<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number
SUREQUEST SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 41-1826635
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13606 T I Blvd., Dallas, Texas 75243
----------------------------------------
(Address of principal executive offices)
972 / 238-7200
(Issuer's telephone Number)
check whether the issuer has (1) filed all reports required by Section 13 or
15(d) of the Securities Exchange Act during the past 12 months, and (2) been
subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
As of September 30, 2000, 32,402,213 shares of Common Stock were outstanding.
<PAGE> 2
THIS DOCUMENT IS PREPARED AND FILED UNDER THE REQUIREMENTS OF REGULATIONS S-B OF
THE SECURITIES AND EXCHANGE COMMISSION, EFFECTIVE JULY 31, 1992.
INDEX
<TABLE>
<S> <C>
PART I - Financial Information
Item 1. - Financial Statements
Consolidated Balance Sheets at September 30, 2000 (unaudited)
and December 31, 1999.............................................................................................3
Consolidated Statements of Operations for the three
months ended September 30, 2000 and 1999 (unaudited)..............................................................5
Consolidated Statements of Operations for the nine
months ended September 30, 2000 and 1999 (unaudited)..............................................................6
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 (unaudited)..............................................................7
Notes to Consolidated Financial Statements........................................................................8
Item 2. Management's Discussion and Analysis or Plan of Operation...............................................14
PART II - Other Information......................................................................................18
Item 1. Legal Proceedings.......................................................................................18
Item 2. Changes in Securities...................................................................................18
Item 3. Defaults Upon Senior Securities.........................................................................18
Item 4. Submission of Matters to a Vote of Securities Holders...................................................18
Item 5. Other Information.......................................................................................18
Item 6. Exhibits and Reports on Form 8-K........................................................................18
Signature........................................................................................................19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
December 31, 2000
1999 (Unaudited)
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,795 $ 32,488
Notes receivable 5,700 8,200
Accounts receivable - trade, less allowance
for doubtful accounts of $54,218 and $39,432 at
December 31, 1999 and September 30, 2000,
respectively 71,704 132,999
Prepaid expenses and other current assets 29,256 42,354
-------------- --------------
Total current assets 110,455 216,041
PROPERTY AND EQUIPMENT
Office furniture and fixtures 13,871 13,871
Computer equipment 166,488 173,297
Office and other equipment 28,257 28,675
Automobile 23,500 --
Leasehold improvements 60,491 66,479
-------------- --------------
292,607 282,322
Less: Accumulated depreciation and amortization (191,377) (196,678)
-------------- --------------
Net property and equipment 101,230 85,644
OTHER ASSETS
Land held for sale 378,903 378,903
Capitalized software development costs, net of
accumulated amortization of $889,000 and $1,212,493
at December 31, 1999 and September 30, 2000,
respectively 1,153,055 829,563
Other 16,012 11,870
-------------- --------------
Total other assets 1,547,970 1,220,336
-------------- --------------
TOTAL ASSETS $ 1,759,655 $ 1,522,021
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
September 30,
December 31, 2000
1999 (Unaudited)
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Convertible debentures $ 52,000 $ 127,303
Current portion of notes payable to officers,
shareholders and affiliates 138,973 129,063
Current portion of credit lines and long-term debt 299,606 168,424
Accounts payable - trade 287,922 291,036
Payroll tax obligations 522,362 649,635
Accrued expenses 122,735 47,699
Accrued interest 121,066 177,139
Advances from officers and affiliates 64,237 --
-------------- --------------
Total current liabilities 1,608,901 1,590,299
CREDIT LINES AND LONG-TERM DEBT, net of current portion 108,539 45,837
NOTES PAYABLE TO OFFICERS, SHAREHOLDERS
AND AFFILIATES, net of current portion 819,727 824,657
LONG-TERM ADVANCES FROM OFFICERS 437,372 --
DEFERRED COMPENSATION 397,171 279,883
-------------- --------------
Total liabilities 3,371,710 2,740,676
COMMITMENTS AND CONTINGENCIES (Note 13) -- --
SHAREHOLDERS' DEFICIT
Preferred stock - $.001 par value, 1,000,000 shares
authorized, none issued and outstanding -- --
Common stock - $.001 par value, 50,000,000 shares
authorized, 27,196,362 and 32,402,213 issued and
outstanding at December 31, 1999 and September 30,
2000, respectively 27,196 32,402
Common stock subscriptions receivable (180,000) --
Additional paid-in capital 4,033,346 5,088,938
Accumulated deficit (5,492,597) (6,339,995)
-------------- --------------
Total shareholders' deficit (1,612,055) (1,218,655)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 1,759,655 $ 1,522,021
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(Unaudited)
<TABLE>
<CAPTION>
September 30,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
Revenues
Dietary services and supplies $ 142,288 $ 132,754
Software sales and rental 282,779 239,884
------------ ------------
Total revenues 425,067 372,638
Cost of revenues
Dietary services and supplies 63,864 53,777
Software sales and rental 52,993 35,594
------------ ------------
Total cost of revenues 116,857 89,371
------------ ------------
Gross profit 308,210 283,267
Operating expenses
Sales and marketing 79,287 42,940
General and administrative 283,075 210,230
Depreciation and amortization 121,318 119,916
------------ ------------
Total operating expenses 483,680 373,086
------------ ------------
Loss from operations (175,470) (89,819)
Other (income) expense
Interest expense 37,141 92,853
Tax penalties 26,391 592
Other, net -- (10)
------------ ------------
Total other expense, net 63,532 93,435
------------ ------------
Net loss before income tax provision (239,002) (183,254)
Income tax provision -- --
------------ ------------
Net loss $ (239,002) $ (183,254)
============ ============
Basic and diluted net loss per weighted average
share of common stock outstanding $ (0.01) $ (0.01)
============ ============
Weighted average number of shares of basic
and diluted common stock outstanding 26,814,956 32,397,396
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(Unaudited)
<TABLE>
<CAPTION>
September 30,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
Revenues
Dietary services and supplies $ 448,595 $ 456,608
Software sales and rental 572,789 810,832
------------ ------------
Total revenues 1,021,384 1,267,440
Cost of revenues
Dietary services and supplies 193,924 184,403
Software sales and rental 197,731 124,369
------------ ------------
Total cost of revenues 391,655 308,772
------------ ------------
Gross profit 629,729 958,668
Operating expenses
Sales and marketing 223,169 164,767
General and administrative 952,008 951,472
Depreciation and amortization 363,276 356,365
------------ ------------
Total operating expenses 1,538,453 1,472,604
------------ ------------
Loss from operations (908,724) (513,936)
Other expense
Interest expense 93,392 203,115
Tax penalties 59,802 687
Other, net -- 129,660
------------ ------------
Total other expense, net 153,194 333,462
------------ ------------
Net loss before income tax provision (1,061,918) (847,398)
Income tax provision -- --
------------ ------------
Net loss $ (1,061,918) $ (847,398)
============ ============
Basic and diluted net loss per weighted average
share of common stock outstanding $ (0.04) $ (0.03)
============ ============
Weighted average number of shares of basic
and diluted common stock outstanding 26,548,096 30,609,412
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(Unaudited)
<TABLE>
<CAPTION>
September 30,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,061,918) $ (847,398)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 363,276 356,365
Provision for bad debt -- 8,000
Common stock options issued for services
and in conjunction with debt 11,498 11,047
Common stock issued as payment for consulting services 72,000
197,196
Common stock issued as litigation settlement -- 85,000
Convertible debentures issued with a beneficial conversion feature -- 23,666
(Increase) decrease in
Notes receivable -- (2,500)
Accounts receivable - trade (128,395) (69,295)
Prepaid expenses and other current assets (2,525) (13,098)
Other 3,511 4,143
Increase (decrease) in
Accounts payable - trade (27,775) 3,114
Payroll tax obligation 241,873 127,273
Accrued expenses (58,968) (75,036)
Accrued interest 25,545 53,774
Deferred compensation 150,000 56,400
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (411,878) (81,349)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (19,160) (17,287)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in advances from officers 310,207 --
Proceeds from convertible debentures 20,000 78,303
Payments on convertible debentures (8,000) (3,000)
Proceeds from notes payable to officers,
shareholders and affiliates -- 16,998
Payment on notes payable to officers, shareholders and affiliates (34,795) (21,978)
Proceeds from long-term debt 38,446 634
Payments on long-term debt (43,114) (99,628)
Proceeds from common stock subscribed 45,000 100,000
Proceeds from sale of common stock -- 56,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 327,744 127,329
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (103,294) 28,693
Cash and cash equivalents at beginning of period 71,384 3,795
------------ ------------
Cash and cash equivalents at end of period $ (31,910) $ 32,488
============ ============
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Retirement of affiliate and long-term officer advances
by convertible debenture issuance $ -- $ 501,609
Retirement of deferred compensation by convertible
debenture issuance -- 173,689
Retirement of long-term debt by convertible debenture issuance -- 94,890
Retirement of convertible debenture by common stock issuance -- 767,889
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE> 8
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") for interim financial
information and in accordance with the instructions per Item 310(b) of
Regulation SB. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. These financial
statements should be read in conjunction with the Company's December 31, 1999
financial statements contained in the Company's previously filed Form 10-SB.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three month and nine month periods ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2 - BACKGROUND AND ORGANIZATION
SureQuest Systems, Inc., (formerly Rosegold Corporation), is a publicly traded
company and was incorporated under the laws of the State of Nevada on August 19,
1941. SureQuest Systems, Inc. is in the business of providing dietary services,
supplies and private consulting, and developing and selling proprietary dietary
management software products. Primary customers include hospitals, nursing homes
and assisted living facilities in the United States and Canada.
NOTE 3 - GOING CONCERN UNCERTAINTY
The consolidated financial statements have been prepared on the assumption that
the Company will continue as a going concern. The Company sustained a net loss
of $2,071,358 and $1,577,767 during the years ended December 31, 1998 and 1999,
respectively, and a net loss of $847,398 for the nine months ended September 30,
2000. Current liabilities at September 30, 2000 of $1,590,299 exceed current
assets of $216,041. Total liabilities at September 30, 2000 of $2,740,676 exceed
total assets of $1,522,021. The Company's continued existence depends upon the
success of management's continued efforts to raise additional capital necessary
to meet the Company's obligations as they come due and to obtain capital to
execute its business plan. The Company intends to obtain capital primarily
through issuance of common stock and debt financing. There can be no degree of
assurance that the Company will be successful in securing additional capital to
sustain operations.
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.
8
<PAGE> 9
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CAPITALIZED SOFTWARE COSTS
The Company has two proprietary dietary software packages, a DOS based platform
that was developed internally, and a Windows based package that was purchased in
connection with the Positive Input, Inc. acquisition in 1998. Amortization
expense related to its DOS package is $103,304 for the nine months ended
September 30, 2000. This package will be fully amortized during the year 2000.
Amortization expense related to the Windows package is $220,189 for the nine
months ended September 30, 2000.
NOTE 5 - CREDIT LINES AND LONG-TERM DEBT
Credit lines and long-term debt consists of the following at September 30, 2000:
<TABLE>
<S> <C>
$21,300 revolving credit line with bank secured by personal guarantee of a
shareholder; minimum monthly payments of 2%
of the outstanding principal; interest at 24.98% per annum $ 18,343
Revolving credit line with bank secured by the personal guarantee of a
shareholder; minimum monthly payments of 2%
of the outstanding principal; interest 19.74% per annum 7,190
Revolving credit line with bank secured by the personal
guarantee of an affiliate; interest at 18.65% per annum 2,511
Promissory note to bank; matures June 17, 2001; quarterly payments of interest
only at 10% per annum; principal due
at maturity; secured by land 100,000
Extended payment terms from one supplier in the form of an
unsecured demand promissory note 7,800
Note payable to a bank; collateralized by the Company's receivables, inventory
and equipment; interest at prime plus 2.75% (12.25% at September 30, 2000);
payable in monthly installments of principal and interest of $887;
matures September 2001 9,906
Note payable to a bank; collateralized by the Company's receivables, inventory
and equipment; interest at prime plus 2.75% (12.25% at September 30, 2000);
payable in monthly installments of principal and interest of $877;
matures April 2003 23,674
Note payable to a bank; unsecured; interest at 10% per
annum; payable in monthly installments of principal and
interest of $810; matures November 2003 28,355
Note payable to finance company; secured by equipment; interest at 25.45% per
annum; payable in monthly installments of principal and interest of $171;
matures
August 2002 3,735
</TABLE>
9
<PAGE> 10
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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 12,747
--------
Total credit lines and long-term debt 214,261
Less current maturities 168,424
--------
$ 45,837
========
</TABLE>
NOTE 6 - CONVERTIBLE DEBENTURES
Convertible debentures consist of the following at September 30, 2000:
Principal balance outstanding at September 30, 2000 consists of two debentures;
monthly payments of $500 for principal and interest on $4,000 of debentures
maturing 2001; additional debentures issued January 11, 2000 in the amount of
$123,000 that included $45,000 of debentures outstanding and previously issued
in 1998 and 1999 and accrued interest of $8,303 related thereto; terms of this
debenture include interest at 11% compounded semi-annually; principal and
accrued interest mature January 10, 2001; holder may convert $31,429 of
principal and accrued interest at $.30 per share; in addition holder has the
option to acquire 938,096 Company common shares at prices ranging from
$.10-$.30. These warrants expire January 21, 2002. Total outstanding balance at
September 30, 2000 is $127,303.
NOTE 7 - NOTES PAYABLE TO OFFICERS, SHAREHOLDERS AND AFFILIATES
Note payable to officers, shareholders and affiliates consist of the following
at September 30, 2000:
<TABLE>
<S> <C>
$100,000 unsecured promissory note payable to shareholder affiliate; principal
and interest payments of $965 beginning May 14, 2000 for a period of
twenty four months with a balloon principal
payment of $96,517 due April 14, 2002 $ 99,330
$10,000 unsecured promissory note payable to shareholder affiliate; interest
payable semi-annually at 8% per annum; principal payable
on demand 10,000
Unsecured promissory note to affiliate; interest at 10%; monthly installments of
principal and interest payments of $806; matures
May 2002 14,804
Promissory note to shareholder affiliate; interest at 10% with total accrued
interest and principal payable at maturity, January 2001;
security interest in all assets of the Company subordinated to
certain banks and shareholders holding prioritized liens 500,000
Promissory note to shareholder; 100,000 shares of Company stock held in escrow
as security; 10% interest with accrued interest and principal payable on
demand; shareholder has verbal agreement with Company not to demand
redemption within the
following 12 months 220,811
</TABLE>
10
<PAGE> 11
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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 87,496
$31,400 unsecured promissory note to shareholder; interest at 10%;
monthly principal and interest installments of $2,761 beginning
May 15, 2000 21,279
--------
Total notes payable to officers, shareholders and affiliates 953,720
Less current portion 129,063
--------
$824,657
========
</TABLE>
NOTE 8 - LITIGATION SETTLEMENT
On June 12, 2000 the Company entered into a settlement agreement with plaintiffs
that sought additional consideration from the Company as a result of the
original merger with Rosegold Corporation in 1996. This settlement agreement
provides plaintiffs $25,000 payable in five equal monthly installments of $5,000
beginning in June 2000. In addition, the Company issued to plaintiffs in escrow
500,000 of the Company's common shares that are subject to Rule 144 of the
Securities Exchange Act. If these shares have an aggregate value of more than
$400,000, determined by the average of the mid of the high bid and low asked
price at the closing for the first five trading days prior to the first trading
day 365 days after execution of this Agreement, the excess number of shares are
to be returned to the Company.
NOTE 9 - DEFERRED COMPENSATION
Deferred compensation relates to salaries accrued for a certain
officer/shareholder. These amounts are convertible into common stock of the
Company with the conversion price determined on the last business day of each
respective year. The amounts are cumulatively convertible. At September 30, 2000
the officer could have elected to convert the deferred compensation obligation
outstanding to 2,831,938 shares.
NOTE 10 - COMMON STOCK SUBSCRIPTIONS RECEIVABLE
On September 17, 1998 the Company issued 1,400,000 shares of Company common
stock to an unrelated third party at $0.16 per share under terms of a promissory
note. Under the terms of this note, the buyer agreed to remit to Company
$255,000 in 3 equal installments of $85,000 on June 24, July 23 and August 24,
1999, respectively. In addition, the note provides for an interest payment
calculated at 8% per annum, calculated on the value of the shares within a
definable period. The buyer had an option to redeem the obligation by returning
the stock at any time to the Company for the outstanding subscribed balance owed
to the Company. During the year ended December 31, 1999, the buyer remitted to
Company $75,000 of the obligation. At March 22, 2000, the Company agreed to
accept a total of $100,000 in 3 installments as settlement of the remaining
obligation with the first payment of $50,000 received on March 27, 2000 and the
remaining $50,000 was received during April 2000.
11
<PAGE> 12
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - PAYROLL TAX OBLIGATIONS AND INCOME TAXES
The Company has not remitted Federal and State employer and employee payroll
taxes for the years 1998 and 1999 and for the first quarter of 2000. The Company
has determined this obligation to be the actual amounts of the tax withheld from
employees and the employer portion of the Social Security Federal Tax obligation
in addition to an estimated penalty accrual for each respective year's
obligations. The total obligation associated with these delinquent amounts due
is estimated by management to be $649,635 at September 30, 2000 and has been
reflected in the accompanying consolidated financial statements as Payroll Tax
Obligations. At July 5, 2000, the Department of Treasury issued notices to the
Company that the total assessed liability is $726,538. The obligation recorded
of $649,635 is an estimate by Company's management of the final settlement
balance.
The Company incurred significant operating losses in each of the years 1997,1998
and 1999 and therefore, no federal income taxes are payable.
NOTE 12 - LAND HELD FOR SALE
The Company acquired certain undeveloped land in 1998 in exchange for 500,000
shares of the Company's common stock. The agreement included a one year option
granted to the seller to acquire an additional 250,000 shares at $0.40 per
share. The option was not exercised and expired May 4, 1999. The land is
recorded at estimated fair value at date of acquisition based upon the report of
an independent accredited appraiser.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company has operating leases for its office facilities, automobiles, and
certain equipment. Future minimum rental commitments under non cancelable leases
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31 Amount
----------- ---------
<S> <C>
2000 (3 months) $ 24,464
2001 93,226
2002 79,733
2003 33,863
2004 1,542
---------
$ 232,828
=========
</TABLE>
At March 8, 2000, a creditor agreed to accept 333,333 of the Company's common
shares in exchange for a note obligation of $66,667 and accrued interest of
$7,731. As part of the consideration, the Company agreed to guaranty a minimum
value of $.20 per share to the holder at March 8, 2001. If the average of the
closing bid and ask price of the shares at March 8, 2001 is less than 20 cents
per share, the Company will issue additional shares so that the total shares
issued is equal to $66,667.
12
<PAGE> 13
SUREQUEST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company may be subject to other various legal proceedings and claims that
arise in the ordinary course of business. Management believes that resolving
these matter(s), if any, will not have a material adverse impairment on the
Company's financial position or its results of operations.
NOTE 14 - STOCK OPTIONS
The following table summarizes information regarding options outstanding at
September 30, 2000:
<TABLE>
<CAPTION>
Number Range of Range of
Classification Outstanding Exercise Price Expiration
-------------- -------------- -------------- --------------
<S> <C> <C> <C>
Employee 250,000 $0.25 02-02-01
Other 1,719,763 $0.07 to $0.50 11-15-00 to
03-17-02
</TABLE>
NOTE 15 - RELATED PARTY TRANSACTIONS
A member of the Company's Board of Directors and an officer also provides legal
services for the Company. The officer does not receive a salary from the Company
but bills for services rendered as an independent contractor. Fees billed for
the nine months ended September 30, 2000 were not in excess of $10,000.
On May 24, 2000, the Company's Chairman and President conveyed to a
shareholder/former officer of the Company $430,000 of Company obligations owed
in exchange for certain personal indebtedness owed by the Company's
Chairman/President to the shareholder/former officer. As part of the Agreement,
the individual assuming the Company's obligation agreed to convert the entire
obligation to $430,000 of Convertible Subordinated Debentures pursuant to the
Company's Private Placement Memorandum dated March 8, 2000 and concurrently
convert these debentures to 1,433,330 of the Company's common stock. The
conversion rate applied of $.30 per share is stipulated in the Private Placement
Memorandum and was in excess of the $.20 per share closing price at May 24,
2000.
Certain officers and/or shareholders of the Company have provided debt funding
to the Company during the years ended December 31, 1998 and 1999 respectively.
Terms of the debt obligations are described in Note 8 in the accompanying
consolidated financial statements.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE DISCUSSION IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" IN THIS FORM 10-QSB MAY CONTAIN ANALYSES AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTIONS 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND ECONOMIC RISKS, AND OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN RISK FACTORS THAT MAY IMPACT
FUTURE OPERATING RESULTS AS SET FORTH IN OUR ANNUAL REPORT FILED ON FORM 10-SB
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998. THE CAUTIONARY STATEMENTS MADE
IN THIS FORM 10-QSB SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED
FORWARD-LOOKING STATEMENTS, WHEREVER THEY APPEAR IN THIS FORM 10-QSB. THESE
STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONCERNING THE POTENTIAL
OPERATIONS AND RESULTS OF THE COMPANY DESCRIBED BELOW.
OVERVIEW AND RECENT DEVELOPMENTS
SureQuest Systems, Inc. (the "Company") is a provider of dietary and food
management software, menu services and dietary consulting to the institutional
food service industry. Since 1984 the Company has focused on developing a client
base in healthcare food service, concentrating on the Long-Term Care segment of
the industry represented by nursing homes and assisted living facilities. The
Company's wholly-owned subsidiaries' operations, assets and liabilities are
insignificant and not material to the Company's operations.
SureQuest Systems, Inc. believes that it is uniquely positioned in its industry
because of its proprietary technology that provides nutrition management systems
and services to food service institutions in over 40 states and Canada through
strategic partner networks. These networks, comprising certain of the largest
food distribution and healthcare management companies in the United States and
Canada, have aligned with the Company because of their recognition that the
Company's menu based products and services are state of the art in the industry.
The Company's software, among other features, manages dietary and kitchen
operations, provides menus that accurately forecast food purchase needs, and
monitors and analyzes over 50 nutrients of foods consumed. Recognizing that
there may be tremendous opportunities in nutrition delivery systems, the Company
plans to develop during the year 2001 an Internet version of its menu based
dietary management software that management believes will accelerate and expand
its present growth to health care facilities, schools, prisons and other captive
food delivery institutions. In addition, the Company plans to market nutrition
based information to consumers utilizing other health related businesses that
will direct consumers to the Company's informational site. This information will
provide dietary strategies to the consumer to improve health and quality of
life, while hopefully generating significant revenues for the Company.
To facilitate this development and implementation, the Company is currently
negotiating with several companies that have reviewed the Company's planned
business strategies and expressed preliminary approval in providing the capital
resources necessary to implement these strategies. While access to this capital
cannot be assured, the Company believes that it will succeed in aligning itself
with a capital resource partner during the year 2000 and will begin to implement
the development during the first quarter of 2001.
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The Company continues to incur significant operating losses with a net operating
loss of $847,398 for the nine months ended September 30, 2000 and a $183,254 net
operating loss for the three months ended September 30, 2000. The Company
incurred operating losses of $2,071,358 and $1,577,767, respectively, for the
years ended December 31, 1998 and 1999. In addition, the Company has $649,635 of
payroll tax obligations outstanding recorded at September 30, 2000, including a
provision for penalty and interest, that reflect unpaid employee and employer
withholding taxes for the years 1998, 1999 and the first quarter of the year
2000. The Company has made timely withholding tax deposits for the second and
third quarters of 2000. Because of these operating losses and payroll tax
obligations, the Company may not be able to continue operations without
additional investment capital. This financial condition caused the Company's
auditor to issue a "going concern" opinion report in the December 31, 1998 and
1999 Annual Report, Form 10-SB Filing.
On June 12, 2000, the Company entered into a settlement agreement with
plaintiffs who sought additional consideration from the Company as a result of
the merger with Rosegold Corporation in 1996. This settlement agreement provides
plaintiffs with $25,000, payable in five equal installments of $5,000 that began
in June 2000. This obligation was retired during the third quarter of 2000. In
addition, the Company issued in escrow to plaintiffs 500,000 of the Company's
common shares. If these shares have an aggregate value of more than $400,000, as
determined by a formula based on the average trading value five trading days
prior to the date 365 days after the execution of the agreement, the excess
shares are to be returned to the Company.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the three months ended September 30, 2000 were $372,638, a
decrease of $52,429 over total revenues of $425,067 for the corresponding period
ended September 30, 1999. Total revenues for the nine months ended September 30,
2000 were $1,267,440, an increase of $246,056 over total revenues of $1,021,384
for the corresponding period ended September 30, 1999.
DIETARY SERVICES AND SUPPLIES REVENUES
Dietary services and supplies revenues were $132,754 for the three months ended
September 30, 2000, a decrease of $9,534 from total dietary services and
supplies revenues of $142,288 for the corresponding period ended September 30,
1999. Total dietary services and supplies revenues were $456,608 for the nine
months ended September 30, 2000, an increase of $8,013 over total dietary
services and supplies revenues of $448,595 for the corresponding period ended
September 30,1999.
SOFTWARE SALES AND RENTAL REVENUES
Software sales and rental revenues were $239,884 for the three months ended
September 30, 2000, a decrease of $42,895 from total software sales and rental
revenues of $282,779 for the corresponding period ended September 30, 1999.
Total software sales and rental revenues were $810,832 for the nine months ended
September 30,2000, an increase of $238,043 over total software sales and rental
revenues of $572,789 for the corresponding period ended September 30, 1999. The
decrease in the three month period in software sales and rental revenues is
primarily due to software license fee revenues of $176,462 during the third
quarter of 1999 as compared to $109,000 during the corresponding three month
period in 2000. The increase in the nine month period
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in software sales and rental revenues during 2000 is due to a $162,537 increase
in private label license fees from distribution companies that market the
Company's software through private label agreements and a $19,438 increase in
support fees. The remaining increase is due to increased software sales in the
year 2000 offset by lower DOS systems revenues.
COST OF REVENUES
DIETARY SERVICES AND SUPPLIES COST OF REVENUES
Dietary services and supplies cost of revenues was $53,777 (41% of dietary
services and supplies 2000 revenues) for the three months ended September 30,
2000, a decrease of $10,087 from total dietary services and supplies cost of
revenues of $63,864 (45% of dietary services and supplies 1999 revenues) for the
corresponding period ended September 30, 1999. Total dietary services and
supplies cost of revenues was $184,403 (40% of dietary services and supplies
2000 revenues) for the nine month period ended September 30, 2000, a decrease of
$9,521 from total dietary services and supplies cost of revenues of $193,924
(43% of dietary services and supplies 1999 revenues) for the corresponding
period ended September 30, 1999.
SOFTWARE SALES AND RENTAL COST OF REVENUES
Software sales and rental cost of revenues was $35,594 (15% of software sales
and rental 2000 revenues) for the three months ended September 30, 2000, a
decrease of $17,399 over total software sales and rental cost of revenues of
$52,993 (19% of software sales and rental 1999 revenues) for the corresponding
period ended September 30, 1999. Software sales and rental cost of revenues was
$124,369 (15% of software sales and rental 2000 revenues) for the nine months
ended September 30, 2000, a decrease of $73,362 from total software sales and
rental cost of revenues of $197,731 (35% of software sales and rental 1999
revenues) for the corresponding period ended September 30, 1999. The decrease is
attributable to the elimination of one technical support programmer during the
second quarter of 1999 ($9,864 savings) and the closing of the Michigan
technical support office that eliminated support salaries of $48,407 incurred
during the first nine months of 1999.
OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing operating expenses were $42,940 (12% of total 2000 revenues)
for the three months ended September 30, 2000, a decrease of $36,347 from total
sales and marketing expenses of $79,287 (19% of total 1999 revenues) for the
corresponding period ended September 30, 1999. Total sales and marketing
expenses were $164,767 (13% of total 2000 revenues) for the nine month period
ended September 30, 2000, a decrease of $58,402 over total sales and marketing
expenses of $223,169 (22% of 1999 revenues) for the corresponding period ended
September 30, 1999. The decrease during the three months ended September 30,
2000 is attributable to the elimination of marketing consultants that reduced
expenses by $32,573. In addition, sales travel expenses decreased $33,051 during
the first nine months of 2000 as compared to the same nine month period in 1999.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses were $210,230 (56% of total 2000 revenues)
for the three months ended September 30, 2000, an decrease of $72,845 from total
general and administrative expenses of $283,075 (67% of total 1999 revenues) for
the corresponding period ended September 30, 1999. Total general and
administrative expenses were $951,472 (75% of total 2000 revenues) for the nine
months ended September 30, 2000, a decrease of $536 from total general and
administrative expenses of $952,008 (93% of total 1999 revenues) for the
corresponding period ended September 30, 1999. The decrease in general and
administrative expenses for the nine month period ended September 30, 2000 over
the corresponding period at September 30, 1999 is primarily attributable to the
following: a decrease in officer salary expense of $24,510 during 2000; decrease
of $11,734 related to lower employer payroll taxes; and a $34,619 reduction in
legal services due to an over accrual of expected fees during the second quarter
of 2000.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $119,916 for the three months ended
September 30, 2000, a decrease of $1,402 from total depreciation and
amortization expense of $121,318 for the corresponding period ended September
30, 1999. Total depreciation and amortization expense was $356,365 for the nine
month period ended September 30, 2000, a decrease of $6,911 from total
depreciation and amortization expense of $363,276 over the corresponding period
ended September 30, 1999.
INTEREST EXPENSE
Interest expense was $92,853 for the three months ended September 30, 2000, an
increase of $55,712 over the total of $37,141 for the corresponding period ended
September 30, 1999. The increase was due to a $57,680 increase in the provision
for payroll tax obligations during the three month period ended September 30,
2000. Total interest expense was $203,115 for the nine months ended September
30, 2000, an increase of $109,723 over the total of $93,392 for the
corresponding period ended September 30, 1999. The increase for the nine months
ended September 30, 2000 is primarily attributable to an interest provision of
$23,666 during the first three months of 2000 related to the issue of options
below the common share fair market value at date of grant and a $24,192
provision for interest expense related to payroll tax obligations added to the
additional third quarter provision of $57,680.
OTHER, NET
Other, net expense of $129,660 for the nine months ended September 30, 2000
primarily relates to a litigation settlement by the Company at June 12, 2000 of
$25,000 cash and the issuance in escrow of 500,000 Company common shares. The
shares were valued at the closing price of $.17 per share of the Company's stock
at date of settlement for a total settlement expense of $110,000 that includes
the cash settlement of $25,000.
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LIQUIDITY
The Company has financed its operations primarily through debt financing
provided by shareholders, officers and affiliates. The Company's ability to
sustain operations is dependent upon additional investment capital and/or debt
financing because of the Company's negative working capital position and the
excess of total liabilities over assets at September 30, 2000. Although
management believes that such investment/financing can be obtained, there can be
no assurance that the Company will be successful and that if successful, the
sale of additional equity may result in additional dilution to the Company
stockholders.
The Company provided net cash from financing activities of $127,329 for the nine
month period ended September 30, 2000 compared to $327,774 cash provided for the
nine month period ended September 30, 1999. This cash was used to sustain
operating activities that used cash of $411,878 for the nine month period ended
September 30, 1999 compared to $81,349 used for the nine month period ended
September 30, 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 12, 2000, the Company as defendant entered into a settlement agreement
that provided to the plaintiffs $25,000 cash in five equal $5,000 installments
beginning June 2000 and the issuance of 500,000 of the Company's shares subject
to Rule 144 of the Securities Exchange Commission, and to be held in escrow for
a period of one year from date of settlement agreement. The Company's shares
were valued at $.17 a share based on the closing price at date of settlement for
a total settlement value of $110,000, including the cash settlement. Should the
value of the shares conveyed as determined one year from date of settlement
agreement exceed $400,000, the plaintiffs will return those shares in excess of
the $400,000 value.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 Summary Financial Information
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Signature
In accordance with Section 12 of the Securities and Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SureQuest Systems, Inc., a Nevada Corporation
(Registrant)
Date: November 14, 2000
BY: /s/ C. Scott Sykes, Jr.
-----------------------------------------
C. Scott Sykes, Jr.
President
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
27.1 FINANCIAL DATA SCHEDULE
</TABLE>
