<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-15801
SUREQUEST SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 41-1826635
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13606 T I Blvd., Dallas, Texas 75243
------------------------------------
(Address of principal executive offices)
972 / 238-7200
(Issuer's telephone Number)
check whether the issuer has (1) filed all reports required by Section 13
or 15(d) of the Securities Exchange Act during the past 12 months, and (2)
been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
As of June 30, 2000, 32,395,338 shares of Common Stock were outstanding.
<PAGE> 2
THIS DOCUMENT IS PREPARED AND FILED UNDER THE REQUIREMENTS OF REGULATIONS S-B
OF THE SECURITIES AND EXCHANGE COMMISSION, EFFECTIVE JULY 31, 1992.
INDEX
<TABLE>
<S> <C>
PART I - Financial Information
Item 1. - Financial Statements
Consolidated Balance Sheets at June 30, 2000 (unaudited)
and December 31, 1999.......................................................3
Consolidated Statements of Operations for the three
months ended June 30, 2000 and 1999 (unaudited).............................5
Consolidated Statements of Operations for the six
months ended June 30, 2000 and 1999 (unaudited).............................6
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 (unaudited).............................7
Notes to Consolidated Financial Statements..................................8
Item 2. Management's Discussion and Analysis or Plan of Operation.........14
PART II - Other Information................................................17
Item 1. Legal Proceedings..................................................17
Item 6. Exhibits and Reports on Form 8-K...................................17
Signature .................................................................17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, 2000
December 31, 1999 (Unaudited)
----------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,795 $ 10,913
Note receivable 5,700 8,200
Accounts receivable - trade, less allowance
for doubtful accounts of $54,218 and $48,619
(unaudited) at December 31, 1999 and June 30,
2000, respectively 71,704 175,062
Prepaid expenses and other current assets 29,256 42,834
----------- -----------
Total current assets 110,455 237,009
PROPERTY AND EQUIPMENT
Office furniture and fixtures 13,871 13,871
Computer equipment 166,488 173,617
Office and other equipment 28,257 28,675
Automobile 23,500 --
Leasehold improvements 60,491 66,479
----------- -----------
292,607 282,642
Less: accumulated depreciation and amortization (191,377) (185,972)
----------- -----------
Net property and equipment 101,230 96,670
OTHER ASSETS
Land held for sale 378,903 378,903
Capitalized software development costs, net of
accumulated amortization of $889,000 and $1,104,662
(unaudited) at December 31, 1999 and June 30, 2000,
respectively 1,153,055 937,393
Other 16,012 13,251
----------- -----------
Total other assets 1,547,970 1,329,547
----------- -----------
TOTAL ASSETS $ 1,759,655 $ 1,663,226
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 4
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--CONTINUED
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
June 30, 2000
December 31, 1999 (Unaudited)
----------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Convertible debentures $ 52,000 $ 127,303
Current portion of notes payable to officers,
shareholders and affiliates 138,973 51,727
Current portion of credit lines and long-term debt 299,606 195,165
Accounts payable - trade 287,922 293,043
Payroll tax obligations 522,362 597,508
Accrued expenses 122,735 59,595
Accrued interest 121,066 155,680
Advances from officers and affiliates 64,237 --
----------- -----------
Total current liabilities 1,608,901 1,480,021
CREDIT LINES AND LONG-TERM DEBT, net of current portion 108,539 53,564
NOTES PAYABLE TO OFFICERS, SHAREHOLDERS
AND AFFILIATES, net of current portion 819,727 912,718
LONG-TERM ADVANCES FROM OFFICERS 437,372 --
DEFERRED COMPENSATION 397,171 254,882
----------- -----------
Total liabilities 3,371,710 2,701,185
COMMITMENTS AND CONTINGENCIES (NOTE 14) -- --
SHAREHOLDERS' DEFICIT
Preferred Stock - $.001 par value, 1,000,000 shares
authorized, none issued and outstanding -- --
Common Stock - $.001 par value, 50,000,000 shares authorized,
27,196,362 and 32,395,338 issued and outstanding at
December 31, 1999 and June 30, 2000, respectively 27,196 32,395
Common stock subscriptions receivable (180,000) --
Additional paid-in capital 4,033,346 5,086,387
Accumulated deficit (5,492,597) (6,156,741)
----------- -----------
Total shareholders' deficit (1,612,055) (1,037,959)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 1,759,655 $ 1,663,226
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 5
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 2000
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1999 June 30, 2000
------------- -------------
<S> <C> <C>
Revenues
Dietary services and supplies $ 145,726 $ 148,686
Software sales and rental 149,328 304,168
------------ ------------
295,054 452,854
Cost of revenues
Dietary services and supplies 68,655 64,017
Software sales and rental 71,127 48,804
------------ ------------
Total cost of sales 139,782 112,821
------------ ------------
Gross profit 155,272 340,033
Operating expenses
Sales and marketing 91,264 41,450
General and administrative 317,919 426,443
Depreciation and amortization 121,242 118,957
------------ ------------
Total operating expenses 530,425 586,850
------------ ------------
Loss from operations (375,153) (246,817)
Other expense
Interest expense 41,113 43,842
Tax penalties 12,763 --
Other, net -- 104,559
------------ ------------
Total other expense, net 53,876 148,401
------------ ------------
Net loss before income tax provision (429,029) (395,218)
Income tax provision -- --
------------ ------------
Net loss $ (429,029) $ (395,218)
============ ============
Basic and diluted net loss per weighted average
share of common stock outstanding $ (.02) $ (0.01)
============ ============
Weighted average number of shares of basic
and diluted common stock outstanding 26,579,712 31,394,609
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1999 June 30, 2000
------------- -------------
<S> <C> <C>
Revenues
Dietary services and supplies $ 306,307 $ 323,854
Software sales and rental 290,011 570,948
------------ ------------
596,318 894,802
Cost of revenues
Dietary services and supplies 130,060 130,626
Software sales and rental 144,739 88,775
------------ ------------
Total cost of sales 274,799 219,401
------------ ------------
Gross profit 321,519 675,401
Operating expenses
Sales and marketing 143,881 121,827
General and administrative 668,932 741,268
Depreciation and amortization 241,958 236,518
------------ ------------
Total operating expenses 1,054,771 1,099,613
------------ ------------
Loss from operations (733,252) (424,212)
Other expense
Interest expense 56,252 110,262
Tax penalties 33,411 --
Other, net -- 129,670
------------ ------------
Total other expense, net 89,663 239,932
------------ ------------
Net loss before income tax provision (822,915) (664,144)
Income tax provision -- --
------------ ------------
Net loss $ (822,915) $ (664,144)
============ ============
Basic and diluted net loss per weighted average
share of common stock outstanding $ (.03) $ (.02)
============ ============
Weighted average number of shares of basic
and diluted common stock outstanding 26,700,727 30,043,340
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE> 7
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1999 June 30, 2000
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(822,915) $(664,144)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 241,958 236,518
Provision for bad debt -- (5,599)
Common stock options issued for services
and in conjunction with debt 7,665 9,865
Common stock issued as payment for consulting services 46,000 195,820
Common stock issued as litigation settlement -- 85,000
Convertible debentures issued with a beneficial conversion feature -- 23,666
(Increase) decrease in
Notes receivable -- (2,500)
Accounts receivable - trade (28,229) (97,759)
Prepaid expenses and other current assets (9,720) (13,578)
Other (1,499) --
Increase (decrease) in
Accounts payable - trade 12,551 5,121
Payroll tax obligation 163,093 75,146
Accrued expenses (55,869) (63,140)
Accrued interest 6,843 32,315
Deferred compensation 106,250 31,400
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (333,872) (151,869)
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment (12,940) (13,535)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in advances from officers 261,437 --
Proceeds from convertible debentures 20,000 78,303
Payments of convertible debentures (7,500) (3,000)
Proceeds from notes payable to officers,
shareholders and affiliates -- 16,998
Payment of notes payable to officers, shareholders and affiliates (32,545) (11,253)
Proceeds from long-term debt 4,912 634
Payment of long-term debt (20,490) (65,160)
Proceeds from common stock subscribed 25,000 100,000
Proceeds from sale of common stock -- 56,000
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 250,814 172,522
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (95,998) 7,118
Cash and cash equivalents at beginning of period 71,384 3,795
--------- ---------
Cash and cash equivalents at end of period $ (24,614) $ 10,913
========= =========
<CAPTION>
June 30, 1999 June 30, 2000
------------- -------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Retirement of affiliate and long term officer advances
by convertible debenture issuance $ -- $ 501,609
Retirement of deferred compensation by convertible debenture issuance -- 173,689
Retirement of long-term debt by convertible debenture issuance -- 94,890
Retirement of convertible debenture by common stock issuance -- 767,889
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE> 8
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions per Item 310(b) of Regulation SB.
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
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three month and six month periods ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. Actual results may differ from those estimates.
Interim results are not necessarily indicative of results for a full year.
NOTE 2 - BACKGROUND AND ORGANIZATION
SureQuest Systems, Inc. (formerly Rosegold Corporation), is a publicly traded
company and was incorporated under the laws of the State of Nevada on August 19,
1941. SureQuest Systems, Inc. is in the business of providing dietary services,
supplies and private consulting, and developing and selling dietary proprietary
management software products. Primary customers include hospitals, nursing homes
and assisted living facilities in the United States and Canada.
NOTE 3 - GOING CONCERN UNCERTAINTY
The consolidated financial statements have been prepared on the assumption that
the Company will continue as a going concern. The Company sustained a net loss
of $2,071,358 and $1,577,767 during the years ended December 31, 1998 and 1999,
respectively, and a net loss of $664,144 for the six months ended June 30, 2000.
Current liabilities at June 30, 2000 of $1,480,021 exceed current assets of
$237,009. Total liabilities at June 30, 2000 of $2,701,185 exceed total assets
of $1,663,226. The Company's continued existence depends upon the success of
management's continued efforts to raise additional capital necessary to meet the
Company's obligations as they come due and to obtain capital to execute its
business plan. The Company intends to obtain capital primarily through issuance
of common stock and debt financing. There can be no degree of assurance that the
Company will be successful in completing additional financing transactions.
The consolidated financial statements do not include any adjustments to reflect
the possible effects on the recoverability and classification of assets or
classification of liabilities which may result from the inability of the Company
to continue as a going concern.
NOTE 4 - ACQUISITIONS
On June 16, 1998 the Company completed the acquisition of the assets and certain
liabilities of Positive Input, Inc., a Michigan corporation. The transaction was
accounted for as a purchase with operations being included in the Company's
statement of operations from the acquisition date. The purchase consideration
for this transaction was $54,629 paid in cash (net of cash acquired), assumption
of certain liabilities and the issuance of 1,721,054 shares of the Company's
common stock recorded at the Company's closing stock price on the date of the
acquisition, valued at $636,721.
During 1998, Company also acquired all of the outstanding common stock of Choice
Systems, Inc. for 50,000 common shares. Choice Systems, Inc. had insignificant
assets, liabilities and operations when it was acquired and realized no revenues
for the six months ended June 30, 2000.
8
<PAGE> 9
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - CAPITALIZED SOFTWARE COSTS
The Company has two software packages, a DOS based package which was developed
internally, and a Windows based package which was purchased in connection with
the Positive Input, Inc. acquisition in 1998. Amortization expense related to
its DOS package is $68,869 for the six months ended June 30, 2000. This package
will be fully amortized during the year 2000. Amortization expense related to
the Windows package is $146,793 for the six months ended June 30, 2000.
NOTE 6 - CREDIT LINES AND LONG-TERM DEBT
<TABLE>
<CAPTION>
June 30, 2000
-------------
<S> <C>
$21,300 revolving credit line with bank secured by personal guarantee of a
shareholder; minimum monthly payments of 2% of the outstanding
principal; interest at 24.98% per annum $17,925
Revolving credit line with bank secured by the personal guarantee of a
shareholder; minimum monthly payments of 2% of the outstanding principal;
interest 19.74% per annum 7,327
Revolving credit line with bank secured by the personal guarantee of an
affiliate; interest at 18.65% per annum 2,901
Promissory note to bank; matures June 17, 2001; quarterly payments of
interest only at 10% per annum; principal due at maturity; secured by land 112,500
Extended payment terms from two suppliers in the form of unsecured demand
promissory notes; (1) vendor promissory note of $9,060; monthly installments of
principal and interest of $5,000; interest at 1.5% per month; (2) vendor
promissory note of $14,347; monthly installments of principal and interest
of $3,587; interest at 15.9% per annum 23,407
Note payable to a bank; collateralized by the Company's receivables, inventory
and equipment; interest at prime plus 2.75% (11.75% at June 30, 2000); payable
in monthly installments of principal and interest of $879;
matures September 2001 12,186
Note payable to a bank; collateralized by the Company's receivables, inventory
and equipment; interest at prime plus 2.75% (11.75% at June 30, 2000); payable
in monthly installments of principal and interest of $866;
matures April 2003 25,758
Note payable to a bank; unsecured; interest at 10% per annum; payable in
monthly installments of principal and interest of $810; matures November, 2003 28,915
Note payable to finance company; secured by equipment; interest at 25.45% per
annum; payable in monthly installments of principal and interest of
$171; matures August 2002 3,940
Unsecured promissory note to office lessee for purpose of leasehold
improvements; interest at 10% per annum; payable in monthly installments
of principal and interest of $484; matures September 2003 13,870
------------------
Total long-term debt 248,729
Less current maturities 195,165
------------------
Long-term debt $53,564
==================
</TABLE>
9
<PAGE> 10
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
June 30, 2000
-------------
<S> <C>
Principal balance outstanding at June 30,2000 consists of two debentures;
monthly payments of $500 for principal and interest on $4,000 of debentures
maturing 2001; additional debentures issued January 11,2000 in the amount of
$123,000 that included $45,000 of debentures outstanding and previously issued in
1998 and 1999 and accrued interest of $8,303 related thereto; terms of this
debenture include interest at 11% compounded semi-annually and principal and
accrued interest mature January 10, 2000; holder may convert $31,429 of
principal and accrued interest at $.30 per share; in addition, holder has the
option to acquire 938,096 Company common shares at prices ranging from $.10-$.30.
These options expire January 21, 2002. $ 127,303
=========
NOTE 8 - NOTES PAYABLE TO OFFICERS, SHAREHOLDERS & AFFILIATES
$100,000 unsecured promissory note payable to shareholder affiliate; principal
and interest payments of $965 beginning May 14, 2000 for a period of twenty four
months with a balloon principal payment of $96,517 due April 14, 2002 $ 99,735
$10,000 unsecured promissory note payable to shareholder affiliate; interest
payable semi-annually at 8% per annum; principal payable on demand 10,000
Unsecured promissory note to affiliate; interest at 10%; monthly installments of
principal and interest payments of $806; matures May 2002 16,820
Promissory note to shareholder affiliate; interest at 10% with total accrued
interest and principal payable at maturity January 2001; security interest in
all assets of the Company subordinated to certain banks and shareholders holding
prioritized liens 500,000
Promissory note to shareholder; 100,000 shares of Company stock held in escrow
as security; 10% interest with accrued interest and principal payable on demand;
shareholder has verbal agreement with Company not to demand redemption within
the following 12 months 222,711
Promissory note to shareholder with personal guaranty by Company officer;
secured by software source code and subordinated lien on land; interest at 7.5%
monthly; interest and principal payments of $995; balloon payment at maturity,
September 10, 2001 88,797
$31,400 unsecured promissory note to shareholder; interest at 10%; monthly
principal and interest installments of $2,761 beginning May 15, 2000 26,382
---------
Total notes payable to officers, shareholders & affiliates 964,445
Less current portion 51,727
---------
$ 912,718
=========
</TABLE>
10
<PAGE> 11
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - LITIGATION SETTLEMENT
On June 12, 2000 the Company entered into a settlement agreement with plaintiffs
that sought additional consideration from the Company as a result of the
original merger with Rosegold Corporation in 1996. This Settlement Agreement
provides plaintiffs $25,000 payable in five equal monthly installments of $5,000
beginning in June 2000. In addition, the Company issued to Plaintiffs in escrow
500,000 of the Company's common shares that are subject to Rule 144 of the
Securities Exchange Act. If these shares have an aggregate value of more than
$400,000, determined by the average of the mid of the high bid and low asked
price at the closing for the first five trading days prior to the first trading
day 365 days after execution of this Agreement, the excess number of shares are
to be returned to the Company.
NOTE 10 - DEFERRED COMPENSATION
Deferred compensation relates to salaries accrued for a certain
officer/shareholder. These amounts are convertible into common stock of the
Company with conversion price determined on the last business day of each
respective year. The amounts are cumulatively convertible. At June 30, 2000 the
officer could have elected to convert the deferred compensation obligation
outstanding to 2,474,795 shares.
NOTE 11 - COMMON STOCK SUBSCRIPTIONS RECEIVABLE
On September 17, 1998 the Company issued 1,400,000 shares of Company common
stock to an unrelated third party at $0.16 per share under terms of a promissory
note. Under the terms of this note, the buyer agreed to remit to Company
$255,000 in 3 equal installments of $85,000 on June 24, July 23 and August 24,
1999, respectively. In addition, the note provides for an interest payment
calculated at 8% per annum, calculated on the value of the shares within a
definable period. The buyer had an option to redeem the obligation by returning
the stock at any time to the Company for the outstanding subscribed balance owed
to the Company. During the year ended December 31, 1999, the buyer remitted to
Company $75,000 of the obligation. At March 22, 2000, the Company agreed to
accept a total of $100,000 in 3 installments as settlement of the remaining
obligation with the first payment of $50,000 received on March 27, 2000 and the
remaining installments were received during April 2000.
NOTE 12 - PAYROLL TAX OBLIGATIONS AND INCOME TAXES
The Company has not remitted Federal and State employer and employee payroll
taxes for the years 1998 and 1999 and for the first quarter of 2000. The Company
has determined this obligation to be the actual amounts of the tax withheld from
employees and the employer portion of the Social Security Federal Tax obligation
in addition to a 25% penalty accrual for each respective year's obligations. The
total obligation associated with these delinquent amounts due is $597,508 at
June 30, 2000 and has been reflected in the accompanying consolidated financial
statements as Payroll Tax Obligations. At July 5, 2000, the Department of
Treasury issued notices to the Company that the total assessed liability is
$726,538. The obligation recorded of $597,508 is an estimate by Company's
management of the final settlement balance.
The Company has not filed Federal Income Tax Returns for the years 1996, 1997,
1998 and 1999. The Company incurred significant operating losses in each of
these years and therefore, no taxes are expected to be payable.
11
<PAGE> 12
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - LAND HELD FOR SALE
The Company acquired certain undeveloped land in 1998 in exchange for 500,000
shares of the Company's common stock. The agreement included a one year option
granted to the seller to acquire an additional 250,000 shares at $0.40 per
share. The option was not exercised and expired may 4, 1999. The land is
recorded at estimated fair value at date of acquisition based upon the report of
an independent accredited appraiser.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company has operating leases for its office facilities, automobiles, and
certain equipment. Future minimum rental commitments under non cancelable leases
are as follows:
<TABLE>
<CAPTION>
Period ended
December 31 Amount
------------ ------
<S> <C>
2000 (6 months) $ 55,638
2001 102,081
2002 85,369
2003 38,727
2004 6,625
---------
$ 288,440
=========
</TABLE>
On March 8, 2000, a creditor agreed to accept 333,333 of the Company's common
shares in exchange for a note obligation of $66,667 and accrued interest of
$7,731. As part of the consideration, the Company agreed to guaranty a minimum
value of $.20 per share to the holder at March 8, 2001. If the average of the
closing bid and ask price of the shares at March 8, 2001 is less than 20 cents
per share, the Company will issue additional shares so that the total shares
issued is equal to $66,667.
The Company may be subject to other various legal proceedings and claims that
arise in the ordinary course of business. Management believes that resolving
these matter(s), if any, will not have a material adverse impairment on the
Company's financial position or its results of operations.
NOTE 15 - STOCK OPTIONS
The following table summarizes information regarding options outstanding at June
30, 2000:
<TABLE>
<CAPTION>
Number Range of Range of
Classification Outstanding Exercise Price Expiration
-------------- ----------- -------------- ----------
<S> <C> <C> <C>
Employee 250,000 $0.25 02-11-01
Other 1,760,763 $0.07 to $0.50 08-01-00 to
03-17-02
</TABLE>
12
<PAGE> 13
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - RELATED PARTY TRANSACTIONS
A member of the Company's Board of Directors and an officer also provides legal
services for the Company. The officer does not receive a salary from the Company
but bills for services rendered as an independent contractor. Fees billed for
the six months ended June 30, 2000 were $2,941.
On May 24, 2000, the Company's Chairman and President conveyed to a
shareholder/former officer of the Company $430,000 of Company obligations owed
in exchange for certain personal indebtedness owed by the Company's
Chairman/President to the shareholder/former officer. As part of the Agreement,
the individual assuming the Company's obligations agreed to convert the entire
amount of obligations to $430,000 of Convertible Subordinated Debentures
pursuant to the Company's Private Placement Memorandum dated March 8, 2000 and
concurrently converted these debentures to 1,433,330 of the Company's common
stock. The conversion rate applied of $.30 per share is stipulated in the
Private Placement Memorandum and was in excess of the $.20 per share closing
price at May 24, 2000.
Certain officers and/or shareholders of the Company have provided debt funding
to the Company during the years ended December 31, 1998 and 1999, respectively.
Terms of the debt obligations are described in Note 8 in the accompanying
consolidated financial statements. No interest has been paid since inception of
these notes. Accrued interest related to these obligations is $120,130 at June
30, 2000.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE DISCUSSION IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" IN THIS FORM 10-QSB MAY CONTAIN ANALYSES AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTIONS 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND ECONOMIC RISKS, AND OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN RISK FACTORS THAT MAY IMPACT
FUTURE OPERATING RESULTS AS SET FORTH IN OUR ANNUAL REPORT FILED ON FORM 10-SB
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998. THE CAUTIONARY STATEMENTS MADE
IN THIS FORM 10-QSB SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED
FORWARD-LOOKING STATEMENTS, WHEREVER THEY APPEAR IN THIS FORM 10-QSB. THESE
STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONCERNING THE POTENTIAL
OPERATIONS AND RESULTS OF THE COMPANY DESCRIBED BELOW.
OVERVIEW AND RECENT DEVELOPMENTS
SureQuest Systems, Inc. (the "Company") is a provider of dietary and food
management software, menu services and dietary consulting to the institutional
food service industry. Since 1984 the Company has focused on developing a client
base in healthcare food service, concentrating on the Long-Term Care segment of
the industry represented by nursing homes and assisted living facilities. The
Company's wholly-owned subsidiaries' operations, assets and liabilities are
insignificant and not material to the Company's operations.
The Company continues to incur significant operating losses with a net operating
loss of $664,144 realized for the six months ended June 30, 2000 and a $395,218
net operating loss for the three months ended June 30, 2000. The Company
incurred operating losses of $2,071,358 and $1,577,767 respectively, for the
years ended December 31, 1998 and 1999. In addition, the Company has $597,508
payroll tax obligations outstanding recorded at June 30, 2000, including a
provision for penalty and interest, that reflect unpaid employee and employer
withholding taxes for the years 1998, 1999 and the first quarter of the year
2000. The Company made timely withholding tax deposits for the second quarter
2000. Because of these operating losses and payroll tax obligations, the Company
may not be able to continue operations without additional investment capital.
This financial condition caused the Company's auditor to issue a "going concern"
opinion report as part of the December 31, 1998 and 1999 audited financial
statements filed in the Company's Form 10-SB.
On June 12, 2000, the Company entered into a settlement agreement with
plaintiffs who sought additional consideration from the Company as a result of
the merger with Rosegold Corporation in 1996. This settlement agreement provides
plaintiffs with $25,000, payable in five equal installments of $5,000 that began
in June 2000. In addition, the Company issued to plaintiffs in escrow 500,000 of
the Company's common shares. If these shares have an aggregate value of more
than $400,000, as determined by a formula based on the average trading value
five trading days prior to the date 365 days after the execution of the
agreement, the excess shares are to be returned to the Company.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the three months ended June 30, 2000 were $452,854, an
increase of $157,800 over total revenues of $295,054 for the corresponding
period ended June 30, 1999. Total revenues for the six months ended June 30,
2000 were $894,802, an increase of $298,484 over total revenues of $596,318 for
the corresponding period ended June 30, 1999.
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DIETARY SERVICES AND SUPPLIES REVENUES
Dietary services and supplies revenues were $148,686 for the three months ended
June 30, 2000, an increase of $2,960 over total dietary services and supplies
revenues of $145,726 for the corresponding period ended June 30, 1999. Total
dietary services and supplies revenues were $323,854 for the six months ended
June 30, 2000, an increase of $17,547 over total dietary services and supplies
revenues of $306,307 for the corresponding period ended June 30,1999.
SOFTWARE SALES AND RENTAL REVENUES
Software sales and rental revenues were $304,168 for the three months ended June
30, 2000, an increase of $154,840 over total software sales and rental revenues
of $149,328 for the corresponding period ended June 30, 1999. Total software
sales and rental revenues were $570,948 for the six months ended June 30,2000,
an increase of $280,937 over total software sales and rental revenues of
$290,011 for the corresponding period ended June 30, 1999. The increases in both
the three and six month periods in software sales and rental revenues were
primarily due to software license sales of $110,000 during the first quarter of
2000 and an additional $130,000 during the second quarter of 2000 to a food
distribution company that markets the Company's software through a private label
agreement.
COST OF REVENUES
DIETARY SERVICES AND SUPPLIES COST OF REVENUES
Dietary services and supplies cost of revenues was $64,017 (43% of dietary
services and supplies 2000 revenues) for the three months ended June 30, 2000, a
decrease of $4,638 over total dietary services and supplies cost of revenues of
$68,655 (47% of dietary services and supplies 1999 revenues) for the
corresponding period ended June 30, 1999. Total dietary services and supplies
cost of revenues was $130,626 (40% of dietary services and supplies 2000
revenues) for the six month period ended June 30, 2000, an increase of $566 over
total dietary services and supplies cost of revenues of $130,060 (42% of dietary
services and supplies 1999 revenues) for the corresponding period ended June 30,
1999.
SOFTWARE SALES AND RENTAL COST OF REVENUES
Software sales and rental cost of revenues was $48,804 (16% of software sales
and rental 2000 revenues) for the three months ended June 30, 2000, a decrease
of $22,323 over total software sales and rental cost of revenues of $71,127 (48%
of software sales and rental 1999 revenues) for the corresponding period ended
June 30, 1999. Software sales and rental cost of revenues was $88,775 (16% of
software sales and rental 2000 revenues) for the six months ended June 30, 2000,
a decrease of $55,964 over total software sales and rental cost of revenues of
$144,739 (50% of software sales and rental 1999 revenues) for the corresponding
period ended June 30, 1999. The decrease is attributable to the elimination of
one technical support programmer during the second quarter of 1999 ($ 12,441
savings) and the closing of the Michigan technical support office that
eliminated support salaries of $36,635 incurred during the first six months of
1999.
OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing operating expenses were $41,450 (9% of total 2000 revenues)
for the three months ended June 30, 2000, a decrease of $49,814 over total sales
and marketing expenses of $91,264 (31% of total 1999 revenues) for the
corresponding period ended June 30, 1999. Total sales and marketing expenses
were $121,827 (14% of total 2000 revenues) for the six month period ended June
30, 2000, a decrease of $22,054 over total sales and marketing expenses of
$143,881 (24% of 1999 revenues) for the corresponding period ended
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June 30, 1999. The decrease during the three months ended June 30, 2000 is
attributable to the elimination of marketing consultants that reduced expense
from $47,270 during the first quarter of 2000 to $3,037 during the second
quarter of 2000. In addition sales travel expenses decreased from $27,285 during
the first six months of 1999 to $2,203 during the first six months of 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $426,443 (94% of total 2000 revenues)
for the three months ended June 30, 2000, an increase of $108,524 over total
general and administrative expenses of $317,919 (108% of total 1999 revenues)
for the corresponding period ended June 30, 1999. Total general and
administrative expenses was $741,268 (83% of total 2000 revenues) for the six
months ended June 30, 2000, an increase of $72,336 over total general and
administrative expenses of $668,932 (112% of total 1999 revenues) for the
corresponding period ended June 30, 1999. The increase in general and
administrative expenses for the six month period ended June 30, 2000 over the
corresponding period at June 30, 1999 is primarily attributable to the
following: an increase in programming expense of $129,714 during 2000 ($117,303
during three months ended June 30, 2000); net decrease of $9,727 related to
officer salaries; $18,306 reduction in rent expense due to a subleasing
arrangement initiated in November 1999; decrease of $33,411 related to tax
penalties incurred during the first six months of 1999 due to payroll
withholding.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $118,957 for the three months ended
June 30, 2000, a decrease of $2,285 over total depreciation and amortization
expense of $121,242 for the corresponding period ended June 30, 1999. Total
depreciation and amortization expense was $236,518 for the six month period
ended June 30, 2000, a decrease of $5,440 over total depreciation and
amortization expense of $241,958 over the corresponding period ended June 30,
1999.
INTEREST EXPENSE
Interest expense was $43,842 for the three months ended June 30, 2000, a slight
increase over the total of $41,113 for the corresponding period ended June 30,
1999. Total interest expense was $110,262 for the six months ended June 30,
2000, an increase of $54,010 over the total of $56,252 for the corresponding
period ended June 30, 1999. The increase for the six months ended June 30, 2000
is primarily attributable to an interest provision of $23,666 during the first
three months of 2000 related to the issue of options below the common share fair
market value at date of grant and a $24,192 provision for interest expense
related to payroll tax obligations.
OTHER, NET
Other, net expense of $104,559 for the three months ended June 30, 2000
primarily relates to a litigation settlement by the Company at June 12, 2000 of
$25,000 cash and the issuance in escrow of 500,000 Company common shares. The
shares were valued at the closing price of $.17 per share of the Company's stock
at date of settlement for a total settlement expense of $110,000 that includes
the cash settlement of $25,000.
LIQUIDITY
The Company has financed its operations primarily through debt financing
provided by shareholders, officers and affiliates. The Company's ability to
sustain operations is dependent upon additional investment capital and/or debt
financing because of the Company's negative working capital position and the
excess of total liabilities over assets at June 30, 2000. Although management
believes that such investment/financing can be obtained, there can be no
assurance that the Company will be successful and that if successful, the sale
of additional equity may result in additional dilution to the Company
stockholders.
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The Company provided cash from financing activities of $172,522 for the six
month period ended June 30, 2000 compared to $250,814 cash provided for the six
month period ended June 30, 1999. This cash was used to sustain operating
activities that used cash of $151,869 for the six month period ended June 30,
2000 compared to $333,872 used for the six month period ended June 30, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In March, 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue 00-2, "Accounting for Web Site Development Costs". This issue addresses
whether specific types of costs incurred in developing a Web site should be
capitalized. Because the Company's future business model projects significant
investment in Web site development, the Company is currently evaluating this
issue to determine its impact on the Company's future financial position,
results of operations and cash flows, although the Company has not incurred any
such costs for the six months ended June 30,2000. EITF is effective for costs
incurred after June 30, 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 12, 2000, the Company as defendant entered into a settlement agreement
in litigation filed in May 1999 in Hennepin County, Minnesota, entitled
Richterand Roitenberg v. Surequest Systems, Inc. and Milton D. Price, Jr. court
file No. CT 99-008061 that provided to the plaintiffs $25,000 cash in five equal
$5,000 installments beginning June 2000 and the issuance of 500,000 of the
Company's shares subject to Rule 144 of the Securities Exchange Commission, and
to be held in escrow for a period of one year from date of settlement agreement.
The Company's shares were valued at $.17 a share based on the closing price at
date of settlement for a total settlement value of $110,000, including the cash
settlement. Should the value of the shares conveyed as determined one year from
date of settlement agreement exceed $400,000, the plaintiffs will return those
shares in excess of the $400,000 value.
Item 6. Exhibits and Reports on Form 8-K
Exhibit Description
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27.1 Financial data schedule as required by Article 5 of Regulation S-K
SIGNATURES
In accordance with Section 12 of the Securities and Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized
<TABLE>
<S> <C>
SureQuest Systems, Inc., a Nevada Corporation
(Registrant)
Date August 11, 2000 By/s/ C. SCOTT SYKES, JR.
---------------------------------------------------
C. Scott Sykes, Jr. President
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<S> <C>
27.1 Financial Data Schedule
</TABLE>
