998, and the related statements of operations,
stockholders' equity and cash flows for the nine-month periods ended December
31, 1998 and 1997, and the statements of operations for the three month periods
ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of March 31, 1998, and the related statements of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein), and in our report dated May 27, 1998, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of March
31, 1998, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
Grant Thornton LLP
Vienna, Virginia
January 29, 1999
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E-NET, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31, 1998 MARCH 31, 1998
----------------------- -------------------
(UNAUDITED) (AUDITED)
Current Assets
Cash and cash equivalents $ 2,897,960 $ 855,743
Short-term investments 5,516,821 960,248
Accounts receivable 682,826 334,602
Inventory 1,160,942 202,917
Prepaid expenses 219,206 176,264
------------------ ------------------
TOTAL CURRENT ASSETS 10,477,755 2,529,774
DEPOSITS AND OTHER ASSETS 14,821 14,821
PROPERTY, PLANT AND EQUIPMENT, NET 539,690 372,403
SOFTWARE DEVELOPMENT COSTS, NET 668,113 805,188
------------------ ------------------
$ 11,700,379 $ 3,722,186
------------------ ------------------
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable--trade 237,282 314,010
Accrued liabilities 461,787 561,093
------------------ ------------------
TOTAL CURRENT LIABILITIES 699,069 875,103
LONG TERM DEBT - -
------------------ ------------------
TOTAL LIABILITIES 699,069 875,103
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares
authorized, 8,284,717 and 5,750,000 shares outstanding
at December 31, and March 31, 1998, respectively 82,847 57,500
Stock subscriptions (23) (46)
Additional paid-in capital 28,474,004 14,163,090
Retained deficit (17,555,518) (11,373,461)
------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 11,001,310 2,847,083
------------------- ------------------
$ 11,700,379 $ 3,722,186
------------------- ------------------
------------------- ------------------
The accompanying notes are an integral part of these statements.
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E-NET, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
1998 1997
--------------- ---------------
SALES
Products $ 242,946 $ 99,235
Services 124,394 65,505
-------------- -------------
Total sales 367,340 164,740
COST OF PRODUCT SOLD AND SERVICE PROVIDED
Products 182,828 32,412
Services 43,531 65,003
-------------- -------------
Total cost of product sold and service provided 226,359 97,415
GROSS PROFIT 140,981 67,325
OPERATING EXPENSES
Selling, general and administrative 1,632,680 818,544
Research and development 833,229 310,470
-------------- -------------
LOSS FROM OPERATIONS (2,324,928) (1,061,689)
OTHER INCOME (EXPENSE)
Other expenses (52,936) (20,404)
Interest income 109,138 48,128
-------------- -------------
LOSS BEFORE INCOME TAXES (2,268,726) (1,033,965)
INCOME TAX PROVISION - -
-------------- -------------
NET LOSS $ (2,268,726) $ (1,033,965)
-------------- -------------
-------------- -------------
LOSS PER SHARE $ (.27) $ (.18)
-------------- -------------
-------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING 8,256,828 5,750,000
The accompanying notes are an integral part of these statements.
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E-NET, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
1998 1997
------------- -------------
SALES
Products $ 678,739 $ 128,176
Services 439,082 250,079
------------- -------------
Total sales 1,117,821 378,255
COST OF PRODUCT SOLD AND SERVICE PROVIDED
Products 456,477 48,017
Services 133,268 160,045
------------- -------------
Total cost of product sold and service provided 589,745 208,062
GROSS PROFIT 528,076 170,193
OPERATING EXPENSES
Selling, general and administrative 4,774,615 1,990,798
Research and development 2,106,880 573,651
------------- -------------
LOSS FROM OPERATIONS (6,353,419) (2,394,256)
OTHER INCOME (EXPENSE)
Interest and financing expense - (5,158)
Other expenses (165,048) (101,082)
Interest income 336,410 178,092
------------- -------------
LOSS BEFORE INCOME TAXES (6,182,057) (2,322,404)
INCOME TAX PROVISION - -
------------- -------------
NET LOSS $ (6,182,057) $(2,322,404)
------------- -------------
------------- -------------
LOSS PER SHARE $ (.79) $ (.41)
------------- -------------
------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING 7,777,597 5,695,455
The accompanying notes are an integral part of these statements.
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E-NET, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
1998 1997
------------- -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,182,057) $ (2,322,404)
Adjustments to reconcile net loss to net cash from
operating activities
Depreciation and amortization 393,165 128,976
Stock-Based Compensation - 62,244
Changes in operating assets and liabilities
(Increase) Decrease in accounts receivable (348,223) 17,452
(Increase) in inventory (958,025) (233,144)
(Increase) in prepaid expenses, deposits and other assets (42,943) (117,987)
(Decrease) Increase in accounts payable
and accrued liabilities (176,034) 23,972
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (7,314,117) (2,440,891)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (393,377) (290,353)
Capitalized software development costs (30,000) (379,969)
Investment in short term securities (4,556,573) (2,254,180)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (4,979,950) (2,924,502)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from initial public offering of common stock - 5,870,082
Issuance of common stock 25,347 15,000
Net proceeds from issuance of stock in private placement, warrant redemption,
and options exercised 14,310,914 -
Payments of common stock subscriptions 23 -
Payments on capital leases - (4,480)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,336,284 5,880,602
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,042,217 515,209
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 855,743 379,441
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,897,960 $ 894,650
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $ - $ -
------------- -------------
------------- -------------
Interest Paid $ - $ 158
------------- -------------
------------- -------------
The accompanying notes are an integral part of these statements.
- 7 -
E-NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK STOCK
--------------------------- SUBSCRIPTIONS ADDITIONAL TOTAL
NO. OF AND NOTES PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------ ------------
Balance, April 1, 1998 5,750,000 $ 57,500 $ (46) $ 14,163,090 $(11,373,461) $ 2,847,083
Sale of common stock
in private placement 750,000 7,500 -- 5,114,188 -- 5,121,688
Stock-warrants redeemed -- -- -- (195) -- (195)
Common stock issued
in lieu of warrant redemption 1,720,924 17,209 -- 8,974,022 -- 8,991,231
Common stock issued
for exercised options 63,793 638 -- 222,899 -- 223,537
Stock-subscriptions received -- -- 23 -- -- 23
Net loss -- -- -- -- (6,182,057) (6,182,057)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 8,284,717 $ 82,847 $ (23) $ 28,474,004 $(17,555,518) $ 11,001,310
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements.
- 8 -
E-NET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements include the accounts of
e-Net, Inc. (the "Company"). Such statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the regulations of the Securities and Exchange Commission;
accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included. The
results of operations for the quarter and nine months ended December 31, 1998
are not necessarily indicative of the results for the fiscal year ending March
31, 1999. The accompanying unaudited financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1998.
NOTE B--SIGNIFICANT TRANSACTIONS
PRIVATE PLACEMENT TRANSACTION
In April 1998, the Company offered for sale to accredited investors 750,000
restricted shares of the Company's common stock, par value $.01 per share
("Common Stock"), at $7.50 per share. The share price was based upon the average
of the last reported sales prices for the Common Stock for the five (5) business
days immediately preceding the date upon which the Offering Price is determined,
which was April 3, 1998. The transaction was completed in April 1998, and
resulted in proceeds, net of transaction costs, to the Company of approximately
$5,100,000.
WARRANT REDEMPTION
In May 1998, the Company authorized the redemption of its publicly traded
Redeemable Common Stock Purchase Warrants ("Warrants"). The Company had issued
1,725,000 warrants in its initial public offering, effective April 7, 1997.
Under the terms governing the Warrants, the Company was entitled to redeem, for
$.05 per Warrant, the Warrants that had not already been exercised and converted
to a share of Common Stock at an exercise price of $5.25, if the Company's
Common Stock closing bid price equaled or exceeded $10.00 per share for a thirty
consecutive trading day period. Such a period ended on May 14, 1998. The
redemption occurred on June 19, 1998 and the exercise of Warrants prior to this
date resulted in proceeds, net of transaction costs, to the Company of
approximately $9,000,000.
NOTE C--INVENTORY
Inventory is stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method. The elements of cost include
subcontracted costs and materials handling charges.
NOTE D--SOFTWARE DEVELOPMENT COSTS
The Company has capitalized certain software development costs incurred
after establishing technological feasibility. Software costs will be amortized
over the estimated useful life of the software once the product is available for
general release to customers. The useful life of capitalized software
development costs is estimated to be three years. At December 31, 1998, the
Company has capitalized $668,113, net of accumulated amortization. Should
sufficient product sales fail to materialize, the carrying amount of capitalized
software costs may be reduced accordingly in the future. Amortization expense
for the nine-month periods ended December 31, 1998 and 1997 were $167,075 and
$-0-, respectively.
NOTE E--LINE OF CREDIT FACILITY
On May 31, 1998, the Company signed a one (1) year promissory note for
a $1,000,000 line of credit facility which is secured by investments,
receivables and inventory of the Company.
NOTE F--NON-QUALIFIED STOCK OPTION PLAN
At December 31, 1998, the Company had two stock-based compensation plans.
As permitted under generally accepted accounting principles, grants under those
plans are accounted for following APB Opinion No. 25 and related
interpretations. The compensation cost associated with grants to non-employees
or non-directors of the Company has been recognized. All options granted to
employees are without compensation expense for financial statement purposes.
- 9 -
NOTE G--INCOME TAXES
The Company has generated net operating losses since its inception. At
December 31, 1998, the Company recorded a valuation allowance in an amount equal
to the deferred tax asset due to the uncertainty of generating future taxable
income.
NOTE H--CONCENTRATION
Approximately 71% of the Company's accounts receivable balance at December
31, 1998 was from four customers, and approximately 74% of the Company's sales
for the nine months ended December 31, 1998, were from four customers.
NOTE I--CONTINGENCIES
The Company is the defendant in civil litigation brought by the holders of
300,000 warrants issued in connection with the underwriting of the Company's
initial public offering (the "Holders"). The Holders allege that the Company did
not register the reoffer and resale of those warrants when required by the
Underwriting Agreement and Representative's Warrant Agreement between the
Company and Barron Chase securities, Inc., the underwriter of the Company's
initial public offering (the "Underwriter" ). The Holders, to whom the
Underwriter assigned its rights to receive those warrants and who include Robert
Kirk, the President of the Underwriter (as holder of 240,000 of the 300,000
total warrants), seek to recover between $2,562,000 and $2,862,000 in alleged
losses. The Company removed the case to the United States District Court for the
Southern District of Florida, and the plaintiffs have moved to remand the case
to state court. Prior to completion of the removal process, the state court
entered a default, which was entered without notice to the Company's counsel as
required by Florida law. The plaintiffs have not sought to have judgement ended
on the default and the Company would vigorously oppose any such effort. The
Company has moved in federal court to vacate the default.
The Company disputes the Holders' interpretation of the Underwriting
Agreement and Representative's Warrant Agreement and believes that it has
complied with its obligations under the Underwriting Agreement and
Representative's Warrant Agreement. While management intends to vigorously
defend this case, management believes it is too early to form an opinion as to
its ultimate impact on the Company's financial condition or results of
operations and can give no assurance in that regard.
The Company is a co-defendant in civil litigation brought by Prudential
Securities, Inc. ('Prudential"), which seeks damages in excess of $3 million
associated with a margin loan made to a non-affiliated shareholder of the
Company. The action alleges that either the Company or American Stock Transfer &
Trust Co., the transfer agent for the Company's Common Stock (the "Transfer
Agent"), improperly removed a restrictive legend from the stock certificate
underlying the shares used to collateralize the margin loan. The Company has
moved to have the Prudential suit dismissed and has filed a countersuit against
Prudential and a cross-claim against American Stock Transfer seeking indemnity.
The Transfer Agent has filed a cross-claim against the Company for indemnity and
other theories to recover from the Company any amounts it pays Prudential or
expends in defending the suit.
The Company believes the claims against it are without merit and that its
actions will cause the matter to be either entirely dismissed or will otherwise
eliminate the Company from any liability. The Company is vigorously prosecuting
the matter and does not believe the outcome of the suit or any related
countersuits or counterclaims will have a material adverse impact on the
Company's financial position or results of operations.
- 10 -
ITEM 2. MANAGEMENT'S DISCUSSION OR PLAN OF OPERATION.
This information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1998.
RESULTS OF OPERATIONS
THIRD QUARTER ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
SALES
Sales for the third quarter ended December 31, 1998 were approximately
$367,300, an increase of 123% over the approximately $164,700 recorded for the
corresponding quarter of 1997. The revenue increase was due primarily to the
availability of the Company's T2000 product line. The services sales for the
quarter ended December 31, 1998 were primarily from two customers.
GROSS PROFIT
Gross profits for the third quarter ended December 31, 1998 were
approximately $141,000 or 38% of sales, compared to the approximately $67,300 or
41% of sales for the corresponding quarter of 1997. The gross profit for product
sales for the third quarter ended December 31, 1998 was approximately 25% of
sales, compared to approximately 67% of sales for the corresponding quarter of
1997. The gross profit percentage decrease for product sales was due primarily
to an increase of the amortization of capitalized software costs in the quarter.
OPERATING EXPENSES
Selling, general & administrative expenses for the third quarter ended
December 31, 1998 were approximately $1,632,700, an increase of 99% over the
approximately $818,500 recorded for the corresponding quarter of 1997. The
dollar increase in these expenses over the prior year primarily reflected
additional spending for personnel and programs consistent with the Company's
emphasis on the T2000 product line. The increased spending level in the third
quarter of 1998 also reflected higher spending for programs and promotions
needed to generate and support product roll-out of, as well as substantial
marketing expenditures made in connection with the general availability of, the
Company's T2000 product line.
Research & development expenses for the third quarter ended December 31,
1998 were approximately $833,200, a 168% increase over the approximately
$310,500 recorded for the corresponding quarter of 1997. The increased
expenditures for research and development are due to the increase in number of
employees and other expenditures devoted to the general development of the
Company's technology products.
OTHER INCOME (EXPENSE)
Other income (expense) for the third quarter ended December 31, 1998 was
approximately $56,200, an increase over the approximately $27,700 recorded for
the corresponding quarter of 1997. In the third quarter ended December 31, 1998,
the Company's other income and expenses included interest income earned on
investments in marketable securities, which were significantly larger than the
investments in the corresponding quarter in 1997.
NINE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
SALES
Sales for the nine months ended December 31, 1998 were approximately
$1,117,800, an increase of 196% from the approximately $378,300 recorded for the
corresponding nine months of 1997. The revenue increase was due primarily to the
availability of the Company's T2000 product line. The services sales for the
nine months ended December 31, 1998, were primarily from two customers.
GROSS PROFIT
Gross profits for the nine months ended December 31, 1998 were
approximately $528,100 or 47% of sales, compared to the approximately $170,200
or 45% of sales for the corresponding quarter of 1997. The gross profit for
product sales for the nine months ended December 31, 1998 was approximately 33%
of sales, compared to approximately 63% of sales for the corresponding nine
months of 1997.
- 11 -
The gross profit percentage decrease for product sales was due primarily to an
increase of the amortization of capitalized software costs in the period.
OPERATING EXPENSES
Selling, general & administrative expenses for the nine months ended
December 31, 1998 were approximately $4,774,600, an increase of 140% over the
approximately $1,990,800 recorded for the corresponding nine months of 1997. The
dollar increase in these expenses over the prior year primarily reflected
additional spending for personnel and programs consistent with the Company's
emphasis on the T2000 product line. The increased spending level in the nine
months ended December 31, 1998 also reflected higher spending for programs and
promotions needed to generate and support product roll-out of, as well as
substantial marketing expenditures made in connection with the general
availability of the Company's T2000 product line.
Research & development expenses for the nine months ended December 31, 1998
were approximately $2,106,900, a 267% increase over the approximately $573,700
recorded for the corresponding nine months of 1997. The increased expenditures
for research and development are due to the increase in number of employees and
other expenditures devoted to the general development of the Company's
technology products.
OTHER INCOME (EXPENSE)
Other income (expense) for the nine months ended December 31, 1998 was
approximately $171,400, an increase over the approximately $71,900 recorded for
the corresponding period of 1997. In the nine months ended December 31, 1998,
the Company's other income and expenses included interest income earned on
investments in marketable securities, which were significantly larger than the
investments in the corresponding period in 1997.
OTHER
IMPACT OF INFLATION
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in
supplies or other operating costs may adversely affect the Company's
operations; however, the Company believes it may increase prices of its
products and systems to offset increases in costs of goods sold or other
operating costs.
SEASONALITY
To date, seasonality has not had a material impact on the Company's results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended December 31, 1998 the Company received net
proceeds of approximately $5,100,000 from a private placement of the Company's
Common Stock and net proceeds of approximately $9,000,000 from the exercise of
the Company's Common Stock warrants. The Company also renewed a $1,000,000 one
year credit facility that is secured by investments, receivables and inventory.
The Company used approximately $(5,788,900) in cash flows from operating
activities, excluding changes in assets and liabilities, during the first nine
months ended December 31, 1998, compared to approximately $(2,131,200) for the
corresponding quarter of 1997. The increase in cash flows used in operating
activities excluding changes in assets and liabilities was mainly due to the
increase in selling, general and administrative expenses and research and
development expenses discussed above. The total net cash used by operating
activities was approximately $(7,314,100) for the nine months ended December 31,
1998, compared to approximately $(2,440,900) for the corresponding quarter of
1997.
Cash used by investing activities totalled approximately $(4,980,000) for
the nine months ended December 31, 1998 as compared to approximately
$(2,924,500) for the corresponding period of 1997. The main component of that
investing activity was the investment in short-term securities of approximately
$(4,556,600), as well as continued expenditures for property and equipment of
approximately $(393,400).
Cash provided by financing activities totalled approximately $14,336,000
compared to approximately $5,881,000 for the corresponding period of 1997. The
Company successfully completed a private placement in April 1998 that yielded
net proceeds of approximately $5,100,000, and exercises of the Company's Common
Stock warrants prior to their redemption in June 1998 yielded net proceeds of
approximately $9,000,000. The Company has access to a $1,000,000 credit line
secured by investments, inventory and receivables, but did not borrow against
that line of credit during the third quarter ended September 30, 1998.
- 12 -
The Company expects to continue to make significant investments in the
future to support its overall growth. Currently, it is anticipated that ongoing
operations will be financed primarily from net proceeds of the private
placement, warrant exercise, the line of credit facility, and from internally
generated funds. The Company presently has a line of credit, investments, and
cash and cash equivalents on hand and believes that these will be sufficient to
meet cash requirements as needed. However, as indicated in the Company's most
recent Annual Report on Form 10-KSB, as amended, while operating activities may
provide cash in certain periods, to the extent the Company experiences growth in
the future, the Company anticipates that its operating and product development
activities may use cash and consequently, such growth may require the Company to
obtain additional sources of financing. There can be no assurances that
unforeseen events may not require more working capital than the Company
currently has at its disposal.
FUTURE OPERATING RESULTS
The preceding paragraphs and the following discussion include
forward-looking statements regarding the Company's future financial position and
results of operations. Actual financial position and results of operations may
differ materially from these statements. All such statements are qualified by
the cautionary statements set forth in Part I, Item 1 of the Company's most
recent Annual Report on Form 10-KSB, as amended, under "Forward Looking and
Cautionary Statements," as well as the following statements.
The Company has invested significant amounts in the research and
development and the initial product roll-out marketing and selling for the
Telecom 2000 product line. The emphasis, attention, and dedication of Company's
limited resources for the Telecom 2000 product line have caused and, in
management's view, will continue to cause negative operating results. However,
the Company believes that the value and sales potential of the Telecom 2000
product line outweighs the risk of continued operating losses.
The first products of the Telecom 2000 product line became generally
available during the third quarter of fiscal 1998 and the Company believes that
revenues will continue to grow as contracts are finalized and products are
delivered over fiscal 2000. The protracted process of obtaining governmental
regulatory approval of products (i.e. Federal Communications Commission product
certification) and the hiring of senior telecommunications sales and technical
staff in the current low-unemployment-rate economy have caused, and may
continue to cause, an effect on the delivery of the Company's products to
market. To date the Company has received all regulatory approvals that it has
sought, and has been able to hire senior telecommunications sales and technical
staff, although no assurance can be given to such results in the future.
The Company does not expect revenue growth to occur ratably over the 1999
and 2000 fiscal years; instead, the Company expects that the major impact of the
Telecom 2000 product introduction on revenues and earnings will occur during
fiscal 2000. Revenue growth in fiscal 1999 will depend to a large extent on the
timing of the Company's rollout for products in the Telecom 2000 product line.
Because of the foregoing uncertainties affecting the Company's future
operating results, past performance should not be considered to be a reliable
indicator of future performance. The use of historical trends to anticipate
results or trends in future periods may be inappropriate. In addition, the
Company's participation in a highly dynamic industry may result in significant
volatility in the price of the Company's common stock.
YEAR 2000 MATTERS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year, consequently, in the
year 2000 those systems may be unable to accurately process certain date-based
information. The Company potentially could be affected by this issue through the
internal computer applications on which it relies, as well as the software that
it develops and sells. The Company is in process of reviewing all of its
significant third party applications and obtaining documentation from the
manufacturers that certify Year 2000 compliance or provide appropriate
assurances of future compliance. The Company also is in process of examining the
architecture of its products, as well as documentation on the third party
components that are integrated into the Company's software products. The Company
believes, although at this stage no assurance can be given, that its products
already are Year 2000 compliant. The Company also is implementing a test plan,
both for third party-supplied internal applications and for its developed or
integrated program products, to validate the results of its initial review.
The Company's testing plan for the computer programs acquired from third
parties and used internally for the Company's infrastructure (financial,
administration, internal data communications, and the like) was completed by
December 31, 1998. The results of this testing and internal systems review
indicate that either (1) no program-based outages or significant system
degradation arising from Year 2000 is expected regarding the programs, or any
such issues are covered by suppliers' warranties; or (2) the programs are
supplied by major manufacturers (Microsoft Corporation, Intel Corporation, and
the like) for whom no viable alternative suppliers exist. For programs without
viable alternatives, there is no contingency plan available to the Company;
however, the Company's Year 2000 performance issues under these programs will
not be significantly different from problems which users of those programs
generally experience, and users of those programs represent a significant number
of all business computer program users. The costs of testing and reviewing third
party-supplied internal applications has been relatively
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nominal, and principally related to the Company's on-staff Operations
organization reviewing third party documentation, examining program performance
under test scenarios, and querying third party vendor technical points of
contact about Year 2000 compliance.
The Company's testing plan for its own products, both those developed by
the Company and those that integrate third party products, is still underway and
is due to be completed by June 30, 1999. Should the Company find any items that
are not Year 2000 compliant in the course of its testing, the Company will
endeavor to take the necessary actions to correct the matter, and will endeavor
to develop a contingency plan by June 30, 1999. The costs of any such
remediation effort are unknown at this time; however, the Company anticipates
that this testing activity and associated costs will be borne internally within
the Company's Quality Assurance organization, and that this remediation activity
and associated costs will be borne internally within the Company's Product
Development organization.
At this time, the Company does not anticipate that Year 2000 compliance
activities will have a material effect on its business, product development,
financial position or results of operations. However, there can be no assurance
that the Company's systems and products are Year 2000 compliant until the
successful completion of its testing procedures. Additionally, despite the
testing and review undertaken by the Company, there can be no assurance that the
systems of other companies on which the Company relies will be Year 2000
compliant. Either of these unfavorable results could result in a material
adverse effect on the Company's business, financial condition and results of
operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On November 30, 1998, the Holders filed a civil suit against the Company in
the Circuit Court in the 15th Judicial Circuit in and for Palm Beach County,
Florida. The Holders allege that the Company did not register the reoffer and
resale of those warrants when required by the Underwriting Agreement and
Representative's Warrant Agreement between the Company and the Underwriter. The
Holders, to whom the Underwriter assigned its rights to receive those warrants
and who include Robert Kirk, the President of the Underwriter (as holder of
240,000 of the 300,000 total warrants), seek to recover between $2,562,000 and
$2,862,000 in alleged losses. The Company removed the case to the United States
District Court for the Southern District of Florida, and the plaintiffs have
moved to remand the case to state court. Prior to completion of the removal
process, the state court entered a default, which was entered without notice to
the Company's counsel as required by Florida law. The plaintiffs have not sought
to have judgement ended on the default and the Company would vigorously oppose
any such effort. The Company has moved in federal court to vacate the default.
The Company disputes the Holders' interpretation of the Underwriting
Agreement and Representative's Warrant Agreement and believes that it has
complied with its obligations under the Underwriting Agreement and
Representative's Warrant Agreement. While management intends to vigorously
defend this case, management believes it is too early to form an opinion as to
its ultimate impact on the Company's financial condition or results of
operations and can give no assurance in that regard.
The Company first reported that it is co-defendant in civil litigation
brought by Prudential in its Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1998. Since that time, the Transfer Agent has filed a
cross-claim against the Company for indemnity and other theories to recover from
the Company any amounts it pays Prudential or expends in defending the suit.
However, the Company continues to believe the claims against it are without
merit and that its actions will cause the matter to be either entirely dismissed
or will otherwise eliminate the company from any liability. The Company is still
vigorously prosecuting the matter and continues that believe that the outcome of
the suit and any related countersuits and counterclaims will not have a material
adverse impact on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 18, 1998, at the Company's 1998 Annual Meeting of Shareholders,
the shareholders of the Company voted on the following matters:
Concerning the election of directors:
Nominees for Director Votes Cast For Votes Withheld
- --------------------- -------------- --------------
Gen. Alonzo E. Short, Jr. 7,256,395 60,265
Robert A. Veschi 7,256,395 60,265
William W. Rogers, Jr. 7,256,395 60,265
William L. Hooton 7,256,395 60,265
Clive G. Whittenbury, Ph.D. 7,256,395 60,265
Concerning approval of the Restated Certificate of Incorporation:
Votes Cast For: 4,838,017
Votes Cast Against: 230,898
Abstentions: 23,340
Broker Non-Votes 2,224,405
Concerning approval of the 1998 Stock Compensation Plan:
Votes Cast For: 4,599,636
Votes Cast Against: 377,820
Abstentions: 20,150
Broker Non-Votes 2,319,054
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Concerning ratification of independent auditors for fiscal year 1999:
Votes Cast For: 7,283,285
Votes Cast Against: 16,470
Abstentions: 16,905
Broker Non-Votes not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Description
Number
3.1 Restated Certificate of Incorporation, filed December 18,
1998 (incorporated by reference from Post-Effective Amendment
No. 2 to the Company's Registration Statement on Form S-1,
as filed with the SEC on January 6, 1998, as further amended
and declared effective on January 27, 1999 ("Post-Effective
Amendment No. 2"))
3.2 Restated Bylaws of the Company (incorporated by reference
from Post-Effective Amendment No. 2)
10.1 Attachments D, effective June 23, 1998, and E, effective
November 23, 1998, to COM21 Software Development Agreement
10.2 1998 Stock Compensation Plan effective June 30, 1998, as
approved by the shareholders on December 18, 1998
(b) Since the end of its most recent fiscal year on March 31, 1998, e-Net, Inc.
has filed the following reports on Form 8-K:
Date of Report Item Reported
April 16, 1998 Item 5 - Other Events
October 26, 1998 Item 5 - Other Events
January 29, 1999 Item 5 - Other Events
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
e-Net, Inc.
(Registrant)
DATE: February 12, 1999 /s/ Donald J. Shoff
-------------------
Donald J. Shoff
Vice President and Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
3.1 Restated Certificate of Incorporation, filed December 18, 1998
(incorporated by reference from Post-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1, as filed with the SEC on
January 6, 1998, as further amended and declared effective on January 27,
1999 ("Post-Effective Amendment No. 2"))
3.2 Restated Bylaws of the Company (incorporated by reference from
Post-Effective Amendment No. 2)
10.1 Attachments D, effective June 23, 1998, and E, effective November 23, 1998,
to COM21 Software Development Agreement
10.2 1998 Stock Compensation Plan effective June 30, 1998, as approved by the
shareholders on December 18, 1998