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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-SB
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION (b) or (g) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
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SUREQUEST SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
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NEVADA 41-1826635
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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C. SCOTT SYKES, JR., PRESIDENT
SUREQUEST SYSTEMS, INC.
13606 TI BLVD
DALLAS, TEXAS 75243-1408
(972) 238-7200
(Address and telephone number of issuer's principal executive offices)
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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None N/A
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
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TABLE OF CONTENTS
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PART I
Item 1. Description of Business..................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Description of Property..................................... 11
Item 4. Security Ownership of Certain Beneficial Owners and
Management.................................................. 12
Item 5. Directors, Executive Officers, Promoters and Control
Persons..................................................... 12
Item 6. Executive Compensation...................................... 13
Item 7. Certain Relationships and Related Transactions.............. 13
Item 8. Description of Securities................................... 14
PART II
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and other Shareholder matters........................ 14
Item 2. Legal Proceedings........................................... 15
Item 3. Changes in and Disagreements with Accountants............... 15
Item 4. Recent Sales of Unregistered Securities..................... 15
Item 5. Indemnification of Directors and Officers................... 15
PART F/S............................................................... 16
PART III
Item 1. Index to Exhibits........................................... 16
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May 22, 2000
PART I
ITEM 1. DESCRIPTION OF BUSINESS
SureQuest Systems, Inc. (the "Company") was incorporated under the laws of
the State of Nevada on August 19, 1941. The Company's Articles of Incorporation
were recently amended and restated and filed with the Secretary of State's
office of the State of Nevada on January 5, 2000. The Company's principal place
of business is 13606 TI Boulevard, Dallas, Texas 75243. SureQuest has an
Internet web site designated as www.surequest.com.
HISTORY
On December 4, 1996, Rosegold Corporation, a non-operating Nevada
corporation, issued 12,000,000 shares of its common stock in exchange for all of
the issued and outstanding common shares of SureQuest Systems, Inc., a
corporation incorporated under the laws of the State of Texas on March 15, 1991
and changed its name to SureQuest Systems, Inc.
Prior to its merger with the Rosegold Corporation, SureQuest Systems, Inc.,
had served the healthcare industry since 1984 (as a proprietorship until its
incorporation in 1991) with dietary consulting services, dietary software and
"hard copy" menu services. The Company developed its DOS modular software
product in the early 1990's and added Microsoft Windows(R) based software
through the acquisition in June 1998 of the assets of Positive Input, Inc., a
Michigan corporation. The assets of Positive Input, Inc. were purchased for
$54,629 in cash (net of cash assumed), 1,721,050 common shares of the Company
and the assumption of approximately $816,000 in debt.
The Company has incurred significant losses of $2,071,358 and $1,577,767
respectively, for the years ended December 31, 1998 and 1999. The Company has
financed these losses primarily through private placement of restricted
securities and debt financing provided by certain officers and shareholders of
the Company. Without a significant increase during 2000 in revenues from
existing software products and services and products introduced during 2000, the
Company may not be able to continue operations without additional working
capital invested in the Company.
The Company's current financial condition requires the Company's accountant
to issue a "going concern" opinion as part of the Company's presentation of its
financial statements.
The Company has not been a party to any bankruptcy, receivership or similar
proceeding.
THE BUSINESS
SureQuest Systems, Inc. is a provider of dietary and food service
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 (LTC)
segment of the industry represented by nursing homes and assisted living
facilities. The Company's software and other products are also used in other
institutional settings including hospitals, continuing care retirement
communities ("CCRC") and prisons. The Company offers its software product in
both a DOS and Windows(R) operating system format. SureQuest currently serves
approximately 700 LTC facilities in 40 states and Canada.
The Company's proprietary software provides food selection and preparation
assistance, inventory and personnel cost controls, improved operating
efficiencies, and electronic documentation of the meals prepared and served to a
facility's residents to reduce liability exposure and ensure compliance with
government nutritional guidelines.
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MARKETING STRATEGY
SureQuest has penetrated the LTC market through strategic alliances,
acquisitions, and direct sales. The Company currently has strategic marketing
alliances or private label agreements with the following companies:
Food Services of America, Inc. -- Food Services of America, Inc. ("FSA"), a
Seattle, Washington based food distribution company operates primarily in the
Northwest and Midwest. It markets a software product called FSA FIRSTLINK(TM), a
private labeled version of SureQuest's proprietary Windows(R) food service
software application. FSA also provides a "hard copy" menu service for its
customers through the Company under the private label SIGNATURE SERIES.
Ben E. Keith Company -- The Ben E. Keith Company, located in Fort Worth,
Texas is a food distributor which serves the Southwest United States and has
been a significant customer of the Company for over ten years. Ben E. Keith
markets SureQuest products and services under the private label MENUMANAGE(TM).
Serca Foodservice, Inc. -- Serca Foodservice, Inc., located in Toronto,
Canada is a food distributor which serves the Canadian market. Serca markets
SERCA SYNERGY(TM), a private labeled version of SureQuest's proprietary
Windows(R) software application to its institutional customers.
In 1998, Ben E. Keith, Food Services of America, Inc. and Serca
Foodservices, Inc. provided 23.7%, 16.1% and 16%, respectively, of the Company's
total gross revenues and 21.3%, 19.4% and 6.1%, respectively, of gross revenues
in 1999.
Achieve Healthcare, Inc. -- In 1999, the Company entered into a marketing
agreement with Achieve Software Corporation (dba Achieve Healthcare Information
Systems), Eden Prairie, Minnesota, a provider of non-dietary software to the
Long Term Care Industry. The Company has been designated as a "Certified Achieve
Partner" ("CAP") and Achieve has agreed to promote and market the Company's
software products to over 3,000 Long Term Care facilities where Achieve
currently has its software.
Health Technologies, Inc. -- In order to meet the expanded demand for the
Company's software products, the Company has recently entered into a strategic
marketing and training agreement with Health Technologies, Inc., Maryland
Heights, Missouri, a dietary consulting company with over 135 Registered
Dietitians, which has agreed to market the Company's software products to health
care facilities and food distributors under the private label SMART
SOLUTIONS(TM). Health Technologies also uses the Company's software to produce
"hard copy" menus for its consulting clients. A number of the Registered
Dietitians of Health Technologies also serve as certified trainers of the
Company's software.
PRODUCTS AND SERVICES
The Company's primary products and services include Food Service Management
Software, Menu Services and Customer Software Support Services.
FOOD SERVICE MANAGEMENT SOFTWARE
Currently, the Company offers a suite of Microsoft Windows(R) and DOS based
nutritional software programs designed to allow health care institutions,
primarily LTC facilities, hospitals and CCRC's to more effectively and
efficiently serve their residents. In Management's opinion the Company's
software provides solutions in the areas of menu management, inventory control,
production management, purchasing and cost control, documentation to reduce
liability exposure, and compliance with Healthcare Finance Administration
(HFCA), Hazard Analysis Critical Control Point (HACCP) and other government
nutritional guidelines.
Also, the Company's software allows LTC facilities to more easily comply
with the changes in Federal Government regulations regarding reimbursement of
operational costs and the new electronic reporting requirements. Specifically,
the Company's software provides facilities the ability to comply with the
Federal Government's PPS (Perspective Payment System) reimbursement guidelines
by establishing a resident's level of dietary care. A resident is listed as
"Clinically Complex", under the Federal Government's MDS (Minimum Data Set)
regulations, if he or she receives 51% or more of their calories through tube
feeding or
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26% of calories and over 500 cc's of fluid from tube feeding. Additional
reimbursement dollars are available to facilities for Clinically Complex
residents under PPS guidelines. The Company's software tracks caloric intakes
for each resident and provides data to be used for MDS reporting on Clinically
Complex residents. The Company's software also provides facilities with weight
management tracking for each resident for data submission to the Federal
Government under MDS regulations. In addition, the Company's software helps
facilities comply with several other nutrition and dietary requirements under
the following MDS Quality Indicator Domains: #3 Clinical Management; #4
Cognitive Functioning; #7 Nutrition and Eating; #8 Physical Functioning; #10
Quality of Life and #12 Skin Care.
The software, Three Squares(TM), establishes nutritionally balanced diets
(conforming to government requirements) for the residents in a Long Term Care
facility. The diets are then translated into actual menus containing the proper
foods for the three meals and snacks to be served by the facility for each day.
The software can maintain a menu cycle of 1 to 8 week(s), indicating when
particular meals or food items will be served (for example, the cycle may show
that two weeks from tomorrow, chicken will be served as the main entree). At the
end of the scheduled cycle, the entire menu cycle begins again, allowing the
Company to continue to know what foods will be served in the future.
Institutions typically serve "warming" foods during the Fall/Winter cycle and
lighter, "cooling" foods during the Spring/Summer cycle, hence two menu cycles
per year. The foods can also be tailored to different geographic regions of the
country. The software maintains a list of more than 50 separate nutrients for
each meal item served, such that the facility's dietitian or administrator may
access and report the number of calories, grams of fat, milligrams of vitamin C
that an individual resident consumed for a meal, a day, a week, or any other
time period. The software also tracks the weight of each resident in the
facility.
Another important element of the software is its ability to track each
resident's likes/dislikes, allergies and other health related conditions
requiring special diets. The software currently supports 99 special diet types
such as low-calorie, diabetic or cardiac. More importantly, during meal
preparation and production, the software automatically determines the types and
quantities of food to be produced based on the resident population profiles and
then prints out individual tray tickets that alert kitchen personnel as to the
specific items that should be placed on each tray. In management's opinion the
Company's software is compliant with the Hazard Analysis Critical Control Point
(HACCP) program guidelines, as incorporated in the U.S. Food Code.
The Company's software is designed to be compatible with two of the popular
computer operating systems: Windows(R) and DOS. The Company believes that its
software programs can be readily adapted to any changes in the aforementioned
operating systems or to new operating systems without significant cost. Any such
changes or updates would be accomplished by "inside" personnel or by outside
independent contractors depending on the complexity of the change or update.
MENU SERVICES
The Federal government regulations require that LTC facilities use a
Registered Dietitian, on either a full time, part time or by consulting
contract, to review the menus and nutritional programs for the LTC residents.
Certain State governments require that each LTC facility in their state
demonstrate a minimum number of dietitian hours to plan and assess the
nutritional needs of the LTC residents. For the facilities that cannot afford
paying separately for these dietitians or for software, the Company has a "hard
copy" menu service program that meets the government requirements. This service
provides menu planning, nutritional analyses, production recipe books, spread
sheets and posting menus. Over 300 facilities are using the Company's "hard
copy" menu service business.
The Company's staff prepares each menu with attention to every detail of
color, texture, and shape of individual foods to enhance the visual appearance
of the meal. Meals are analyzed for nutrient content and compared to the
Recommended Daily Allowances as established by the National Academy of Sciences.
Menus are certified by either one of the facility's registered dietitians or by
one of the Company's registered dietitians with respect to meeting the
nutritional requirements and standards specified by the facility. Scaled,
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quantity recipes included with the menu services are intended to be compliant
with the Hazard Analysis Critical Control Point (HACCP) program guidelines, as
incorporated into the US Food Code.
CUSTOMER SOFTWARE SUPPORT SERVICES
The Company provides the following support to its customers:
Customer Support Center. The Company provides customer software support at
several levels, from answering user questions on the implementation of the
Company's software to technical questions on the database and software
performance. Services are provided 24 hours per day/7 days per week via toll
free telephone number or through the Internet with online support at
www.surequest.com.
Strategic Alliance Training Program. The Company has developed a "train the
trainer" program, where the Company trains strategic alliance personnel capable
of training end users on the use of its dietary software. Health Technologies,
Inc., one of the Company's strategic marketing partners, has identified more
than 20 of its Registered Dietitians to participate in this program. Food
Service of America and Serca Food Service are also participating in this
training program, which allows the Company to support its planned growth in
software sales without significantly increasing training costs.
Audio-Visual Support Aids. The Company plans to develop a self-contained
videocassette that is projected to substantially eliminate the need to contact a
support person at the Company. This will also assist the Company in overcoming
limitations to its growth in software sales due to lack of trainers and support
personnel. It will also assist in managing the continuous training and support
of inexperienced personnel required due to high turnover rates in long term care
kitchen staff.
BUSINESS-TO-BUSINESS INTERNET STRATEGY
As announced in the Company Press Release on December 14, 1999, the Company
has plans to develop a business-to-business Internet site. This Internet
capability will greatly enhance the Company's existing software by allowing
customers to electronically access menu data.
PRICING STRATEGY/METHOD OF COMPENSATION
The Company offers a flexible pricing strategy to meet the financial
requirements of a broad range of clients. To facilitate this strategy, products
and services provided by the Company are offered to clients either through
purchase contracts, lease agreements or monthly rental programs. The Company's
pricing strategy is designed to effectively penetrate targeted markets with
affordable solutions that bring premium value to its clients and accelerate
revenue growth and profitability for the Company.
Software License Fees -- License purchase agreement. The Company provides a
variety of software management solutions in both Windows(R) and DOS operating
systems to clients for an "up front" cash payment to use the software
indefinitely. In addition to the initial license fee, Windows(R) product clients
must participate in the Company's product maintenance and technical support
program (see Maintenance and Support Fees below). License purchase fees for DOS
products range from a one-time payment of $500-$2,000 depending on number of
modules selected. License purchase fees for Windows(R) products range from
$5,000-$30,000 depending on solution type, modules selected, menu type and
number of users. License purchase fees, shown above, are the Company's suggested
list prices and are discounted for multiple license purchases by corporate
clients, including the Company's Strategic Alliance Partners.
Software License Fees -- License Rental and Lease Agreements. The Company
offers clients the option to select a monthly license rental fee or a variety of
license lease options. The monthly license rental fees for DOS products range
from $75-$245 per month depending on the number of modules selected and whether
SureQuest provides computer hardware. License rental fees and lease options for
Windows(R) products range from $220-$535 per month depending on solution type,
modules selected, menu type, number of users, and lease term. The Company also
offers a Super System Lease Program, which includes software, hardware, support
and maintenance fees, and onsite training. Monthly lease payments for Super
System Lease Program range from $285-$565 per month depending on solution type,
modules selected, menu type, and number of
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users. All Windows(R) product lease programs include fully paid license fees ($1
purchase option) after completion of lease term obligations. Lease clients must
continue to participate in the Company's maintenance and support program after
completion of lease term. All maintenance and support fees are included in
rental and lease programs offered by the Company during the term of the rental
or lease agreement. Software license rentals are offered directly through the
Company. License lease agreements are arranged by the Company through third
party leasing companies.
Maintenance & Support Fees -- Software Products. The Company provides
product maintenance and technical support for all software products offered by
the Company. Clients receive 1-2 product updates annually at no extra cost,
unlimited toll free technical support, remote online PC support (Windows(R)
products only) and free consultation with a Registered Dietitian. Windows(R)
product clients, who elect the Company's license purchase agreement option, pay
maintenance and support fees that range between $65-$240 per month depending on
solution type, modules selected, menu type, and number of users. DOS product
clients may elect to participate in the maintenance and support program for
between $75-$195 annually, depending on number of modules selected. Maintenance
and support fees are subject to discounts for multiple license purchases by
corporate clients, including the Company's Strategic Alliance Partners.
Software Training Fees. The Company provides software training, either
onsite at a client facility or at the Company's corporate headquarters in
Dallas, Texas. The Company charges $525 per day for training services and
reasonable travel expenses, when applicable. Corporate clients may elect to
participate in the Company's train the trainer program to help facilitate
implementation for multiple corporate owned facilities.
Menu Service Bureau Fees. The Company's Menu Service Bureau provides a
variety menu products to a broad range of clients. Fees associated with the
Company's menu services range between $55-$260 per month depending on whether
the menu products are for corporate or individual clients, standardized or
custom menu configurations, and the number of periodic menu book deliveries.
Paper Products Pricing. The Company provides custom perforated paper
products for clients to generate tray menus and selective menus for their
healthcare residents and patients. The pricing for these products range from
$16-$79 per case, depending on product type and quantity purchased.
Size of Markets Served. The U.S. population is rapidly aging and the over-65
group is expected to double by the year 2030. LTC facilities will grow, over
time, to meet the demand of this demographic trend and will require use of
dietary software to operate efficiently. The fastest growing market serving
the aging population are the Assisted Living facilities. At present, it is
estimated that only 10% of the LTC facilities in the U.S. use dietary
software.
The following chart sets forth the approximate number of facilities in the
United States as of the end of 1997 (the last year for which industry data is
available):
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MARKETS SERVED # OF FACILITIES
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Nursing Homes.......................................... 17,000(1)
Assisted Living Facilities(3).......................... 12,593(2)
Hospitals.............................................. 6,685(2)
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Total............................................. 36,278
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(1) An Overview of Nursing Home Facilities: Data from the 1997 National Nursing
Home Survey, by the CDC National Center for Health Statistics report number
311, March 1, 2000.
(2) The 1997 Economic Census, Health Care and Social Assistance sector,
published October, 1999.
(3) The January 1, 1998 edition of The Maturing Marketplace estimated that there
were 25,000 assisted living residences, housing up to one million people.
It has been further reported in the 1997 Economic Census (noted in
footnote(2) above) that there are 51,426 Residential Care Facilities in the
United States. Residential Care Facilities are defined by the 1997 Economic
Census as including Nursing Homes, Continuing Care Retirement Communities
(CCRC's),
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Assisted Living Facilities, Residential Mental Health Retardation Facilities,
Residential Mental Health and Substance Abuse Facilities and Homes for the
Elderly. Included in the definition of Residential Care Facilities are 15,605
Nursing Homes.
The above markets do not include other institutional markets into which the
Company plans to expand in the future, to include additional correctional
facilities, educational facilities, business and industry and the Government, to
include the Veterans Administration ("VA") and the military.
COMPETITION
Several competing software companies have dietary software that targets the
healthcare industry, including the LTC market. Primary competitors are GeriMenu
located in York, Pennsylvania; Computrition located in Chatsworth, California;
and C-Bord located in Ithaca, New York. The Company's best estimate is that only
10% of the kitchen operations in LTC facilities have dietary software in order
to make these operations more efficient and cost effective. The Company believes
that because of the effect of the Prospective Payment System there is now a much
greater demand for dietary software in the LTC industry and that there will be a
faster penetration in the future of the remaining 90% of the market which is not
computerized. Of the 10% of the market which is computerized, the Company's best
estimate is that the Company has approximately 30% of this penetrated market and
GeriMenu, the Company's primary competition, has approximately 30%. The Company
does not have sufficient information to evaluate the market shares of
Computrition or C-Bord. There are other software companies including Data
Control, Diet Master, DFM, FMG Software Systems, HyperGen, NutriMax, Nutri-Net,
Reliable and UniSoft serving the dietary market, but to the best estimate of the
Company, none has a significant market share.
PATENTS, TRADEMARKS, SERVICE MARKS, LICENSES
The Company has a copyright for its Windows(R) based software product,
Three Squares.(TM) In addition, the Company has applied for but not yet received
a registration for the service mark: Technology that Feeds America.(SM) The
Company has developed other software products including SurePref(TM) which
tracks a resident's food preference and SureWeight(TM) which tracks the weight
gain and loss of each resident in a facility that it treats as proprietary and
as a trade secret.
EFFECT OF GOVERNMENTAL REGULATIONS ON THE BUSINESS
There are no governmental regulations affecting the conduct of the
Company's business other than the normal and usual governmental regulations
affecting all businesses. The primary market for the Company's services is the
LTC industry which is a highly regulated industry. Therefore, the Company's
customers are subject to numerous governmental regulations, including Medicare
and Medicaid, which directly affect the facilities' ability to pay the costs of
the Company's products and services.
Fixed Rate Medicare/Medicaid Reimbursements. The Balanced Budget Act of
1997 adopted a completely new and unique reimbursement system for payment for
services rendered by nursing facilities and other healthcare providers to
Medicare patients. As of July 1, 1998 and thereafter, all healthcare providers
will be paid for services rendered to Medicare patients in accordance with the
Prospective Payment System (PPS). Prior to that date, services provided to
Medicare patients were paid pursuant to a cost-based reimbursement system.
The PPS reimbursement system is price-based. The prices are set in advance
by the Health Care Financing Administration (HCFA), the government agency
responsible for administration of Medicare. Under PPS the per diem rate paid to
the healthcare provider is all the provider receives, there are no settlements
or adjustments. And the costs incurred by the healthcare provider do not in any
way impact the price HCFA is willing to pay for the services being provided to
Medicare patients.
The practical impact of this change in the Medicare reimbursement system is
that the healthcare providers are being paid substantially less per diem for
each Medicare patient and all healthcare services provided to that patient
(i.e., direct care, indirect care, and all ancillary care) must be paid from
that
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substantially reduced per diem PPS reimbursement from Medicare. Under the
previous cost-based reimbursement system, the healthcare provider was paid for
each component of care, direct care, indirect care and ancillaries, at cost plus
a small profit. Under the cost-based system, the amount reimbursed by Medicare
would increase or decrease based upon the costs incurred by each healthcare
provider. These increases and decreases applied to both direct care and
ancillary care providers.
Under the PPS reimbursement system the healthcare provider is paid one per
diem price per patient. The per diem reimbursement prices paid by HCFA are
established by a reimbursement formula that is based upon a government study of
patient acuity levels. All patient care, including direct care and ancillary
care, must be paid from that per diem price. The per diem reimbursement under
PPS for all healthcare providers is less than most healthcare providers
previously received on a per diem basis under the cost-based Medicare
reimbursement system. And all healthcare providers (i.e., the nursing facility
and all ancillary providers -- radiology, pharmacy, lab, medical supplies,
therapy, etc.) that provide healthcare services to a Medicare patient must be
paid from that smaller per patient per diem reimbursement. In essence, the
Medicare reimbursement monies became significantly smaller, and all healthcare
providers must now share in that smaller amount of reimbursement monies.
As a result of this new Medicare reimbursement system, all healthcare
providers that provide healthcare services to Medicare patients are doing
everything possible to reduce the costs of their operations. This situation
provides an opportunity for SureQuest. The dietary software sold by SureQuest
can create significant savings for its users.
The savings generated by use of the SureQuest software occurs in both the
dietary department and the nursing department of each facility. The savings are
generated by reductions in food and food preparation costs, food usage, dietary
hours and nursing hours.
Other Healthcare Reimbursement Programs. Other sources of reimbursement
available to healthcare providers include Medicaid, private insurance, HMOs,
Veterans Administration ("VA") and private pay. Medicaid is a federally funded,
state administered health insurance program for low-income individuals. Since
the program is state administered, it varies from state to state. However, there
have been no significant changes in the Medicaid program in recent years. And
because the Medicaid program is the largest healthcare reimbursement program in
terms of dollars reimbursed, the lack of significant changes in the program has
created stability for those healthcare providers that are primarily dependant
upon Medicaid reimbursement.
Other reimbursement programs including private insurance, HMOs, VA and
private pay have experienced few significant changes in recent years. Private
pay residents pay what the LTC facilities normally charge. Private insurance,
HMO's and the VA are still cost-based payors, but, to one extent or another,
these programs are evaluating changing their reimbursement to a per diem price
per patient similar to medicare. Because these programs are still cost based,
residents whose needs are reimbursed by such programs are highly sought after.
As a result, a significant amount of marketing effort is expended to attract
these residents to a LTC facility. The nutritional program (menus and diets) are
an important part of these marketing efforts. Therefore, the Company's software
and menu services products add value to these marketing efforts and the Company
uses the "value added" feature to increase its sales to LTC facilities.
AMOUNT SPENT ON RESEARCH AND DEVELOPMENT
PRODUCT DEVELOPMENT
The Company has devoted significant resources during the last 18 months to
significantly improve and increase features and functionality of its Windows(R)
based software products. This development work will allow the Company to expand
its market penetration in other institutional food service environments,
including hospitals, continuing care retirement communities, assisted living
facilities and correctional facilities. The Company's current 16 bit version of
the Company's Window(R) software is designed to run under Microsoft's older
operating system, Windows(R) 3.1 and limits access to the program to one user at
a time. The Company's new 32 bit Version (Version 4.0) is designed to run under
Microsoft's newer operating systems, Windows(R) 95/98 and Windows(R) NT with the
primary benefit being that multiple users can access the program at
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the same time. The Company is currently beta testing Version 4.0 whereby actual
selected customers are using the new software under actual conditions to
determine if there are any problems or "bugs." If the beta testing is completed
successfully, the Company plans to release Version 4.0 in May 2000. The release
of Version 4.0 will also allow the Company to convert its Menu Service Bureau to
its new Windows(R) system creating significant increases in productivity from
the faster program.
The Company also expects to release a 32 bit upgrade to its existing
Export/Import utility application in June 2000. This utility is a companion to
its core Windows(R) system that allows corporate customers to centrally create
menu data bases and send (export) them to all their facility locations. Using
this utility, management believes corporate clients will be able to maintain
control over program functions with corporate or regional management determining
what functions their facilities will be able to perform on a day to day basis
and what functions will be retained by the central home office. The Company
believes that through its current and upgraded Export/Import utility
application, corporate clients are able to limit liability risks by having
greater standardization among all of its facilities and are better equipped to
provide greater quality assurance in their dietary programs. As a result, the
Company believes that this Export/Import utility application will provide highly
desirable dining service solutions for large chains and other corporate clients
and increase the Company's penetration in that market sector. The new 32 bit
Export/Import utility upgrade will be beta tested with current customers after
completion of the testing of Version 4.0.
As a result of the Company's development efforts, the Company spent the sum
of $105,406 and $96,088 for research and development in 1998 and 1999,
respectively.
EMPLOYEES
The Company has 21 full-time employees and 2 part-time employees and
retains specialists as consultants in various fields of expertise.
ENVIRONMENTAL COMPLIANCE
As a software Company, SureQuest has not spent any material amounts of
capital or time in compliance with any federal, state or local environmental
laws.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS.
BACKGROUND
The Company has experienced significant operating losses of $2,071,358 and
$1,577,671, respectively, for the years ended December 31, 1998 and 1999 that
have materially affected the working capital position of the Company. These
losses were due to the Company's investment of financial resources in the
development and enhancement of its proprietary software products ($228,726 and
$172,839 for the fiscal years ended December 31, 1998 and 1999 respectively),
the establishment of national and Canadian marketing food distributor
relationships ($418,612 and $261,366 for fiscal years ended December 31, 1998
and 1999 respectively) and the acquisition of a competitor's proprietary
software operations through the payment of $54,629 cash (net of cash assumed),
assumption of debt and issuance of the Company's common stock. The Company
financed operations, these developments and acquisition from the proceeds of
debt instruments, issuances of the Company's stock, and investment by certain
officers and shareholders of the Company in the form of long-term debt. In
addition, the Company has outstanding substantial payroll tax withholding
liabilities from the years 1998 and 1999 which totaled $522,362 at December 31,
1999. Management plans to negotiate and believes that a monthly installment
schedule will be accepted by the Internal Revenue Service and the Company
intends to comply with future remittances on a timely basis. Management further
believes that this settlement together with prospective business brought about
by the expanded distribution channels will provide a significantly improved
working capital position for the year 2000. The Company expects that as new
software licenses are sold, the Company's recurring revenue base will increase
due to technical support fees associated with each license installed and due to
the increased need of additional paper supplies. Sales revenues are expected to
increase from 1999 as the Company has extended certain major distributor
8
<PAGE> 11
relationships for an additional three years. In addition, the Company
anticipates that a multi-user version of its software, presently in beta
testing, will be introduced in May 2000.
In the event that a settlement cannot be reached with the Internal Revenue
Service, the Company must continue to procure additional working capital through
debt or equity financing to meet its obligations and sustain operations. As a
result of the Company's significant operating losses, its unfunded payroll taxes
and long term debt ($1,523,138 in 1998 and $1,804,217 in 1999), the Company is
in a negative working capital position and has a shareholders' deficit by virtue
of the fact that the Company's total liabilities exceed total assets. These
financial conditions required the Company's Accountant to issue a "going
concern" opinion as part of the presentation of the Company's financial
statements.
RESULTS OF OPERATIONS
REVENUE
Sales Revenues increased eight percent (8%) from $1,212,823 in 1998 to
$1,315,767 in 1999 primarily due to additions in the Company's menu service
customer base. Cost of revenue increased to $513,016 in 1999 from $422,363 in
1998 which was primarily a result of increased labor costs related to servicing
the aforementioned increase in menu services. The result was that overall gross
profit margins decreased from 65% in 1998 to 61% in 1999. The acquisition of
Positive Input, Inc. assets and liabilities did not in itself significantly
impact the Company's revenues.
GENERAL AND ADMINISTRATIVE EXPENSE
Sales and marketing expenses decreased 42% from $418,692 in 1998 to
$243,582 in 1999 as a result of the Company eliminating two management sales
positions ($101,625 and $31,496 for fiscal years ended December 31, 1998 and
1999 respectively) and closing the Michigan office in July 1999 ($85,179 and
$1,942 for the fiscal years ended December 31, 1998 and 1999 respectively) which
the Company acquired as a result of its acquisition of Positive Input, Inc. in
June of 1998. In addition to decreases in sales and marketing costs, the Company
decreased its general and administrative overhead expense from $1,921,542 in
1998 to $1,313,841 in 1999. The 28.9% decrease was primarily attributable to a
nonrecurring expense in 1998 consisting of $780,550 in common stock and stock
options of the Company being issued for services rendered to the Company which
was partially offset by expense increases in health insurance, communications
and benefits to employees. The Company experienced a substantial increase of
40.7% in its depreciation and amortization expense from $347,740 in 1998 to
$489,171 in 1999. The increase was attributable to the full years depreciation
of certain software acquired by the Company in 1998 in connection with the
Positive Company, Inc. transaction.
NET LOSS FROM OPERATIONS
Net loss from operations in fiscal 1999 was $1,313,841 as compared to a net
loss of $1,921,542 in 1998. The improvement from 1998 to 1999 was primarily due
to the nonrecurring expense in 1998 of the issuance of common stock for services
rendered to the Company during 1998.
OTHER INCOME AND EXPENSE
Interest expense increased 20.7% from $136,842 in 1998 to $165,182 in 1999
primarily due to twelve months interest expense resulting from new obligations
arising from the acquisition of Positive Impact, Inc. in June 1998.
First quarter 2000
The cost of supplying dietary services and supplies as a percentage of
gross revenue decreased from 49.8% during fiscal year 1999 to 38.0% during the
first quarter of 2000. The decrease was primarily due to an increase in dietary
services and supplies revenue of $43,792 (over 1999 quarterly average) which
resulted from several new accounts without a corresponding increase in labor
costs as the Company had excess capacity.
9
<PAGE> 12
Management believes that the first quarter cost ratio of 38.0% will be
maintained during the balance of fiscal year 2000.
The cost of software sales and rentals as a percentage of gross revenues
decreased from 31.2% during fiscal 1999 to 15.0% during the first quarter of
2000 primarily from an additional $140,000 in license revenue attributable to
new business and cost savings realized from the Company eliminating its Michigan
technical support office and related labor costs which in fiscal 1999 accounted
for $53,300 in expense.
The Company's General and Administrative operating expenses as a percentage
of gross revenues during the first quarter of 2000 decreased from 105.2% during
fiscal year 1999 to 71.2% for the first quarter 2000. The decrease can be
attributed to the closure of the Michigan office in July 1999 (eliminating
$15,168 in overhead expense), a reduction in legal expense from $90,566 during
fiscal 1999 to $1,544 in the first quarter and a reduction in bad debt expense
of $32,218 in fiscal 1999 to $0 during the first quarter of 2000. Management
believes that this trend will continue for the balance of fiscal year 2000,
however there can be no assurance that this will occur.
LIQUIDITY
During the first quarter of 2000, the Company initiated a Private Placement
under Regulation D, Rule 504 and filed its Form D disclosure with the Securities
and Exchange Commission for the purpose of raising up to $825,000 capital
through the issuance of convertible subordinated debentures. In anticipation of
the Company becoming subject to the reporting requirements of the Securities and
Exchange Act of 1934, the Private Placement was terminated by the Company on May
1, 2000 with the sum of $263,000 being raised by that date. In addition, the
Company received $50,000 in March, 2000 and $50,000 in April, 2000 in payment of
a $100,000 subscription receivable for the Company's stock that was previously
issued in 1998.
Other than the withholding tax liability, a significant portion of the
Company's primary debt obligation is to the Company's officers, shareholders and
affiliates. This related party debt provides the Company with flexibility to
defer certain debt and interest payments that may not be available if these
obligations were with unrelated third parties. Accordingly, management believes
that, subject to the successful settlement of the withholding tax issue with the
Internal Revenue Service and with the additional capital received in 2000 from
its Private Placement, together with the receipt of additional capital committed
to the Company, the Company's debt service obligations are manageable.
Management further expects that the Company will incur approximately an
additional $75,000 of programming and equipment costs during the year 2000 to
complete software enhancements to existing software. This amount includes the
development of the multi-user product Version 4.0 to be released in May 2000.
Management believes that the cash flow from operations for the year 2000 and
working capital received during the first quarter of 2000 as a result of the
proceeds received from the Company's Private Placement will be sufficient to
fund this software development.
The Company's customers are primarily nursing home facilities that provide
long term care. The nursing home industry is dependent upon federal and state
reimbursement policies to subsidize operations. These reimbursements have been
reduced because the policy is now to reimburse operators on a basis of a formula
under Prospective Payment System ("PPS") rather than the former "cost plus"
system. PPS is requiring the nursing home industry to become more cost conscious
and, as a result, the nursing home industry is experiencing working capital
difficulties. Consequently, the Company operations are affected by aged accounts
receivable issues and facilities that have filed bankruptcy to obtain creditor
relief. Although management believes that the Federal and State governments will
provide solutions to these issues, there can be no assurance that these
solutions will be imminent. The Company does receive significant revenues
directly from food distributors that license the Company's products and services
on a private label basis (55.8% of revenues in 1998 and 46.8% in 1999). As a
result, the Company receives payment directly from the distributors on a net 30
day basis rather than relying on the nursing home user of the product.
A significant portion of the Company's liabilities at December 31, 1999 are
payable to officers, shareholders and affiliates ($1,857,480 payable to
officers, shareholders and affiliates of total liabilities of
10
<PAGE> 13
$3,371,710). The Company intends to redeem these obligations from proceeds of
investment capital. Should the Company be unsuccessful in obtaining this capital
to redeem these obligations, the Company intends to convert these obligations to
equity, subject to the approval of the officers, shareholders and affiliates. In
addition, $397,171 of these obligations is deferred compensation. The officer
intends to convert a portion or all of this obligation to the Company's common
stock but not less than 50% of this obligation during 2000.
The Company's business plan is to transform the Company's operations from
being a dietary software products and services only company to a
business-to-business internet enterprise that will greatly enhance the Company's
existing software by allowing its customers to electronically access menu data.
The implementation of the Company's business-to-business capability will require
significant equity/debt capital which the Company is in the process of raising.
Although management is confident that the capital will be secured, there can be
no assurance that such funding will be procured. The Company will not begin
development until such time as sufficient funding is available and will,
nevertheless, continue to pursue its core business of dietary software and
services.
The Company's investment in its software, marketing alliances, and Company
personnel during 1998 and 1999 that gave rise to operating losses during 1998
and 1999 will, in management's opinion, result in positive cash flow from
operations during 2000. Management believes that the Long Term Care industry
will continue to increase its acceptance of software in its dietary operations
because of the cost savings inherent in its use. In order to provide
affordability, the Company plans to offer its products on a "monthly payment
installment" basis as well as the traditional "purchase" method. Management
believes that the monthly payment program will significantly increase placements
of its software. In addition, the Company's multi-user software version, will be
marketed to industries other than Long Term Care, such as hospitals. The monthly
payment option, introduction of the multi-user version, and continued increased
software placements through the Company's distribution network will, in
management's opinion, result in a positive cash flow from operations during the
year 2000 and beyond.
Although management is confident that the Company will receive during 2000
significant debt financing and/or equity capital to continue operations, there
is no assurance that the Company will receive sufficient funding to continue as
a going concern. In the event that this funding is not received during the year
2000, the Company will have no recourse but to abandon its long term business
plan, forgo its dietary menu services operations and operate as a software sales
company only, thereby eliminating the majority of its labor and related overhead
costs. There can be no assurance that this strategy will prevent the Company
from discontinuing operations during 2000 should the creditors demand redemption
of the Company's obligations.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company operates from a single location as its headquarters located in
Dallas, Texas where it leases approximately 8,300 square feet comprising the
entire one-story building located at 13606 TI Boulevard. The lease is a five
year lease which expires May 30, 2003. As part of its lease obligation, the
Company pays a rental fee plus all applicable property taxes. The Company spent
the sum of $38,773 in 1998 (partial year; June to December) and $66,469 in 1999
in support of its lease obligation. The Company has a right of first refusal on
the sale of the building.
As part of the assets of the Company, the Company owns approximately 31.83
acres of vacant farm land in rural southern Dallas County near Wilmer, Texas.
The land was acquired by the Company in return for 500,000 shares of the
Company's common stock. The property was appraised in 1998 at a market value of
$378,903 against which the Company borrowed the sum of $125,000 from a Texas
national bank using the land to secure the promissory note. As of December 31,
1999, the Company owed a balance of $112,500 on the aforementioned note. The
Company currently has no plans for the farm land other than seeking a potential
buyer and does not receive any material rental or material income from the land.
The land is not material to the Company's operations nor does the Company
currently plan to develop a real estate investment business in the future.
11
<PAGE> 14
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
<TABLE>
<CAPTION>
BENEFICIAL OWNER NUMBER OF SHARES OWNED % OUTSTANDING
- ---------------- ---------------------- -------------
<S> <C> <C>
C. Scott Sykes, Jr.(1)..................................... 10,524,778 34.6%
Charles S. Sykes Irrevocable Trust(1)...................... 550,000 1.8%
Alma Sudderth(2)........................................... 538,550 1.8%
L. Kent Chapman............................................ 520,000 1.7%
John Nicholson............................................. 345,000 1.1%
Stan Janczyk............................................... 300,000 0.99%
John E. S. Kramar.......................................... 85,000 0.28%
Public Ownership........................................... 17,535,398 57.7%
---------- ----
TOTAL............................................ 30,398,726 100%
</TABLE>
- ---------------
(1) Mr. Sykes owns directly 160,000 shares of the Company's common stock and
indirectly 10,364,778 shares through VIG Holdings, LLC, a limited liability
company, which as sole member, he beneficially controls. The Charles S.
Sykes Irrevocable Trust was initiated by Mr. Sykes' father and is controlled
by his mother, Kate F. Sykes, as trustee.
(2) Number of shares reflects those owned directly by Ms. Sudderth and by all
immediate family members.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Officers and Significant Employees
C. Scott Sykes, Jr. 60, Chairman of the Board and President, has over 30
years experience in the health care industry. Mr. Sykes became associated with
the Company when, in January 1998, he bought a controlling interest in the
Company from the two co-founders. From 1994 until 2000, Mr. Sykes has operated a
closely held marketing company and for 1994 until 1999, Mr. Sykes was "of
counsel" to the Chicago law firm of Gardner Carton and Douglas. From 1989 to
1994, Mr. Sykes was Senior Vice President and General Counsel of VHA, Inc.,
Irving, Texas, one of the country's largest healthcare organizations. Mr. Sykes
graduated from The University of Virginia in 1962 with a B.A. and from that same
University in 1965 with a LLB degree. Mr. Sykes is the largest shareholder in
SureQuest Systems, Inc.
John Nicholson 51, Senior Vice President, is responsible for the
Institutional Dietary Services business. Mr. Nicholson assumed a marketing
consulting position with the Company in June 1998, when the Company acquired the
assets and liabilities of Positive Input, Inc., a Michigan Company. Mr.
Nicholson was Director of Business Development for Positive Input, Inc. from
June 1994 until June 1998. He was primarily involved with marketing and sales
responsibilities at Positive Input and for negotiating all contracts with major
clients. From January 1992 until June 1994, Mr. Nicholson was Vice President of
Ambassador Mortgage, Inc., a Virginia Company, involved with all aspects of
retail mortgage financing. From July 1977 until December 1991, Mr. Nicholson was
with Vansco Industries, Inc. a Virginia Corporation, engaged in manufacturing
metal fabricated products. Mr. Nicholson served as President of Vansco
Industries, Inc. from 1986 until his departure in 1991. Mr. Nicholson studied
marketing and business administration while he attended colleges in Maryland and
Arizona after serving in the US Army.
Stan Janczyk 53, Senior Vice President, Chief Financial Officer and
Treasurer, was appointed Chief Financial Officer of the Company in March 2000.
Prior to this office, he maintained a financial consulting and tax practice,
including serving as a consulting Chief Financial Officer to the Company from
1998 to March 2000. He is President of a closely held marketing company in
Dallas, Texas, serving in that capacity from 1995 to 2000. From 1993 to 1995, he
served as President of International Insurance Services, a multi-state insurance
brokerage company in Dallas, Texas. From 1990 to 1993, Mr. Janczyk served as a
financial consultant, specializing in the insurance industry. From 1980 to 1989,
he was involved as a financial officer in the life and health insurance
industry. He received his Certified Public Accountant certificate in Illinois in
1976, having served as manager with the firm of Grant Thornton in Chicago,
Illinois and Oklahoma City, Oklahoma from 1974 to 1979. He graduated from
Indiana University in 1974, receiving a B.S. in Business.
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<PAGE> 15
L. Kent Chapman 43, Senior Vice President, is responsible for strategic
planning and the technology development of the Company and has been with the
Company, initially as a consultant, since January, 1998. He operated as an
independent technical consult from August 1997 until he began consulting
exclusively with the Company in January 1998. From March 1996 until July 1997,
he served as President and CEO of Viking Systems, Inc., Dallas, Texas,
developing an Internet-based insurance and banking support system. From 1994
until 1996, he opened the St. Louis office of Systems Engineering Solutions,
Inc. and served as the St. Louis Project Director. From 1990 to 1994, Mr.
Chapman was Senior Systems Engineer with PRC, Inc. where he supported the US
Army's Light Helicopter Program. From 1981 until 1990, he worked at Emerson
Electric in St. Louis as Senior Systems Engineer and was the youngest of the
first four Software Group Engineers responsible for all software development
within Emerson's Electronic and Space Division. He graduated from the University
of Missouri -- Columbia in December 1979 with a B.S. in Electrical Engineering.
John E. S. Kramar 40, Secretary and Director, is a licensed attorney,
practicing in Texas for over 16 years. Mr. Kramer's term as Director commenced
on December 22, 1997. He graduated from the University of North Texas in 1979
with a Bachelor of Science in Economics, and from the University of Houston Law
Center in 1983. In his law practice, Mr. Kramar represents and maintains the
various business interests of diverse corporate clients, working closely with
management as company counsel on matters ranging from corporate records to
contracts to litigation oversight and supervision.
Alma Sudderth 44, Director, began her term as a Director in 1991. Ms.
Sudderth was one of the co-founders of the Company. She has been employed by the
company since 1989 and served as a vice president until January 1998 when Mrs.
Sudderth was named President of the SureQuest Systems Inc., a Texas corporation
and predecessor to the Company. From January, 2000 to the present, Ms. Sudderth
serves as an Industry Market Leader for the Company, and is responsible for
several of the Company's significant strategic alliances. From February 1989
until January 1998, Ms. Sudderth was an Executive Vice-President of the Company.
Ms. Sudderth is a Registered Dietitian. She was graduated from the University of
Tennessee in 1977 with a BS majoring in Dietetics and in 1978 with a Masters of
Science, majoring in Food Science.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ------------
------------- NUMBER OF ALL OTHER (2)
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS COMPENSATION
- --------------------------- ---- ------ ------------ -------------
<S> <C> <C> <C> <C>
C. Scott Sykes, Jr.,........................................ 1999 $0 0 $100,000
Chairman and President 1998 0 0 100,000
Steve Mills(1).............................................. 1999 0 0 78,500
Chairman and CEO 1998 0 0 100,000
</TABLE>
- ---------------
(1) Mr. Mills served as the Company's Chairman and CEO until October 13, 1999
when he resigned and was succeeded by Mr. Sykes.
(2) The stockholders of the Company approved an annual salary of $100,000 each
for Mr. Mills and Mr. Sykes which they are permitted to convert into common
stock of the Company at a conversion price equal to the closing price of the
stock at the last business day of the year in which the salary was due. This
arrangement will continue until the Company has sufficient working capital
to pay the salary in cash.
ITEM 7. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
RELATED PARTIES
Beginning in February 1998, through a series of advances from Mr. C. Scott
Sykes, Jr. or from VIG Holdings, LLC (a limited liability company whose sole
member is C. Scott Sykes, Jr.), the Company has borrowed certain sums now
totaling $296,872 as of March 28, 2000. The advances are due on demand, and do
13
<PAGE> 16
not have an interest rate and are secured by the tangible and intangible
personal property of the Company. In accordance with a verbal agreement with the
Company these amounts will not be repaid during 2000.
In June 1998 the Charles S. Sykes Irrevocable Trust loaned to the Company
the sum of $500,000. The Trust was given a secured promissory note for simple
interest at the rate of ten percent (10%) per annum with the principal and all
accrued interest due at maturity on January 1, 2001. The whole amount of the
note is secured by the tangible and intangible personal property of the Company.
Also in September 1998, C. Scott Sykes, Jr. in order to reduce the cash
flow requirements of the Company, personally guaranteed certain indebtedness in
the sum of $93,056 owed to Ms. Dianne Lindahl, a Company employee. As of
December 31, 1999 the balance of the indebtedness was $91,384.
ITEM 8. DESCRIPTIONS OF SECURITIES.
The Company's amended and restated Articles of Incorporation authorizes two
classes of shares, designated common and preferred. Fifty Million (50,000,000)
common shares are authorized at a par value of one tenth of one cent ($0.001).
As of March 24, 2000, there are currently 30,398,726 common shares issued and
outstanding. The Company's common stock has no special dividend or voting
provisions or preemptive rights. One million (1,000,000) "blank check" preferred
shares are authorized with a par value of one tenth of one cent ($0.001). As
"blank check" preferred shares, all attributes such as dividend, voting,
conversion, liquidation rights, redemption and sinking fund provisions will be
determined at the discretion of the Company's Board of Directors and filed with
the Nevada Secretary of State prior to issuance. There are currently no
preferred shares issued and outstanding.
The Company's stock previously traded on the NASDAQ OTC:BB market under the
symbol DIET; however the Company was delisted for noncompliance with the
Securities Exchange Act of 1934 rules. Once the Company's Form 10SB registration
statement has been cleared of comments by the Securities and Exchange
Commission, the Company anticipates once again being listed on the OTC:BB.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The principal exchange where the common stock of the Company traded, until
its delisting in April, 2000, was the NASDAQ OTC:BB. The high and low sales
prices for each quarter during the last two years is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ----- -----
<S> <C> <C>
March, 1998................................................. $0.56 $0.09
June, 1998.................................................. 0.88 0.17
September, 1998............................................. 0.42 0.18
December, 1998.............................................. 0.29 0.10
March, 1999................................................. 0.13 0.08
June, 1999.................................................. 0.25 0.06
September, 1999............................................. 0.37 0.11
December, 1999.............................................. 0.17 0.07
</TABLE>
The above quotations are inter-dealer quotations without retail mark-up,
mark-down or commission and may not represent actual transactions.
HOLDERS
The number of stockholders of record of the Company's common stock, the
only stock outstanding, as of March 24, 2000, was 2033.
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<PAGE> 17
DIVIDENDS
The Company has not declared or paid any cash or stock dividends on its
common stock in the last two fiscal years and does not anticipate declaring a
dividend in the foreseeable future as all profits, if any, are likely to be
utilized to grow the Company.
There are currently no restrictions that limit the Company's ability to pay
dividends on its common stock.
ITEM 2. LEGAL PROCEEDINGS.
The Company is currently a defendant in litigation filed in May 1999 in
Hennepin County, Minnesota, entitled Sherman Richter and Edward Roitenberg v.
Milton D. Price, Jr. and SureQuest Systems, Inc., Court file No. CT 99-008061.
The plaintiff's claim that the Company owes them approximately $300,000 as a
result of the transaction whereby SureQuest acquired certain shares from the
plaintiffs as part of its acquisition of Rosegold corporation. The plaintiffs
maintain that SureQuest has breached an alleged agreement whereby the shares of
the Company issued to plaintiffs in exchange for their Rosegold corporation
shares were to have a market value of $300,000 within two years of their initial
issuance. SureQuest has responded to the litigation and denies any liability to
the plaintiffs. The Company has reached a tentative confidential settlement with
the plaintiffs subject to execution of a definitive settlement agreement.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The Company has hired the following Certified Public Accounting firm as its
initial auditors:
King Griffin & Adamson P.C.
14160 Dallas Parkway, Ninth Floor
Dallas, Texas 75240
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
On March 8, 2000 the Company initiated a Private Placement pursuant to
Regulation D, Rule 504 of the Securities Act of 1933. The purpose of the
offering is to raise, on a best efforts basis, up to the sum of $825,000 through
the issuance of convertible subordinated eight percent (8%) five year
debentures. The debentures provide that the principal may be repaid at any time
after ninety (90) days from date of issuance upon payment of all accrued
interest and a sum equal to 125% of the outstanding principal amount of the
debenture. The debentures are convertible at any time after issue at a
conversion price equal to seventy five percent of the average closing bid price
for the preceding three trading days prior to the notice of conversion. The
debentures provide for a minimum bid price of $0.40 or a conversion price of
$0.30 per share. The Private Placement was completed on May 1, 2000 with
$263,000 being raised by the Company.
Prior to the above offering, the Company had not engaged in any other
private placement for more than twelve (12) months.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation and Bylaws provide that the Company
will indemnify its directors and officers to the fullest extent provide by
Nevada law. In addition, the Articles or Incorporation contain a provision
limiting a director's and officer's liability for monetary damages to the
fullest extent permitted by Nevada law.
Furthermore, Section 78.751 of the Nevada General Corporation Law (the
"NGCL") contains provisions relating to indemnification of officers and
directors. Section 78.751(1) provides that a corporation may indemnify any
person who was or is a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except for an action, suit or proceeding, whether civil, criminal,
administrative or investigative, except for an action by or in right of the
corporation by reason of the fact that he was director, officer, employee or
agent of the corporation. In order to indemnify, it must be shown that he acted
in good faith and in a manner he reasonably believed to be in the best interest
of
15
<PAGE> 18
the corporation. Generally, no indemnification may be made where the person has
been determined to be negligent or guilty of misconduct in the performance of
his duty to the corporation.
Section 78.751(2) of the NGCL further allows the corporation to indemnify
any person who was or is a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgement in its
favor by reason of the fact that he is or was director, officer, employee, or
agent of the corporation, including amounts paid in settlement and attorneys'
fees if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation. Indemnification may not
be made for any clam, issue or matter to which a court of competent jurisdiction
has adjudged an officer or director liable to the corporation, unless and only
to the extent that a court of competent jurisdiction determines that in view of
the circumstances of the case, the person is fairly and reasonably entitled to
indemnify for such expenses.
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding discussed in the preceding paragraphs, Section 78.751(3) of the NGCL
provide that he must be indemnified by the corporation against expenses,
including attorney's fees, actually and reasonably incurred by him in connection
with the defense.
Except when indemnification is required by a court of competent
jurisdiction, Section 78.751(4) of the NGCL states that the corporation shall
only indemnify upon a determination of (i) the shareholders; (ii) majority vote
of the board that were not parties to the action; (iii) if ordered by a majority
vote of a quorum of directors who were not parties to the action, suit or
proceeding, by independent legal counsel in a written opinion; or (iv) by
independent legal counsel in a written opinion if no quorum or directors who
were not parties to the action may be obtained.
Unless ordered by a court of competent jurisdiction, indemnification may
not be made to or on behalf of any officer or director if a final adjudication
establishes that his acts or omissions involved intentional misconduct, fraud or
a knowing violation of the law and were material to the cause of action.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
person of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
as is therefore unenforceable.
PART F/S
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<S> <C>
(2) Charter and Bylaws
*2.1 Restated Articles of Incorporation Page 1
*2.2 Bylaws Page 4
(6) Material Contracts
*6.1 Business Product Alliance Agreement with Page 23
Achieve Healthcare Information Systems
*6.2 Agreement with Ben E. Keith Company Page 32
*6.3 Purchase and Software License Agreement with Page 41
Food Services of America
*6.4 Marketing and License Agreement with Health Page 64
Technologies, Inc.
*6.5 Software License Agreement with Serca Page 89
Foodservice Inc.
</TABLE>
- ---------------
* Previously filed
16
<PAGE> 19
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 May 22, 2000 By/s/ C. SCOTT SYKES, JR.
---------------------------------------------------
C. Scott Sykes, Jr. President
</TABLE>
- ---------------
(1) Print the name and title of the signing officer under his or her signature.
17
<PAGE> 20
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FOR YEARS ENDED DECEMBER 31, 1998 and 1999
<PAGE> 21
TABLE OF CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..............................................F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets...............................................................F-3
Consolidated Statements of Operations.....................................................F-5
Consolidated Statement of Changes in Shareholders' Deficit................................F-6
Consolidated Statements of Cash Flows.....................................................F-7
Notes to Consolidated Financial Statements........................................F-9 to F-20
</TABLE>
F-1
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of SureQuest Systems, Inc.
We have audited the accompanying consolidated balance sheets of SureQuest
Systems, Inc. and subsidiaries as of December 31, 1998 and 1999 and the related
consolidated statements of operations, changes in shareholders' deficit and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SureQuest Systems,
Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As described in Note 3, the accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. The
Company has experienced losses of $2,071,358 and $1,557,767 for 1998 and 1999,
respectively. Additionally, at December 31, 1999, the Company's current
liabilities exceeded its current assets by $1,498,446 and its total liabilities
exceeded its total assets by $1,612,055. At December 31, 1999, total liabilities
include $522,362 of payroll tax obligations and related penalties and interest
relating to 1998 and 1999. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Unless the Company obtains
additional financing, it will not be able to meet its obligations as they come
due and it will be unable to execute its long-term business plan. Management's
plans as they relate to these issues are also explained in Note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
March 31, 2000
F-2
<PAGE> 23
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31, 2000
1998 1999 (UNAUDITED)
----------- ----------- --------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 71,384 $ 3,795 $ 37,990
Note receivable 5,700 5,700 5,700
Accounts receivable - trade, less allowance
for doubtful accounts of $22,000, $54,218 and
$54,218 at December 31, 1998 and 1999 and
March 31, 2000, respectively 80,115 71,704 137,845
Prepaid expenses and other current assets 6,452 29,256 56,896
----------- ----------- -----------
Total current assets 163,651 110,455 238,431
PROPERTY AND EQUIPMENT
Office furniture and fixtures 18,166 13,871 13,871
Computer equipment 146,836 166,488 173,600
Office and other equipment 28,257 28,257 28,257
Automobile 23,500 23,500 23,500
Leasehold improvements 53,149 60,491 62,160
----------- ----------- -----------
269,908 292,607 301,388
Less: accumulated depreciation and amortization (139,481) (191,377) (199,726)
----------- ----------- -----------
Net property and equipment 130,427 101,230 101,662
OTHER ASSETS
Land held for sale 378,903 378,903 378,903
Capitalized software development costs, net of
accumulated amortization of $457,677, $889,000 and
$996,831 at December 31, 1998 and 1999 and
March 31, 2000, respectively 1,584,378 1,153,055 1,045,224
Other 20,947 16,012 14,632
----------- ----------- -----------
Total other assets 1,984,228 1,547,970 1,438,759
----------- ----------- -----------
TOTAL ASSETS $ 2,278,306 $ 1,759,655 $ 1,778,852
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 24
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31, 2000
1998 1999 (UNAUDITED)
----------- ----------- --------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Convertible debentures $ 49,500 $ 52,000 $ 128,803
Current portion of notes payable to officers,
shareholders and affiliates 165,535 138,973 139,255
Current portion of credit lines and long-term debt 213,266 299,606 181,320
Accounts payable - trade 278,596 287,922 167,166
Payroll tax obligations 234,441 522,362 586,294
Accrued expenses 99,818 122,735 61,775
Accrued interest 50,582 121,066 134,222
Advances from officers and affiliates 65,169 64,237 45,875
----------- ----------- -----------
Total current liabilities 1,156,907 1,608,901 1,444,710
CREDIT LINES AND LONG-TERM DEBT, net of current portion 178,222 108,539 88,012
NOTES PAYABLE TO OFFICERS, SHAREHOLDERS
AND AFFILIATES, net of current portion 832,976 819,727 816,242
LONG-TERM ADVANCES FROM OFFICERS 133,139 437,372 271,872
DEFERRED COMPENSATION 218,600 397,171 422,171
----------- ----------- -----------
Total liabilities 2,519,844 3,371,710 3,043,007
COMMITMENTS AND CONTINGENCIES (Notes 3 and 16) -- -- --
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, 26,342,160, 27,196,362 and 30,204,726
issued and outstanding at December 31, 1998
and 1999 and March 31, 2000, respectively 26,342 27,196 30,205
Common stock subscriptions receivable (255,000) (180,000) (50,000)
Additional paid-in capital 3,901,950 4,033,346 4,517,163
Accumulated deficit (3,914,830) (5,492,597) (5,761,523)
----------- ----------- -----------
Total shareholders' deficit (241,538) (1,612,055) (1,264,155)
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 2,278,306 $ 1,759,655 $ 1,778,852
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 25
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 3 MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, 2000
1998 1999 (UNAUDITED)
------------ ------------ --------------
<S> <C> <C> <C>
Revenues
Dietary services and supplies $ 448,239 $ 551,032 $ 175,168
Software sales and rental 764,584 764,735 266,781
------------ ------------ ------------
1,212,823 1,315,767 441,949
Cost of revenues
Dietary services and supplies 200,824 274,669 66,609
Software sales and rental 221,539 238,347 39,971
------------ ------------ ------------
Total cost of sales 422,363 513,016 106,580
------------ ------------ ------------
Gross profit 790,460 802,751 335,369
Operating expenses
Sales and marketing 418,692 243,582 80,378
General and administrative 1,945,570 1,383,839 314,825
Depreciation and amortization 347,740 489,171 117,560
------------ ------------ ------------
Total operating expenses 2,712,002 2,116,592 512,763
------------ ------------ ------------
Loss from operations (1,921,542) (1,313,841) (177,394)
Other income (expense)
Interest expense (136,842) (165,182) (66,421)
Tax penalties (51,992) (59,732) --
Other, net 39,018 (39,012) (25,111)
------------ ------------ ------------
Total other expense, net (149,816) (263,926) (91,532)
------------ ------------ ------------
Net loss before income tax provision (2,071,358) (1,577,767) (268,926)
Income tax provision -- -- --
------------ ------------ ------------
Net loss $ (2,071,358) $ (1,577,767) $ (268,926)
============ ============ ============
Basic and diluted net loss per weighted average
share of common stock outstanding $ (0.09) $ (0.06) $ (0.01)
============ ============ ============
Weighted average number of shares of basic
and diluted common stock outstanding 23,467,884 26,670,670 28,571,362
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 26
SUREQUEST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Number Common Common Stock Additional Total
of Issued Stock Subscriptions Paid-In Accumulated Shareholders'
Shares Amount Receivable Capital Deficit Deficit
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 19,663,089 $ 19,663 $ -- $ 1,734,438 $(1,843,472) $ (89,371)
Common stock issued for cash 366,846 367 -- 80,233 -- 80,600
Common stock issued for
subscriptions receivable 1,400,000 1,400 (255,000) 253,600 -- --
Common stock issued as pay-
ment for consulting services
and compensation 2,641,171 2,641 -- 708,909 -- 711,550
Common stock issued for
acquisition of assets of
Positive Input, Inc. 1,721,054 1,721 -- 635,000 -- 636,721
Common stock issued for
acquisition of land 500,000 500 -- 374,500 -- 375,000
Common stock issued for
acquisition of Choice
Systems, Inc. 50,000 50 -- -- -- 50
Common stock options issued
to employees below fair market
value recorded as compensation -- -- -- 69,000 -- 69,000
Common stock options issued
with convertible debentures -- -- -- 46,270 -- 46,270
Net Loss for year -- -- -- -- (2,071,358) (2,071,358)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 26,342,160 26,342 (255,000) 3,901,950 (3,914,830) (241,538)
Common stock issued as pay-
ment for consulting services
and compensation 685,000 685 -- 99,315 -- 100,000
Convertible debentures
converted to common stock 169,202 169 -- 16,751 -- 16,920
Cash received on common stock
subscriptions receivable -- -- 75,000 -- -- 75,000
Common stock options issued
with convertible debentures -- -- -- 15,330 -- 15,330
Net Loss for year -- -- -- -- (1,577,767) (1,577,767)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 27,196,362 27,196 (180,000) 4,033,346 (5,492,597) (1,612,055)
Common stock issued for cash
(unaudited) 933,333 933 55,067 56,000
Long-term debt and advances
from officers converted to
common stock (unaudited) 843,332 844 -- 227,046 -- 227,890
Common stock issued as payment
for consulting services
(unaudited) 868,063 868 -- 140,902 -- 141,770
Common stock options issued to
consultants (unaudited) -- -- -- 7,500 -- 7,500
Convertible debentures
converted to common stock
(unaudited) 363,636 364 -- 109,636 -- 110,000
Convertible debentures issued
with a beneficial conversion
feature (unaudited) -- -- -- 23,666 -- 23,666
Cash received on common stock
subscriptions receivable
(unaudited) -- -- 50,000 -- -- 50,000
Write off of subscriptions
receivable (unaudited) -- -- 80,000 (80,000) -- --
Net loss for quarter ended
March 31, 2000 (unaudited) -- -- -- -- (268,926) (268,926)
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2000
(unaudited) 30,204,726 $ 30,205 $ (50,000) $ 4,517,163 $(5,761,523) $(1,264,155)
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this
consolidated financial statement.
F-6
<PAGE> 27
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
3 MONTHS
YEAR YEAR ENDED
ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, 2000
1998 1999 (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(2,071,358) $(1,577,767) $ (268,926)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 347,740 489,171 117,560
Provision for bad debt 14,500 32,218 --
Loss on disposal of equipment -- 1,966 --
Common stock options issued for services
and in conjunction with debt 115,270 15,330 7,500
Common stock issued for services 711,550 100,000 141,770
Convertible debentures issued with a beneficial
conversion feature -- -- 23,666
(Increase) decrease in (net of effects of acquisitions)
Note receivable (5,700) -- --
Accounts receivable - trade (30,105) (23,807) (66,141)
Prepaid expenses and other current assets (1,004) (22,804) (27,640)
Other (5,790) (587) --
Increase (decrease) in (net of effects of acquisitions)
Accounts payable (221,918) 9,326 (120,756)
Payroll tax obligations 234,441 287,921 63,932
Accrued expenses (150,318) 22,917 (60,960)
Accrued interest 50,206 70,484 13,441
Deferred compensation 200,000 178,571 25,000
---------- ---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (812,486) (417,061) (151,554)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property and equipment -- 1,900 --
Purchases of property and equipment (82,012) (26,995) (8,781)
Cash paid for acquired assets, net of cash assumed (54,629) -- --
Closing costs in connection with acquisition of land (3,903) -- --
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (140,544) (25,095) (8,781)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in advances from officers 175,352 303,301 (51,147)
Proceeds from convertible debentures 49,500 19,420 186,803
Proceeds from notes payable to
officers, shareholders and affiliates 500,000 -- --
Payment of notes payable to officers, shareholders
and affiliates (11,700) (39,811) (3,203)
Proceeds from long-term debt 251,759 80,235 --
Payment of long-term debt (21,097) (63,578) (43,923)
Proceeds from common stock subscribed -- 75,000 50,000
Proceeds from sale of common stock 80,600 -- 56,000
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,024,414 374,567 194,530
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 71,384 (67,589) 34,195
Cash and cash equivalents at beginning of year -- 71,384 3,795
---------- ---------- ----------
Cash and cash equivalents at end of year $ 71,384 $ 3,795 $ 37,990
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF INTEREST
AND INCOME TAXES PAID
Interest paid on borrowings $ 44,818 $ 77,448 $ 52,196
========== ========== ==========
Income taxes paid $ -- $ -- $ --
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE> 28
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
3 MONTHS
YEAR YEAR ENDED
ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, 2000
1998 1999 (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Issuance of common stock for subscriptions receivable $ 255,000 $ -- $ --
Issuance of common stock for conversion of debentures -- -- 110,000
Issuance of common stock for conversion of long term debt
and advances from officers -- 16,920 227,890
Issuance of common stock for land 375,000 -- --
Issuance of common stock for assets of Positive Input, Inc. 636,671 -- --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
<PAGE> 29
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 1 - 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 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of SureQuest Systems, Inc. and its
wholly-owned subsidiaries, collectively referred to as "the Company". All
significant intercompany transactions have been eliminated.
Cash and Cash Equivalents
For Statement of Cash Flows purposes, the Company considers all cash in banks,
certificates of deposit and other highly-liquid investments with maturities of
three months or less when purchased, to be cash and cash equivalents.
Accounts Receivable and Revenue Recognition
The Company's revenue recognition policies are consistent with the American
Institute of Certified Public Accountant's Statement of Position (SOP) 97-2,
software revenue recognition, and SOP 98-9 which is a modification of SOP 97-2.
Revenue is recognized at the time services are performed or goods are shipped,
except for revenue from software licenses purchased by "private label"
distributors, which is recognized when payment is received. Certain of the
Company's customers operate under the terms of thirty day open ended rental
agreements cancelable by either party with thirty days notice. In the normal
course of business, the Company extends unsecured credit to virtually all of its
rental and menu form customers. The Company provides for an allowance for bad
debt for those accounts considered doubtful of collection. At December 31, 1998
and 1999, $22,000 and $54,218 is provided as an allowance for doubtful accounts.
F-9
<PAGE> 30
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Common Stock Subscriptions Receivable
The Company entered into an agreement to sell 1,400,000 shares to an unrelated
third party under the terms of a subscription agreement (see Note 12). The
outstanding balance is $255,000 and $180,000 at year end December 31, 1998 and
1999, respectively, and is presented as a reduction of shareholders' deficit.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on a straight-line
basis, over the estimated useful life (generally 3 to 10 years) of the
respective asset. Major additions and betterments are capitalized and
depreciated over the remaining estimated useful life of the related assets.
Maintenance, repairs, and minor improvements are charged to expense as incurred.
Depreciation expense for the years ended December 31, 1998 and 1999 was $40,211
and $40,943, respectively. Leasehold improvements are capitalized and amortized
over the shorter of the life of the improvement or the remaining life of the
lease. Amortization expense for the years ended December 31, 1998 and 1999
related to leasehold improvements is $5,243 and $11,382, the respectively.
Capitalized Software Costs
The Company classifies the costs of planning, designing and establishing the
technological feasibility of a computer software product as research and
development costs and charges these costs to expense when incurred. After
technological feasibility has been established, i.e. the Company has a working
model in use, costs of producing a marketable product and product masters are
capitalized and amortized on a product-by-product basis using the straight-line
method over the estimated life of the product (5 years). Quarterly, the Company
evaluates the recoverability of the carrying value of the capitalized software
costs by comparing the unamortized capitalized costs to the net realized value,
as determined by an undiscounted cash flow analysis. The amount by which the
carrying value exceeds the net realizable value, if any, is written off. Cost of
maintenance and customer support is charged to expense as incurred.
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of". In accordance with SFAS No. 121, long-lived assets are reviewed
for events or changes in circumstances which indicate that their carrying value
may not be recoverable. There was no impairment of the value of such assets for
the years ended December 31, 1998 and 1999.
F-10
<PAGE> 31
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes
The Company utilizes the asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statements and tax basis
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense or benefit is the tax payable
or refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could vary from the estimates that were used.
Loss Per Share
Basic loss per share is computed by dividing consolidated net loss by the
weighted average number of shares of common stock outstanding during the year.
The common stock equivalents are not included in the diluted loss per share for
1998 and 1999 as they are antidilutive.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
Opinion No. 25, compensation expense for employees is based on the excess, if
any, on the date of grant, between of fair value of the Company's stock over the
exercise price.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of the date on
which the counterparty's performance is complete or the date on which it is
probable that performance will occur.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports. SFAS 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating segments
are identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions about how to
allocate resources and assess performance. As the Company only has one operating
segment this standard currently does not impact the Company's disclosures.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", which establishes accounting and reporting standards for
derivative instruments. SFAS No. 137 is effective for all fiscal quarters for
all fiscal years beginning after June 15, 2000. The adoption of SFAS 137 is not
expected to have a significant impact on the Company's results of operations or
disclosures.
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. Cash used by operating activities for the same periods aggregated
$812,486 and $417,061 respectively. Current liabilities at December 31, 1999 of
$1,608,901 exceed current assets of $110,455. Total liabilities at December 31,
1999 of $3,371,710 exceed total assets of $1,759,655. The Company's continued
existence depends upon the success of management's efforts to raise additional
capital necessary to meet the Company's obligations as they come due and to
obtain sufficient capital to execute its business plan. The Company intends to
obtain capital primarily through issuances of common stock. There can be no
degree of assurance given that the Company will be successful in completing
additional financing transactions.
F-11
<PAGE> 32
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 3 - GOING CONCERN - Continued
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.
The summary of the fair value of assets acquired and liabilities assumed is as
follows:
<TABLE>
<S> <C>
Current assets, net of cash acquired ........... $ 35,337
Fixed assets ................................... 4,295
Software acquired .............................. 1,467,926
Current liabilities ............................ (593,547)
Long-term liabilities .......................... (222,711)
-----------
$ 691,300
===========
</TABLE>
The following unaudited pro forma consolidated information for the year ended
December 31, 1998 assumes the acquisition occurred as of January 1, 1998:
<TABLE>
<S> <C>
Revenues ..................................... $ 1,445,193
Net Loss ..................................... $(2,272,198)
Loss per share (basic and diluted) ........... $ (.10)
</TABLE>
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.
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. Amortization expense related to its DOS
package is $137,739 for 1998 and 1999, respectively. This package will be fully
amortized during the year 2000. Amortization expense related to the Windows
Package is $159,025 and $293,585 for 1998 and 1999, respectively.
F-12
<PAGE> 33
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 6 - CREDIT LINES AND LONG-TERM DEBT
<TABLE>
1998 1999
-------- --------
<S> <C> <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 21.98% per annum $ 20,079 $ 19,048
Revolving credit line with bank secured by the personal guarantee of a
shareholder; minimum monthly payments of 2% of the outstanding principal;
interest 16.99% per annum 7,850 7,395
Revolving credit line with bank secured by the personal guarantee of an
affiliate; interest at 18.65% per annum 7,352 3,873
Revolving credit line with bank secured by the personal guarantee of an
affiliate; interest at 27.07% per annum 4,767 1,258
Promissory note to bank; matures June 17, 2000; quarterly payments of
interest only at 9.75% per annum; principal due at maturity, secured by
land 125,000 112,500
Extended payment terms from two suppliers in the form of unsecured promissory
notes; (1) vendor promissory note of $36,001; monthly installments of principal
and interest of $5,000; interest at 1.5% per month; matures June 2000; (2)
vendor promissory note of $40,390; monthly installments of principal and
interest of $3,587; interest at 15.9%; matures June 2000. -- 60,235
</TABLE>
F-13
<PAGE> 34
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 6 - CREDIT LINES AND LONG-TERM DEBT - CONTINUED
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Note payable to a bank; collateralized by the Company's receivables,
inventory and equipment; interest at prime plus 2.75% (11.5% at December 31,
1999); payable in monthly installments of principal and interest of $875;
matures September 2001 25,450 16,746
Note payable to a bank; collateralized by the Company's receivables, inventory
and equipment; interest at prime plus 2.75% (11.5% at December 31, 1999); payable
in monthly installments of principal and interest of $856; matures April 2003 35,970 29,302
Note payable to a bank; collateralized by an automobile; interest at 8.75%
per annum; payable in monthly installments of principal and
interest of $470; matures January 2000 6,661 495
Note payable to bank; unsecured; interest at 10% per annum; payable in monthly
installments of principal and interest of $810; matures November 2003 38,327 32,715
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 -- 4,406
Unsecured promissory note to third party; interest at 8% per annum; payable in
monthly installments of principal and interest of $5,562; matures April 2001 100,000 84,139
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 20,032 16,033
</TABLE>
F-14
<PAGE> 35
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 6 - CREDIT LINES AND LONG-TERM DEBT - CONTINUED
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Promissory note; interest rate of 10%; interest payments due monthly;
matures April 9, 2000; secured by principal of the company -- 20,000
---------- ----------
Total long-term debt 391,488 408,145
Less current maturities 213,266 299,606
---------- ----------
Long-term debt $ 178,222 $ 108,539
========== ==========
</TABLE>
NOTE 6
<TABLE>
<CAPTION>
Principal maturities of credit lines and long-term debt are as follows at December 31, 1999:
<S> <C>
Year
2000 $299,606
2001 69,924
2002 23,867
2003 14,224
2004 524
--------
$408,145
========
</TABLE>
NOTE 7 - CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Four debentures were issued during the year ended December 31, 1998 in the
aggregate principal amount of $49,500; terms of the debentures included interest
at 12% and an option to convert to Company's common ranging from $.10 to $.625
per share. $17,500 principal was converted to common stock in 1999; $20,000
additional debentures were issued April 4, 1999 at a $.12 per share conversion
rate, monthly payments of $500 for principal and interest on $7,000 of
debentures maturing 2001, $45,000 debentures accrue interest with principal and
interest due at maturity, 2001; all amounts unsecured $ 49,500 $ 52,000
========== ==========
</TABLE>
NOTE 8 - NOTES PAYABLE TO OFFICERS, SHAREHOLDERS & AFFILIATES
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
$100,000 unsecured promissory note payable to shareholder affiliate;
interest at 10% per annum payable monthly; principal payable on demand $ 100,000 $ 100,000
$10,000 unsecured promissory note payable to
shareholder affiliate; interest payable semi-annually
at 8% per annum; principal payable on demand 10,000 10,000
$10,000 unsecured demand promissory note payable to
shareholder; interest payable at 10% per annum;
principal payable on demand 5,800 5,800
</TABLE>
F-15
<PAGE> 36
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 8 - NOTES PAYABLE TO OFFICERS, SHAREHOLDERS & AFFILIATES - Continued
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
$10,000 unsecured demand promissory note payable to shareholder; interest
payable at 10% per annum; principal payable on demand 10,000 10,000
Unsecured promissory note to affiliate; interest at 10%; monthly installments of
principal and interest payments of $806; matures May 2002 25,000 20,705
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 500,000 500,000
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 222,711 220,811
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 125,000 91,384
-------- --------
Total notes payable to officers, shareholders and affiliates 998,511 958,700
Less current portion 165,535 138,973
-------- --------
$832,976 $819,727
======== ========
</TABLE>
NOTE 8
Principal maturities of notes payable to officers, shareholders, and affiliates
are as follows at December 31, 1999:
<TABLE>
<CAPTION>
Year Principal Amount
<S> <C>
2000 $ 138,973
2001 815,793
2002 3,934
----------
TOTAL $ 958,700
==========
</TABLE>
NOTE 9 - ADVANCES FROM OFFICERS
Advances from officers/shareholders of the Company are non-interest bearing. In
accordance with a verbal agreement with its majority shareholder the Company
will not be expected to repay a portion of this advance during 2000 and
accordingly a portion of the advances are classified as long-term in the
accompanying consolidated financial statements.
F-16
<PAGE> 37
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 10 - DEFERRED COMPENSATION
Deferred compensation relates to salaries accrued for certain officers, not yet
paid. These amounts are convertible into common stock of the Company determined
on the last business day of each respective year. The amounts are cumulatively
convertible. At December 31, 1998 and 1999, the officer could have elected to
convert the deferred compensation obligation outstanding to 1,666,666 and
3,546,361 shares, respectively.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosure About Fair Value
of Financial Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate. At
December 31, 1998 and 1999 the carrying value all of the Company's accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of their short term nature. Convertible debentures, credit lines, notes
payable and long-term debt carrying values approximate fair values based on the
borrowing rates currently available to the Company for loans with similar terms.
NOTE 12 - 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 agreed to in principle in 1998 and formally executed June 17, 1999. Under
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. The remaining two payments
of $25,000 are due in April, 2000. Should either of these two remaining
installments default, the agreement will revert to the original principal amount
plus accrued interest due by the buyer less payments previously received. The
outstanding note receivable amounts are classified in the accompanying
consolidated balance sheet as a contra to equity.
F-17
<PAGE> 38
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 13 - 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. 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 of the respective year's obligations. The total
obligation associated with these delinquent amounts due is $234,441 and $522,362
at December 31, 1998 and 1999, respectively and has been reflected in the
accompanying consolidated financial statements as Payroll Tax Obligations.
The Company has not filed Federal Income Tax Returns for the years 1996, 1997,
1998 and 1999. The Company had losses in each of these years and therefore, no
taxes are payable for any of these years.
NOTE 14 - 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 was
recorded at estimated fair value based upon the report of an independent
accredited appraiser.
NOTE 15 - INCOME TAXES
Deferred tax assets and liabilities at December 31, 1998 and 1999 consist of
the following:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Current deferred tax asset $ 7,480 $ 18,434
Non-Current deferred tax asset 786,571 1,136,826
Non-Current deferred tax liability (538,689) (392,039)
Valuation allowance (255,362) (763,221)
--------- -----------
Net deferred tax asset $ -0- $ -0-
========= ===========
</TABLE>
F-18
<PAGE> 39
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 15 - INCOME TAXES - CONTINUED
The current deferred tax asset results from the allowance for doubtful accounts.
The non-current deferred tax asset results primarily from the net operating loss
carryforward and deferred compensation. The net operating loss available at
December 31, 1999 amounts to approximately $2,900,000 and begins to expire in
2012. The non-current deferred tax liability results from capitalized software
costs that have previously been expensed for tax purposes. At December 31, 1998
and 1999 the net deferred tax asset has a 100% allowance due to the uncertainty
of the Company generating future taxable income.
The Company's income tax benefit for the years ended December 31, 1998 and 1999
differed from the statutory federal rate of 34% as follows:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Statutory rate applied to loss before
income taxes $(704,262) $(536,441)
Increase in income taxes resulting from amounts
not deductible for income tax purposes 66,570 28,582
Deferred tax liabilities acquired 499,095 --
Increase in valuation allowance 138,597 507,859
--------- ---------
Income tax Benefit $ -- $ --
========= =========
</TABLE>
NOTE 16 - COMMITMENTS AND CONTINGENCIES
The Company has operating leases for its office facilities, automobiles, and
certain equipment. Rental expense for operating leases was $95,994 and $111,630
for 1998 and 1999, respectively. Future minimum rental commitments under non
cancelable leases for the succeeding five years are as follows:
<TABLE>
<CAPTION>
Year ended
December 31 Amount
- ------------------- ---------
<S> <C>
2000 $ 111,275
2001 102,081
2002 85,369
2003 38,727
2004 6,625
---------
$ 344,077
=========
</TABLE>
The Company is currently a defendant in a lawsuit in which the plaintiffs claim
that the Company owes them $300,000 as a result of the original merger with
Rosegold Corporation in 1996. Based upon the advice of its counsel the Company
believes there is little, if any, merit to this lawsuit. The Company is unable
to estimate the possible cost of this litigation. The amount could be material
to the results of operations and financial condition of the Company if the suit
were settled unfavorably.
The Company may be subject to other various legal proceedings and claims that
arise in the ordinary course of business. Management currently believes that
resolving these matter(s) will not have a material adverse impairment on the
Company's financial position or its results of operations.
NOTE 17 - FINANCIAL RISK
During 1998 and 1999 approximately 56% and 46%, respectively, of total revenues
are attributable to three distributors that represent the Company through
private label software products for the respective years. During 1998 the three
distributors accounted for 24%, 16% and 16%, respectively, of the Company's
total revenues. During 1999 the three distributors accounted for 21%, 19% and
6%, respectively of the Company's total revenues.
F-19
<PAGE> 40
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 18 - STOCK OPTIONS
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for all options granted to employees. Had compensation
cost for the Company's stock based compensation Plans been determined consistent
with FASB statement No. 123, "Accounting for Stock Based Compensation," the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1999
------------ ------------
<S> <C> <C>
Net loss As reported $ (2,058,826) $ (1,577,767)
Pro forma $ (2,103,929) $ (1,581,888)
Net loss per share As reported $ (.09) $ (.06)
Pro forma $ (.09) $ (.06)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1998: dividend yield of 0 percent; expected volatility of 290%; risk
free interest rate of 6%; and an expected life of 1 to 3 years.
A summary of changes in the Company's compensatory options follows:
<TABLE>
<CAPTION>
Employee Stock Options Other Stock Options Combined Total
Weighted Weighted
Average Average
Exercise Options/ Exercise Options/
Options Price Warrants Price Warrants
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1997 -- $ -- -- $ -- --
Granted 250,000 .17 849,000 .27 1,099,000
Exercised -- -- (400,000) .16 (400,000)
Expired -- -- -- -- --
------- ----- -------- ----- ---------
Outstanding at December 31, 1998 250,000 .17 449,000 .37 699,000
Granted -- -- -- -- --
Exercised -- -- -- -- --
Expired -- -- (270,000) .38 (270,000)
------- ----- -------- ----- ---------
Outstanding at December 31, 1999 250,000 $ .17 179,000 $ .31 429,000
======= ===== ======== ===== =========
</TABLE>
The following table summarizes information about employee stock options
outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted
Range of Number remaining average Number Weighted average
exercise prices outstanding contractual life exercise price Exercisable exercise price
---------------- ------------- ----------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
1999 $.15-$.25 250,000 .1 years $.17 250,000 $.17
</TABLE>
The following table summarizes information about other stock options outstanding
at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted
Range of Number remaining average Number Weighted average
exercise prices outstanding contractual life exercise price Exercisable exercise price
---------------- ------------- ----------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
1999 $.10-$.63 179,000 .6 years $.31 115,000 $.17
</TABLE>
The other stock options were issued with convertible debentures, common stock
sold for cash, the acquisition of land and for services performed.
NOTE 19 - 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 paid were
$9,850 and $6,248 for the years 1998 and 1999.
During the year ended December 31, 1998, the Company issued 500,000 of the
Company's common stock to an officer/principle who arranged debt funding to
accommodate the acquisition of the assets of Positive Input, Inc. As the debt
is due on demand the value of the common stock, $205,000 was expensed during
1998 as a financing fee.
During the year ended December 31, 1999, the Company issued 250,000 of the
Company's common stock to an officer/shareholder of the Company who provided a
personal guaranty in order to extend the maturity of a Company's debt
obligation. The shares were valued at $27,500 which has been recorded as
compensation expense in the accompanying consolidated financial statements.
Certain officers/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 during 1998 or 1999. Accrued
interest related to these obligations is $32,231 and $82,231 at December 31,
1998 and 1999.
NOTE 20 - SEGMENT INFORMATION
Surequest Systems, Inc. has two reportable segments: Dietary Services and
Supplies and Software Sales and Rental. The Dietary Services and Supplies
segment provides menu services that consist of hard copy menus to its
customers. The Software Sales and Rental segment provides sales and rental of
its proprietary dietary software, installation services, technical support to
the user and related paper products. The Company also has a proprietary
scheduling software sales and technical support segment but the revenues are
insignificant to the consolidated operations of the Company and are included
with the Software Sales and Rental segment.
The accounting policies of the segments are the same as described in the summary
of significant accounting policies. Assets of the segment groups are not
relevant for management of the business nor for disclosure. Amortization of the
proprietary software is allocated in accordance with the revenue provided by
each segment. Accordingly interest expense is also allocated on the lines of
segment revenue provided. Income taxes, if any, and other unusual items are not
allocated.
Each respective segment is managed separately and requires different strategic
and marketing efforts.
Revenues from the Software Sales and Rental segment include sales from Canada of
$194,069 and $90,847 for the years ended December 31, 1998 and 1999,
respectively. All other revenues are from U.S. operations.
Segment Loss Allocation
<TABLE>
<CAPTION>
Dietary Software
Services and Sales and
Year Ended December 31, Supplies Rental Total
------------- ------------- -------------
<S> <C> <C> <C>
1998
Revenue $ 448,239 $ 764,584 $ 1,212,823
Interest Expense 54,737 82,105 136,842
Amortization - software 118,705 178,058 296,763
Segment loss (754,583) (1,316,775) (2,071,358)
1999
Revenue $ 551,032 $ 764,735 $ 1,315,767
Interest Expense 69,211 95,971 165,182
Amortization - software 180,725 250,599 431,324
Segment loss (605,636) (933,118) (1,538,754)
</TABLE>
<TABLE>
<CAPTION>
Segment Loss Reconciliation
1998 1999
------------- ------------
<S> <C> <C>
Total loss for reportable segments $ (2,071,358) $ (1,538,754)
Unallocated amounts:
Investment expense -- (37,047)
Loss from disposal of assets -- (1,966)
------------- -------------
Net loss $ (2,071,358) $ (1,577,767)
============= =============
</TABLE>
NOTE 21 - UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim financial information as of March 31, 2000 and for the
three months ended March 31, 2000 has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of this interim information.
Operating results for the three months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2000.
F-20
