SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
___________________
INTRACO SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 87-0381511
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(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
3998 Florida Atlantic University Boulevard, Suite 210
Boca Raton, Florida 33431
(561) 367-0600
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(Address and Telephone Number of Principal Executive Offices)
Copies of communications to:
Michael D. Karsch, Esq.
Broad and Cassel
7777 Glades Road, Suite 300
Boca Raton, Florida 33434
Telephone No. (561) 483-7000
_______________________________
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
To be so registered each class is to be registered
None
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Securities to be registered under Section 12(g) of the Act:
Common Stock
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(Title of class)
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. INTRACO'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
DOCUMENT. THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION AND IS QUALIFIED
IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THE DOCUMENT AND PARTICULARLY IN THE SECTION ENTITLED
"RISK FACTORS."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Intraco Systems Inc. (the "Company") was incorporated in Florida in
March 1990. In April 1999, Intraco completed an exchange agreement with
Custom Touch Electronics, Inc. ("CTE"), a Nevada corporation with no material
operations whose common stock traded on the OTC Bulletin Board, pursuant to
which all outstanding shares of Intraco capital stock were exchanged for
10,531,500 CTE shares. The prior shareholders and promoters of CTE hold
2,429,489 shares and the Intraco shareholders at the time of the exchange
hold 10,531,500 shares. As a result, Intraco Systems became a wholly-owned
subsidiary of CTE and CTE changed its name to Intraco Systems, Inc. All
references in this document to "Intraco" refer to the Nevada parent and the
Florida subsidiary. The principal offices of Intraco are located at 3998 FAU
Boulevard, Boca Raton, Florida 33431 and its phone number is (561) 367-0600.
Intraco is a Communications Solution Provider ("CSP"), offering the
integration of voice, data and Internet based technology solutions to a wide
range of customers. Intraco offers complementary IT solutions to clients on a
local and regional basis. Intraco's targeted customers include small and
mid-size companies in a wide range of industries including communications,
health care, financial services, manufacturing, professional services and
technology.
Intraco is currently seeking to execute an aggressive growth strategy which
includes both internal (product, sales and marketing expansion) and external
(mergers and acquisitions) strategies. Intraco is currently acquiring
companies in the Telecommunications, Internet Development and Network Systems
Integration areas. During June 1999, Intraco completed the acquisition of
Page Telecomputing Inc., a Delray Beach, FL-based developer of telemarketing
and call center computer telephony and Voice-over-IP applications.
The acquisition will increase Intraco's focus on computer telephony
integration and allow it to best serve sales and marketing-oriented
customers, such as insurance brokers, investment advisors, real estate
agents, healthcare marketers and more who rely on intensive inbound and
outbound phone activity. Page Telecomputing develops proprietary automated
telemarketing software, including its Sales Call Software™, LINK™,
Page Prospect!™ and SCRSLITE ™ for telecommunications facilities,
sales offices, customer support centers and more.
Intraco's broad range of complementary IT business solutions includes the
following services:
Voice over IP (VoIP) and Computer Telephony Integration (CTI)
High-end Web Application Development and Integration
Network and Systems Design and Implementation
IT Operational Support
Currently, Intraco is primarily serving customers in the Southeast region of
the United States with a number of national and international customers.
Intraco intends to extend its comprehensive service offerings nationally
through strategic alliances. Intraco delivers IT solutions including services
and support for all the major technology needs of its customers. This
includes a variety of operating systems (Windows 95/98/NT, Tru-64 (Digital)
Unix, NetWare, SunOS, Digital Open VMS, and HP-UX) on a variety of hardware
platforms, (Intel, Sun, HP, and Compaq/Digital). In addition, Intraco
supports its customers' hardware and software needs in such areas as the
World Wide Web and high-end telephony services. The solutions developed often
include a mix of hardware, software and services.
Market And Industry Overview
Since the mid-1980s, dramatic changes have occurred in the delivery of IT
solutions to end users. The explosive growth of Web-enabled systems and
client/server technology is changing the nature of the IT industry from
servicing personal computer network systems to servicing high-powered servers
with open platforms, scalable architectures, integrated applications,
security, back-up and fail-safe operability issues. As the complexities of
acquiring, sharing and managing information become a
business-within-a-business for mid-sized companies, the corporate approach to
IT management and deployment is changing significantly.
Businesses have been increasingly turning to outside organizations such
as Intraco for the design, development, implementation, and support of IT
systems. The United States market for IT services is expected to grow from
approximately $85 billion in 1998 to approximately $150 billion in 2001. Due
in part to the rapid pace of technological change, business solutions
frequently are too sophisticated and complex for a business enterprise to
undertake internally . The increased use of outside IT solutions firms is
also being driven by competitive pressures requiring rapid implementation of
new systems and the adverse effects of selecting inappropriate or outdated
technology. Many companies have made strategic decisions to focus on core
competencies, minimize fixed costs, reduce workforces, and defer investment
in large IT staffs.
Intraco's Strategy
Intraco's objective is to service clients' strategic business needs by
becoming their Communications Solutions Provider. Intraco intends to meet
this objective through a combination of targeted strategic acquisitions and
internal growth including the addition of new services and IT specialties.
Intraco's acquisition strategy is to simultaneously expand its range of
services while extending its geographic reach to the regions outside of the
Southeast United States by acquiring existing, profitable businesses in the
Telecommunications Interconnect, Internet Developers and Network Systems
areas.
Intraco has identified three key growth categories of converging
technologies that best serve existing and targeted customers: Internet
Business Solutions, Computer Telephony Services, and Network and Systems
Integration. Each of these areas complements the other as well as having
distinct advantages and opportunities of its own.
Internet Business Solutions - This includes e-mail integration, website
creation and design, management of website traffic, on-line marketing,
Internet/intranet/extranet connectivity, database design, implementation and
management, migration and web enabling of legacy systems, e-commerce
applications, and traditional network and systems integration services.
Internet solutions generate ongoing annuity revenue and profits through the
use of annual support contracts. Intraco operates, updates and manages
Internet sites for customers while increasing customer website traffic
through on-line marketing.
Computer Telephony Services - Intraco provides a complete environment for
businesses with the data information system as a backbone to all data
processing and communications. Through Intraco, the customer has all
components of their communications and information systems integrated into a
seamless working environment. This convergence of data and voice technologies
is commonly referred to as Computer Telephony Integration or CTI. For
example, the phone system is fully integrated into the computer network,
along with such functions as fax servers and page/messaging capabilities. This
also includes video and sound transfer as well as voice recognition and
automated attendant systems. The real value to the customer is in the delivery
of a working business environment while improving the efficiencies and
effectiveness of their operations.
Network and Systems Integration - For over nine years Intraco has provided
enterprise level solutions that include complex systems, non-stop
cluster-based computing environments, complete networks and a wide range of
support services. These include 24x7 support and Y2K expertise for the
traditional systems, legacy systems and networking markets.
Collectively these categories offer ongoing incremental sales
opportunities as new technologies are introduced. Customers realize high
value from the increased productivity and enhanced functionality inherent to
these technologies. The combination of Voice, Data and Internet Development
Services enable Intraco to exploit new market opportunities as well as
maximize existing markets.
The Intraco Solution
Intraco offers clients a single source for Business Data and Communications
solutions and services. Intraco has identified four sectors that constitute
its current offerings. These sectors of Intraco's business and the services
provided within each sector are:
Telephony Design and Integration Services
Design and integrate voice plus VoIP solutions
Design and integrate strategic corporate-wide voice solutions
Voice enabled web applications
Integration of CTI with PBX systems
Intraco seeks to maintain current knowledge of the attributes of all
telecommunications systems, and to use this knowledge to develop systems for
specific customer environments from simple key systems to complex voice/data
communications systems. Intraco recognizes the importance of global
communication, and has the ability to integrate LAN and WAN, data and voice
communications, video conferencing, voicemail, and voice processing into the
telecommunications infrastructure of' the future.
High-end Web Application Development and Integration Services
Design and integrate complex websites with sophisticated back-end systems
Develop strategies for business to business applications
Web enabling existing back-end legacy systems and databases
Create and implement online marketing campaigns for increased web traffic
Enhance current web presence by adding high tech features and functionality
Expertise in e-commerce solutions and web enabling offline business models
Intraco offers fully interactive database development, eye-catching
layouts and design, integration to legacy systems for web connectivity,
scalable and robust e-commerce solutions, ongoing website maintenance,
comprehensive intranet design and development, and methods to increase
efficiency and streamline operations.
Network and Systems Design and Implementation Services
Local area network (LAN) and wide area network (WAN) client/server design and
integration
Internet/intranet/extranet infrastructure design and integration
Voice and data communication infrastructure
Communication network solutions involving hubs, routers, DSU/CSUs and switches
Capacity planning
Network performance management and monitoring
Connectivity and security services
Intraco delivers enterprise-wide turnkey IT business solutions by
combining business knowledge with technical expertise concerning hardware,
software, and support capabilities to achieve customer objectives. These
solutions address customer needs for high bandwidth applications, from
transaction processing to Internet commerce.
Intraco designs, develops, installs and supports full application-ready,
distributed client/server computing platforms and integrates them into
existing IT infrastructures. Capabilities include project planning,
technology integration and installation that maximize system performance and
delivery of computing solutions in the most cost-effective way, assuring
flexible, open systems capable of integrating new technologies.
IT Engineering and Support Services
Outsourcing of IT professional services
Outsourcing of IT product procurement
Engineering and network management services
Warranty support - Help desk support
On-site and remote support services
Hardware and software maintenance and support
Facility infrastructure cabling and installation
Intraco provides both short and long-term technical expertise to address a
wide range of network operation and project needs, including LAN and WAN
design, installation, implementation, management, systems management, system
administration, and support services.
Organizational Structure
Intraco operates with a decentralized management structure that enables
it to deliver superior client service and a motivating environment for its
operating companies. To minimize overhead, Intraco provides corporate
management, marketing, finance, accounting, legal, management information
systems, treasury, employee benefits (HR), and purchasing centrally.
Sales and Marketing
Intraco focuses its sales and marketing efforts on the small and
mid-size business market sector in the U.S. where the demand for outsourced
IT consulting services is strong and loyal. To develop new clients, Intraco
uses a combination of sales, engineering and consulting sales services,
including trade shows and professional seminars. Intraco will also be
enhancing its own Websites (www.intraco.com and www.intracodirect.com) on an
ongoing basis to provide easy, convenient, cost-effective access to
information for customers.
Through the acquisition of Telecommunications Interconnects Intraco will
expand its client base exponentially. The targeted acquisitions have a large
base of business customers that are likely to utilize network connectivity to
their existing telecommunications system. This distribution channel is
utilized for the proactive introduction of new technologies as they become
available.
Intraco has built relationships with many of the industry's leading
technology manufacturers, including Compaq/Digital, HP, Nortel/Bay,
Microsoft, Cisco, Oracle, Xyplex as well as others. These vendors provide a
source of leads for Intraco, augment technical sales expertise, and offer
additional name recognition for marketing events and programs.
The current sales management team at Intraco Systems has well over 100 years
of combined experience in the technology industry providing a strong ability
to understand existing and new technologies as well as the ability to
determine how to create and deliver value from integrating various
technologies.
Customers
Intraco currently has a significant installed customer base which provides a
ready market for new and other emerging technologies. The profile of the
installed customer base represents larger enterprise customers requiring a
high degree of customized solutions. Clients include middle market and
Fortune 1000 companies in a wide range of industries (including
communications, healthcare, financial services, government, manufacturing,
pharmaceuticals, professional services, and technology. Intraco has developed
an aggressive promotional campaign to inform existing Intraco customers of
these latest innovations. The following is a partial list of past and
existing customers:
Gambro Health Care (previously REN Labs) Encore Computer Products
Shell Oil Novartis (previously Ciba Geigy)
INPHYNET Medical Management Tenix Pty
Internet Financial Network U.S.Plastics
Florida Atlantic University Vacation Break
Florida International University Interim Services
Sensormatic Security Plastics
Racal-Datacom Arvida
Competition
The IT solutions market is very competitive, subject to rapid
change, and includes a large number of participants whose expertise covers an
expansive range. Intraco faces extensive competition from large national
providers who specialize in one or more of its target markets as well as from
numerous smaller local competitors. Intraco's principal competitors include
IKON Office Solutions, Inc., MicroAge Integration, Inc, National Business
Group, Inc. and TotalTec Systems, Inc., all of which have significantly
greater financial, technical and marketing resources, generate substantially
higher revenues and have greater name recognition. Intraco believes the
principal competitive factors in the segment of the industry in which it
competes include scope of services, service delivery approach, technical and
industry expertise, perceived value, objectivity and results orientation.
Intraco believes that its ability to compete successfully against such
competitors depends in part on a number of factors both within and outside of
its control, including the ability to hire, retain and motivate senior IT
consultants, competitors' pricing for comparable services, and the extent of
competitors' responsiveness to customer needs. There can be no assurance that
Intraco will be able to compete successfully in the future.
Relationship with Suppliers
Intraco has entered into dealer agreements with its major
vendors/manufacturers. These agreements are typically subject to periodic
renewal and to termination on short notice. Substantially all of Intraco's
dealer agreements may be terminated by the vendor without cause upon 30 to 90
days advance notice, or immediately upon the occurrence of certain events. A
vendor could also terminate an authorized dealer agreement for reasons
unrelated to Intraco's performance. The loss of such a vendor/product line or
the deterioration of Intraco's relationship with such a vendor/manufacturer
would have a material adverse effect on Intraco.
Intraco has also established relationships with industry leaders relating to
its services segment including the authorization to perform warranty and
non-warranty repair work. Intraco's technical personnel currently have an
aggregate of more than 40 certifications from major vendors.
Sales Arrangements
Most products and services are sold pursuant to written contracts with
customers. These contracts typically establish prices for certain equipment
and services and require short delivery dates for equipment and services
ordered by the customer. These contracts do not require the customer to
purchase microcomputer products or services exclusively from Intraco and may
be terminated without cause upon 30 to 90 days notice.
Intraco generally provides its services to customers on a
time-and-materials basis pursuant to written contracts or purchase orders.
Intraco's arrangements with its customers generally can be terminated by
either party with limited or no advance notice. Intraco also provides some of
its services under fixed-price contracts. Fixed-price contracts are used when
Intraco believes it can clearly define the scope of services to be provided
and the cost of providing those services.
Human Resources
As a service provider, Intraco views its employees as the most valuable
asset. Accordingly, a continuously evolving program has been implemented to
encourage and sustain long-term employee retention. Intraco offers a
competitive compensation package which includes, stock options, technical
education, a progressive human resources program, and other competitive
benefits designed to enhance long-term employee retention.
As of June 30, 1999, Intraco had a total staff of 21 employees,
comprised of 7 technical professionals, 8 sales and marketing personnel and 6
administrative personnel. No employees are represented by a labor union or
subject to a collective bargaining agreement. Management believes that
employee relations generally are good.
Intraco's success will depend in large part upon the ability to
attract, retain and motivate highly-skilled employees. Qualified technical
professionals are in great demand and are likely to remain a scarce resource
for the foreseeable future. However, management believes that Intraco has
been successful in its efforts to attract, develop and retain the
high-quality professionals needed to support present operations and future
growth. Although Intraco expects to continue to attract sufficient numbers of
highly-skilled employees and to retain senior personnel for the foreseeable
future, there can be no assurance that Intraco will be able to continue to do
so.
Intellectual Property Rights
Intraco relies on a combination of nondisclosure and other contractual
arrangements and trade secret, copyright, and trademark laws to protect
proprietary rights and the proprietary rights of third parties. Intraco
enters into confidentiality agreements with key employees, and limits the
distribution of proprietary information.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of financial condition and results of
operations contain some forward-looking statements. Forward-looking
statements give Intraco's and management's current expectations or forecasts
of future events. The reader can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning in connection with
any discussion of future operating or financial performance. In particular,
these include statements relating to anticipated operating results for the
full year ended December 31, 1999, and anticipated cash flow, and to future
actions, future performance or results of current and anticipated sales and
marketing efforts, expenses, the outcome of contingencies such as legal
proceedings, and other financial results. From time to time, Intraco or its
management also may provide oral or written forward-looking statements in
other materials released to the public.
Neither Intraco nor its management undertake any obligation to publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise. The reader is advised, however, to consult any
further disclosures made on related subjects in future SEC filings. Also note
that there is a cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to Intraco's business under this section.
These are factors that could cause actual results to differ materially from
expected and historical results. Other factors besides those listed could
also adversely affect Intraco.
Overview
Intraco is a Communications Solution Provider ("CSP"), offering the
integration of voice, data and internet based technology solutions to a wide
range of customers. Intraco offers complementary IT solutions to clients on a
local and regional basis. Intraco's targeted customers include small and
mid-size companies in a wide range of industries including communications,
health care, financial services, manufacturing, professional services and
technology.
Intraco's consolidated financial statements do not give effect to the results
of a business acquired in June 1999 in a business combination accounted for
under the purchase method (the "Purchased Company") because it was after the
date of the financial statements and is not considered material.
The report of Intraco's independent auditors for the year ended December
31, 1998 included a footnote that there is a substantial doubt about
Intraco's ability to continue as a going concern unless it can improve its
sales or obtain additional financing. Management's plan to increase sales
and obtain additional capital includes several specific actions. On the sales
side, Intraco will place greater emphasis on systems, CTI, web development
and services, as these areas have higher profit margins and represent more
rapidly growing markets than traditional contract services. Intraco is also
actively pursuing acquisitions that will add significantly to revenues and
profits. For capital sourcing, Intraco will continue to seek private capital
as well as public funds through the sale of its securities. Between November
1, 1998 and June 30, 1999, Intraco raised approximately $1,007,525 through
sales of preferred and common stock.
Results Of Operations
The following table sets forth various items for the six months ended
June 30, 1999(unaudited) and June 30,1998(unaudited).
Six months ended June 30, 1999 Compared to June 30, 1998
Note that the company did not perform monthly closings for 1998 and therefore
all comparisons to 1998 are approximate.
Revenues. Revenues increased 20.5% from $1,411,629 for 1998 to $1,701,613 for
1999. This increase was primarily due to a $690,175 increase in systems and
network sales offset by a decrease of $400,191 in service contract revenue.
Cost of revenues. Cost of revenues increased $383,337 consistent with the
increase in revenues from large orders with lower gross margins.
Gross Profit. Gross profit decreased $93,353 consistent with the increase in
cost of goods.
Selling, General and Administrative. Selling, general and administrative
expenses increased $240,740 or 64.9%. This is due primarily to the investment
in staff and facility to support the broader product offerings.
Interest Expense. Interest expense, net of interest income decreased $16,856
from net interest expense of $18,179 in 1998 to $1,323 in 1999.
Provision For Income Taxes. Intraco has an unused net operating loss
carryforward of $663,000 for use on its federal and state income tax returns
and thus has not reserved for any income taxes for 1999.
Net Loss. As a result of the foregoing, Intraco reported a net loss of
($303,697) in 1999 and a profit of $73,540 in 1998. The change is primarily
due to the investment in staff and facilities.
Year Ended December 31, 1998 Compared To December 31, 1997
Revenues. Consolidated revenues decreased 23.9% from $3,556,177 for 1997
to $2,704,931 for 1998. This decrease was primarily due to a $1,039,037
decrease in revenues from system and network design and installation, offset
by a $187,791 increase in service contract revenues. As part of management's
plan to restructure Intraco and broaden the product offerings, the decision
was made to focus on higher margin sales.
Cost of revenues. Cost of revenues decreased $839,949 or 32.2% from
$2,606,669 for 1997 to $1,712,720 for 1998. Cost of systems were $638,885 or
51.2% of systems revenues in 1998 compared to $1,443,080 or 63.1% of systems
revenue in 1997. Cost of service contracts were $1,073,835 or 73.7% of
service contract revenue in 1998 compared to $1,163,589 or 91.7% in 1997. This
improvement in the cost of product ratio to sales is the result of the action
described above.
Gross profit. Gross profit increased $42,703 or 4.5% from $949,508, or
26.7% of revenues, for 1997 to $992,211, or 36.7% of revenues, for 1998. This
increase in gross profit as a percentage of revenues was due to a higher
concentration of business in projects and sales of higher margin items.
Selling, general and administrative. Selling, general and administrative
expenses decreased $78,369 or 7.0% from $1,116,198, or 31.4% of revenues, for
1997 to $1,037,829, or 38.4% of revenues, for 1998.
Interest expense. Interest expense, net of interest income, increased
$30,004 from net interest expense of $4,573 in 1997 to $34,577 in 1998. The
increase was due primarily to the conversion of accounts payable due Digital
Equipment Corp into a note with interest at 10%.
Provision for income taxes. Intraco has an unused net operating loss
carryforward of $663,000 for use on its federal and state income tax returns
and thus has not reserved for any income taxes for 1998. Until May 1997
Intraco was taxed as an S Corporation.
Net loss. As a result of the foregoing, Intraco reported a net loss of
$80,195 in 1998 and $171,263 in 1997.
Liquidity And Capital Resources
At December 31, 1998, Intraco had current assets of $273,930, consisting
of cash, accounts receivable, inventory and prepaid expenses, and current
liabilities of $981,071, consisting of payables, deferred revenues, deposits
and notes payable. This resulted in a working capital deficit of $707,141.
Intraco's capitalization, defined as the sum of long-term debt and
stockholders' equity, at December 31, 1998, was $ ($390,207).
At June 30, 1999, Intraco had current assets of $652,103, consisting of
cash, accounts receivable, note receivable, inventory and prepaid expenses,
and current liabilities of $1,069,135, consisting of payables, deferred
revenues, deposits and notes payable. This resulted in a working capital
deficit of $417,032. Intraco's capitalization, defined as the sum of long-term
debt and stockholders' equity, at June 30, 1999, was $ ($149,097).
During 1998, net cash used in operating activities was $116,730. Accounts
receivable decreased by $185,727 due to timing of completion of several sales
and improved collection efforts and accounts payable increased by $143,236 due
to timing of purchases and the conversion of the Digital Equipment payable to
a note. Deferred revenue decreased by $441,559 as a result of Intraco
completing performance of contracts entered into in prior periods and
recognizing the revenues in 1998. Net cash used in investing activities was
$58,058 due to the purchase of property and equipment. Net cash used in
financing activities was $48,001 as Intraco realized 218,800 for the issuance
of stock, offset by $110,107 of costs in connection with these issuances and
the repayment of $156,694 of long-term debt. As a result, Intraco realized a
net decrease in cash of $222,789.
During the 1999 period, net cash used in operating activities was
$299,851. Accounts receivable increased by $271,100 due to timing of
completion of several sales and improved collection efforts and accounts
payable increased by $308,526 due to timing of purchases and the conversion of
the Digital Equipment payable to a note. Deferred revenue decreased by $88,277
as a result of Intraco completing performance of contracts entered into in
prior periods and recognizing the revenues in 1999. Net cash used in investing
activities was $5,391 due to the purchase of property and equipment. Net cash
provided by financing activities was $322,261 as Intraco realized 930,792 for
the issuance of stock, offset by $202,964 of costs in connection with these
issuances and the repayment of $121,322 of long-term debt and costs of our
recapitalization of $283,153. As a result, Intraco realized a net increase in
cash of $17,019.
At December 31, 1998, Intraco had approximately $420,212 of outstanding
debt to Digital Equipment Corporation, of which $306,526 was classified as
short-term. The notes are payable in monthly installments ranging from
$12,000 to $39,000, bear interest at 10% and have a final maturity date of
March 2000. These notes are secured by all of Intraco's assets. At June 30,
1999 the then full amount of $298,890 of this debt was treated as short-term.
In order to meet its liquidity requirements for the remainder of 1999,
Intraco will be required to raise additional capital. Intraco is working with
several financing sources to raise additional capital. If Intraco is
unsuccessful in raising cash, it may have to curtail or restructure
operations.
Year 2000 Readiness Disclosure Statements
Historically, many computer programs have been written using two digits
rather than four to define the applicable year. This could lead, in many
cases, to a computer recognizing a date ending in "00" as 1900 rather than
the year 2000. This phenomenon could result in major computer system failures
or miscalculations, and is generally referred to as the "Year 2000" problem.
Intraco is currently in the process of assessing its exposure to the Year
2000 problem and will establish a detailed response to any exposure that may
be identified. Generally, Intraco has Year 2000 exposure in three areas: (1)
Information Technology ("IT") Related Systems--financial and management
computerized operating systems used to manage Intraco's business; (2) Non-IT
Related Systems-- equipment with "embedded chips" used by Intraco, including
telephone and building security systems; and (3) Third Parties--computer
systems used by third parties, in particular customers and suppliers of
Intraco.
Although Intraco, based on its analysis to date, does not believe that it
will incur any material costs or experience material disruptions in its
business, related to the Year 2000 problem, there can be no assurances that
Intraco or its third parties, customers or suppliers will successfully become
Year 2000 compliant on a timely basis and thus will not experience serious
unanticipated negative consequences or material costs. Undetected errors or
defects in the technology used for Intraco's systems, which include hardware
and software, and defects in the systems of Intraco's third parties, could
cause these consequences. The most likely worst case scenario would include
hardware failure, software failure resulting in an inability to receive
orders from customers or shipments from suppliers or to bill customers and
pay suppliers, and failure of infrastructure services provided by third parties
(such as phone systems and building security systems).
Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ from those indicated in forward-looking statements made in this
document. The following factors contain some forward-looking statements.
Forward-looking statements give current expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," and other words
and terms of similar meaning in connection with any discussion of future
operating or financial performance. In particular, these include statements
relating to our anticipated operating results for the year ending December
31, 1999, and our anticipated cash flow and to future actions, future
performance or results of current and anticipated sales and marketing
efforts, expenses, the outcome of contingencies, and other financial results.
From time to time, Intraco or its management may provide oral or written
forward-looking statements in other materials released to the public.
Any or all forward-looking statements in this document and in any other
public statements made may turn out to be wrong. They can be affected by
inaccurate assumptions or by known or unknown risks and uncertainties. Many
factors mentioned in the discussion below will be important in determining
future results. Consequently, no forward-looking statement can be guaranteed.
Actual future results may vary materially.
Neither Intraco nor its management undertake any obligation to publicly
update any forward-looking statements, whether as a result of new
information, future events or otherwise. The reader is advised, however, to
consult any further disclosures made on related subjects in future filings
with the SEC.
History of Losses
Intraco has reported a net loss for each of the last two years. We
cannot assure you that we will report a profit for 1999 or for future years.
Need For Additional Capital
Intraco must raise additional capital in the near term to continue its
business plan. Intraco is working with several financial sources to raise
additional capital but there are no guarantees that Intraco will be able to
raise sufficient capital on a timely basis and on reasonable terms.
Rapid Growth
Intraco intends to continue to pursue both acquisitions and internal growth
opportunities as part of its business strategy. Management cannot assure the
reader that Intraco will be successful in achieving rapid growth in the
future. Intraco expects that more of its future growth will result from
acquisitions. Intraco recently completed a small acquisition, is negotiating
several more and continues to evaluate expansion and acquisition
opportunities that would complement our ongoing operations. There can be no
assurance that Intraco will be able to identify, acquire or profitably manage
additional companies or successfully integrate additional businesses into
Intraco without substantial costs, delays or other problems. In addition,
there can be no assurance that companies acquired in the future will be
profitable at the time of their acquisition or will achieve levels of
profitability that would justify the investment. Acquisitions may involve a
number of special risks, including, but not limited to, adverse short-term
effects on Intraco's reported operating results, diversion of management's
attention, dependence on retaining, hiring and training key personnel, risks
associated with unanticipated problems or legal liabilities and amortization
of acquired intangible assets, some or all of which could have a material
adverse effect on Intraco's operations and financial results.
Manufacturer Market Development Funds
Several manufacturers offer market development funds, cooperative advertising
and other promotional programs to computer resellers such as Intraco. Intraco
utilizes these programs to fund some of its advertising and promotional
programs. The funds received from manufacturers are offset directly against
the expense, thereby reducing selling, general and administrative expenses
and increasing net income. While these programs have been available to
Intraco in the past, there is no assurance that these programs will be
continued. Any discontinuance or material reduction of these programs could
have an adverse effect on Intraco's operations and financial results.
Management Information System
Intraco relies upon the accuracy and proper utilization of its management
information system to provide timely distribution services, manage its
inventory and track its financial information. To manage its growth, Intraco
is continually evaluating the adequacy of its existing systems and procedures
(including Year 2000 issues) and continues to update and integrate critical
functions. Intraco anticipates that it will regularly need to make capital
expenditures to upgrade and modify its management information system,
including software and hardware, as Intraco grows and the needs of its
business change. There can be no assurance that Intraco will anticipate all
of the demands which its expanding operations will place on its management
information system. The occurrence of a significant system failure or
Intraco's failure to expand or successfully implement its systems could have
a material adverse effect on Intraco's operations and financial results.
Dependence On Technical Employees
The success of Intraco's services business, in particular its network and
integration services, depends in large part upon Intraco's ability to attract
and retain highly skilled technical employees in competitive labor markets.
There can be no assurance that Intraco will be able to attract and retain
sufficient numbers of skilled technical employees. The loss of a significant
number of Intraco's existing technical personnel or difficulty in hiring or
retaining technical personnel in the future could have a material adverse
effect on Intraco's operations and financial results.
Inventory Management
The information technology industry is characterized by rapid product
improvement and technological change resulting in relatively short product
life cycles and rapid product obsolescence. While most of the inventory
stocked by Intraco is for specific customer orders, inventory devaluation or
obsolescence could have a material adverse effect on Intraco's operations and
financial results. Current industry practice among manufacturers is to
provide price protection intended to reduce the risk of inventory
devaluation, although such policies are subject to change at any time and there
can be no assurance that such price protection will be available to Intraco in
the future. During fiscal 1998, many manufacturers reduced the number of days
for which they provided price protection. Also, Intraco currently has the
option of returning inventory to certain manufacturers and distributors,
subject to certain limitations. The amount of inventory that can be returned to
manufacturers without a restocking fee varies under Intraco's agreements and
such return policies may provide only limited protection against excess
inventory. There can be no assurance that new product developments will not
have a material adverse effect on the value of Intraco's inventory or that
Intraco will successfully manage its existing and future inventory. In
addition, Intraco stocks parts inventory for its services business. Parts
inventory is more likely to experience a decrease in valuation as a result of
technological change and obsolescence and there are no price protection
practices offered by manufacturers with respect to parts.
Dependence On Key Personnel
The success of Intraco is dependent on the services of Jack Berger its
President and Chief Executive Officer and other key personnel. The loss of
the services of Mr. Berger or other key personnel could have a material
adverse effect on Intraco's business. Intraco has entered into employment
agreements with certain of its key personnel, including Mr. Berger. Intraco's
success and plans for future growth will also depend on its ability to
attract and retain highly skilled personnel in all areas of its business.
Intraco does not currently maintain key man life insurance policies for any of
its officers or other personnel.
Backlog
Intraco does not have a significant backlog of business since it normally
delivers and installs products purchased by its customers within 30 days from
the date of order. Accordingly, backlog is not material to Intraco's business
or indicative of future sales. From time to time, Intraco experiences
difficulty in obtaining products from its major vendors as a result of
general industry conditions. These delays have not had, and are not
anticipated to have, a material adverse effect on Intraco's results of
operations.
Growth Through Acquisitions
Acquisitions are expected to contribute significantly to Intraco's growth.
Intraco believes that acquisitions are one method of increasing its presence
in existing markets, expanding into new geographic markets, adding
experienced service personnel, gaining new product offerings and services,
obtaining more competitive pricing as a result of increased purchasing
volumes of particular products and improving operating efficiencies through
economies of scale. In recent years, there has been consolidation among
providers of microcomputer products and services and Intraco believes that this
consolidation will continue, which, in turn, may present additional
opportunities for Intraco to grow through acquisitions. Intraco continually
seeks to identify and evaluate potential acquisition candidates. Intraco is
currently engaged in preliminary discussions with potential acquisition
candidates. Although it has no binding commitments to acquire such
candidates, management believes that Intraco may acquire one or more of these
candidates in the future.
The consideration for these acquisitions may consist of cash, stock and/or
notes. The stock may cause dilution to current stockholders.
Integration Of Acquisitions
Integration of acquisitions may involve a number of risks that could have
a material adverse effect on Intraco's operating results and financial
condition, including: restructuring charges associated with the acquisitions
and other expenses associated with a change of control; non-recurring
acquisition costs such as accounting and legal fees; investment banking fees;
amortization of acquired intangible assets; recognition of
transaction-related obligations and various other acquisition-related costs;
diversion of management's attention; difficulties with retention, hiring and
training of key personnel; and risks of incurring unanticipated problems or
legal liabilities.
Although Intraco conducts due diligence, hires outside independent
financial and accounting consultants, and generally requires representations,
warranties and indemnifications from the former owners of acquired companies,
there can be no assurance that such owners will have accurately represented
the financial and operating conditions of their companies. If an acquired
company's financial or operating results were misrepresented, or the acquired
company otherwise fails to perform as anticipated, the acquisition could have
a material adverse effect on the operating results and financial condition of
Intraco.
Variability Of Quarterly Operating Results
Intraco has experienced, and may in the future continue to experience,
fluctuations in its quarterly operating results. Factors that may cause
Intraco's quarterly operating results to vary include the number of active
client projects, the requirements of client projects, the termination of
major client projects, the loss of major clients, the timing of new client
engagements, and the timing of personnel cost increases. Certain of these
factors may also affect Intraco's personnel utilization rates which may cause
further variation in quarterly operating results. The timing of revenues is
difficult to forecast because Intraco's sales cycle is relatively long and
Intraco's services are impacted by both the financial condition and
management decisions of its clients and general economic conditions. Because
a high percentage of Intraco's expenses are relatively fixed at the beginning
of any period and Intraco's general policy is to not adjust its staffing levels
based upon what it views as short-term circumstances, a variation in the
timing of the initiation or the completion of client assignments,
particularly at or near the end of any quarter, can cause significant
variations in operating results from quarter to quarter and could result in
losses for any particular period. In addition, many of Intraco's engagements
are, and may be in the future, terminable by its clients without penalty. A
termination of a major project could require Intraco to maintain under-utilized
employees, resulting in a higher than expected percentage of unassigned
professionals, or to terminate the employment of excess personnel. Due to all of
the foregoing factors, there can be no assurance that Intraco's results of
operations will not be below the expectations of investors for any given fiscal
period or periods.
Dependence On Major Customers
During 1998, approximately 29% of Intraco's total net sales and revenues were
derived from one customer and 65% from our top 10 customers.
Attraction And Retention Of Employees
Intraco's business involves the delivery of professional services and is
labor intensive. Intraco's success depends in large part on its ability to
attract, develop, motivate, and retain technical professionals. At June 30,
1999 approximately 33% of Intraco's employees were technical professionals.
Qualified technical professionals are in great demand and are likely to
remain a limited resource for the foreseeable future. There can be no
assurance that Intraco will be able to attract and retain sufficient numbers
of technical professionals in the future. An increase in turnover rates could
have a material adverse effect on Intraco's business, including its ability
to secure and complete engagements and obtain new business, which could have a
material adverse effect on Intraco's operating results and financial
condition.
Rapid Technological Change
As with all IT solutions companies, Intraco's success will depend in part
on its ability to develop IT solutions that keep pace with continuing changes
in IT, evolving industry standards and changing client preferences. There can
be no assurance that Intraco will be successful in adequately addressing
these developments on a timely basis or that, if these developments are
addressed, Intraco will be successful in the marketplace. In addition, there
can be no assurance that products or technologies developed by others will
not render Intraco's services noncompetitive or obsolete. Intraco's failure to
address these developments could have a material adverse effect on Intraco's
operating results and financial condition.
Material Amount Of Goodwill And Intangibles
If Intraco completes a significant number of acquisitions, it may be
required to record a significant amount of goodwill. Goodwill represents the
excess of cost over the fair market value of net tangible and identified
intangible assets acquired in business combinations accounted for under the
purchase method of accounting. In addition, Intraco will be required to
periodically evaluate the recoverability of goodwill by reviewing the
anticipated undiscounted future cash flows from the operations of the
acquired companies and comparing such cash flows to the carrying value of the
associated goodwill. If goodwill becomes impaired, Intraco would be required
to write down the carrying value of the goodwill and incur a related charge
to its income. A reduction in net income resulting from the amortization or
write down of goodwill could have a material and adverse impact upon the
market price of Intraco Common Stock.
Effect Of Anti-Takeover Provisions
The Intraco Board has the authority to issue up to 10,000,000 shares of
preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by Intraco
stockholders. The rights of the holders of Intraco Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of
preferred stock. While Intraco has no present intention to issue shares of
preferred stock, such issuance, while providing desired flexibility in
connection with possible acquisitions or other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of
Intraco and entrenching current management. In addition, such preferred stock
may have other rights, including economic rights senior to those of the Intraco
Common Stock, and, as a result, the issuance thereof could have a material
adverse effect on the market value of the Intraco Common Stock.
A number of provisions of Intraco's Amended and Restated Certificate of
Incorporation and By-Laws and the Nevada General Corporation Law relating to
matters of corporate governance, certain rights of directors, and the
issuance of preferred stock without stockholder approval, may be deemed to
have and may have the effect of making more difficult, and thereby discourage
a merger, tender offer, proxy contest or assumption of control and change of
incumbent management, even when stockholders other than Intraco's management
or principal stockholders consider such a transaction to be in their best
interest.
Intellectual Property Rights
Intraco's success is dependent in part on methodologies used in
designing, installing and integrating computer software and systems and other
proprietary intellectual property rights. Intraco relies on a combination of
nondisclosure and other contractual arrangements and trade secret, copyright,
and trademark laws to protect their proprietary rights and the proprietary
rights of third parties, enter into confidentiality agreements with their key
employees, and limit distribution of proprietary information. There can be no
assurance that the steps taken in this regard will be adequate to deter
misappropriation of proprietary information or that Management will be able
to detect unauthorized use and take appropriate steps to enforce the
intellectual property rights.
Although Intraco believes that its services do not infringe the
intellectual property rights of others and that it has all rights necessary
to utilize the intellectual property employed in its business, Intraco is
subject to the risk of claims alleging infringement of third-party
intellectual property rights. Any such claims could require Intraco to spend
significant sums in litigation, pay damages, develop non-infringing
intellectual property, or acquire licenses to the intellectual property that
is the subject of an asserted infringement claim.
Intraco owns no trademarks or patents. Although Intraco's various dealer
agreements do not generally allow Intraco to use the trademarks and trade
names of these various manufacturers, the agreements do permit Intraco to
refer to itself as an "authorized representative" or an "authorized service
provider" of the products of those manufacturers and to use their trademarks
and trade names for marketing purposes. Intraco considers the use of these
trademarks and trade names in its marketing efforts to be important to its
business.
ITEM 3. DESCRIPTION OF PROPERTY
Intraco's corporate headquarters are located in approximately 6,800 square
feet of leased office space in Boca Raton, Florida. The lease expires in
October, 2003 and provides for annual payments ranging from $84,060 in the
first year to $98,431 in the fifth year. Intraco has two 5-year renewal
options.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of Intraco, beneficially by each person owning
more than 5% of such common shares and the directors and executive officers,
and by all officers and directors, as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of Class
Beneficial Owner (1), (2) Beneficial Ownership Outstanding
<S> <C> <C>
Jack S. Berger 8,109,000 63%
Robert G. Hildreth, Jr. 20,0000 .15%
Vestar Capital, Inc. 891,000 6.87%
All Officers and Directors
as a Group 8,129,000 63.15%
(3 persons)
</TABLE>
(1) Except as indicated, the address of each person named in the table is
c/o Intraco Systems, Inc., 3998 Florida Atlantic University Boulevard, Suite
210, Boca Raton, Florida 33431
(2) Except as otherwise indicated, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock
listed, which include shares of common stock that such persons have the right
to acquire a beneficial interest within 60 days from the date of this Report.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of Intraco are set forth below. All
directors and officers hold office for one year or until their successors
have been elected and qualified. Vacancies in the existing board are filled
by majority vote of the remaining directors.
<TABLE>
<CAPTION>
Name Age Position (s) Held
<S> <C> <C>
Jack S. Berger 45 President, Secretary and Director
Robert Marcus 56 Chief Financial Officer and Treasurer
Carlos A. Munoz 46 Vice President of Technology Services
Robert G. Hildreth, Jr. 61 Director
</TABLE>
Jack S. Berger has been Chief Executive Officer, President, and a
Director of Intraco since its inception in 1990. Mr. Berger has over 20
years of experience in the domestic and international computer systems
industry. During this time he has been involved in systems design, production
control, domestic sales and marketing, international sales and marketing and
field service for systems installation, maintenance, both on-site and
off-site support, management and training. This combination of experiences
gives Mr. Berger a keen understanding of all aspects of the computer industry.
Robert Marcus joined Intraco in January 1999 as Chief Financial Officer
and Treasurer. Prior to this he was a partner in American Imprints, LLC, an
advertising specialty company, from 1996 to 1998, chief executive officer of
In-Store Opportunities, Inc., a marketing and display company serving major
food manufacturers, from 1991 to 1996 and Chief Financial Officer from 1988
to 1990, Chief Operating Officer and Chief Financial Officer of Pioneer
Communications Network, a publicly- traded publishing company, from 1985 to
1988. He previously worked for the Xerox Corporation from 1972 to 1985, in
the Information Resources Group in various positions including Manager of
Business Development & Manager of Financial Planning & Analysis.
Carlos Munoz joined Intraco in 1998 as Vice President of Engineering
Services and oversees project management and engineering personnel. He is a
senior level systems and design engineer with a broad base of experience.
Prior to joining Intraco he was with Digital/Compaq since 1980, most recently
as the NT Server Technical Marketing Manager. He was responsible for
providing high level support for sales campaigns, project management, PC
Server business, product marketing and training for WNT business on Intel and
Alpha. He was also responsible for new Intel and Alpha product line
promotions and projects. He coordinated Benchmarks, Demos, Events and
Product Presentations in the US, Latin America, Central America and the
Caribbean with Oracle, Novell, and Microsoft and promoted NT/E, MS Clusters
Digital Clusters, Oracle Failsafe and Network Management Tools. Mr. Munoz
has developed business plans and marketing strategies while interfacing with
Product Managers for information of forecast, margins and discounts of new
products. He has certifications with Microsoft MCSE, Novell CNE,
DIGITAL/COMPAQ (VMS, PathWorks, Networks, Servers, and Clusters). He has
First Class FCC and Electrician licenses.
Robert G. Hildreth, Jr. has been a director since May 1999. He is
currently president of Hildreth Associates, a consulting firm, and was
formerly the international director of the law firm of LeBouef, Lamb, Leiby &
McRae, a senior utility advisor to Goldman Sachs Co., a Managing Director of
Investment Banking for Merrill Lynch and a director of Merrill Lynch
International Bank in London.
ITEM 6. EXECUTIVE COMPENSATION
Summary Compensations Table
The following table sets forth information concerning compensation for
1996-1998 received by the Chief Executive Officer (the "CEO").
<TABLE>
<CAPTION>
Long
Term
Annual Compensation Compensation
Securities
Name and Fiscal Other Annual Underlying
Principal Position Year Salary Bonus Compensation Options/SARs
<S> <C> <C> <C> <C> <C>
Jack S. Berger, Pres. 1998 $137,800 -0- -0- -0-
Jack S. Berger, Pres. 1997 $ 99,900 -0- -0- -0-
Jack S. Berger, Pres. 1996 $ 91,500 -0- -0- -0-
</TABLE>
Compensation of Directors
Non-employee directors of Intraco do not receive cash compensation for their
services. Mr. Hildreth was granted options to purchase 20,000 shares of
common stock at an exercise price of $.25 in October 1998.
Employment Agreements
Intraco entered into a three-year employment agreement with Jack S. Berger,
effective as of January 1, 1998, pursuant to which he serves as Intraco's
president, secretary, and treasurer. The agreement provides for an annual
salary of $137,800, payable in installments according to Intraco's regular
payroll schedule. The base salary shall be adjusted at the end of each year
of employment at the discretion of the board of directors.
The agreement also provides that Mr. Berger's employment may be terminated at
Intraco's discretion during the initial term, provided that Intraco shall pay
Mr. Berger an amount equal to payment at his base salary rate for the
remaining period of the initial term, plus an amount equal to 50% of his base
salary. In the event of such termination, Mr. Berger is not entitled to any
incentive salary payment of any other compensation then in effect, prorated
or otherwise. At its discretion, Intraco may also terminate Mr. Berger any
time after the initial term, provided that in such case Mr. Berger shall be
paid 50% of his then applicable base salary. In the event of such
termination, Mr. Berger shall not be entitled to receive any incentive salary
payment or any other compensation then in effect, prorated or otherwise.
The agreement may also be terminated by Mr. Berger at his discretion by
providing at least 30 days prior written notice to Intraco, in which case
Intraco may immediately relieve Mr. Berger of all duties and immediately
terminate the agreement, provided that Intraco shall pay Mr. Berger at the
then applicable base salary rate to the termination date included in Mr.
Berger's original termination notice.
In the event that Mr. Berger is in breach of any material obligation owed to
Intraco, habitually neglects the duties to be performed under the agreement,
engages in any conduct which is dishonest, damages the reputation or standing
of Intraco, or is convicted of any criminal act or engages in any act of
moral turpitude, then Company may terminate the agreement upon five days
notice to Mr. Berger. In the event of such termination, Mr. Berger shall be
paid only at the then applicable base salary rate up to and including the
date of the termination, and shall not be paid any incentive salary payments or
other compensation, prorated or otherwise.
Intraco entered into a three-year employment agreement with Robert Marcus,
effective as of January 18, 1999, pursuant to which he serves as Intraco's
Chief Financial Officer. The agreement provides for a base salary of $84,000
during the first year. Upon the first anniversary of the consummation of
this agreement, the compensation will be reviewed and raised to a salary base
of $10,000 per month provided that Intraco has grown to an annual run rate of
$15,000,000 gross revenues and a profitability of at least 8% net before
taxes measured over the average of the preceding 90 days of operations.
Further increases will be at the discretion of the board of directors.
The agreement provides that Mr. Marcus's employment may be terminated at
Intraco's discretion during the initial term, provided that Intraco shall pay
Mr. Marcus an amount equal to payment at his base salary rate for the
remaining period of the initial term. In the event of such termination, Mr.
Marcus shall not be entitled to any incentive salary payment of any other
compensation then in effect, prorated or otherwise. The agreement may also
be terminated by Mr. Marcus at his discretion, according to the same terms
and conditions applicable to Mr. Berger, described above.
In the event that Mr. Marcus is in breach of any material obligation owed to
Intraco, habitually neglects the duties to be performed under the agreement,
engages in any conduct which is dishonest, damages the reputation or standing
of Intraco, or is convicted of any criminal act or engages in any act of
moral turpitude, Intraco may terminate the agreement upon the same terms and
conditions applicable to Mr. Berger, as described above.
In recognition of the potential value of Mr. Marcus to Intraco and to induce
him to forego other employment opportunities, Intraco agreed to issue to Mr.
Marcus an option to purchase 200,000 shares of Intraco common stock. The
option to purchase 100,000 shares is exercisable by Mr. Marcus on January
18th of the years 2000 and 2001, at a purchase price of $.25 per share, and
expires January 18, 2004.
Intraco entered into an employment agreement with Carlos Munoz, effective as
of January 4, 1998, through December 31, 1999, pursuant to which he serves as
Intraco's Vice-President of Technology Services. The agreement provides for
a base rate of $75,000 per annum effective July 1, 1999, with an increase to
$80,000 per annum effective October 1, 1999.
Compensation Committee Interlocks and Insider Participation
Intraco had no compensation committee during 1998. Intraco anticipates
forming and implementing a compensation committee during 1999.
Stock Option Plan
Intraco's stock option plan currently authorizes the award of up to 2,000,000
shares of common stock in the form of stock options As of June 1, 1999, stock
options to purchase 1,127,500 shares of common stock were outstanding under
the plan. Accordingly, 872,500 shares of common stock are available for
future awards under the plan. The purpose of the plan is to enable Intraco
to attract and retain qualified and competent employees and to enable such
persons to participate in the long-term success and growth of Intraco by
giving them an equity interest in Intraco, and to enable Intraco to pay all
or part of the compensation of the directors of Intraco other than a director
who is an officer or employee of Intraco, and to provide consultants and
advisors with options to purchase shares of Intraco's common stock, thereby
increasing the proprietary interest in Intraco.
All employees of Intraco are eligible to be granted awards under the plan.
Consultants of and advisors to Intraco are eligible to be granted awards
under the plan if their services are of a continuing nature or otherwise
contribute to the long-term success and growth of Intraco.
The participants under the plan shall be selected from time to time by the
board of directors, or if constituted by the board of directors, by the
compensation committee, in its sole discretion, from among those eligible.
In granting options, the compensation committee considers current levels of
compensation, the need to provide incentives to particular employees, past
performance, comparison to employees at comparable companies holding similar
positions and Intraco's overall performance.
The plan is administered by the compensation committee, currently the board
of directors or such other committee of directors as the board shall
designate. The committee makes all decisions or determinations by either a
majority vote of its members at a meeting or by the unanimous written
approval of its members. The committee may adopt, alter or repeal any
administrative rules, guidelines and practices for carrying out the purposes of
the plan. The committee has the right to determine, among other things, the
persons to whom awards are granted, the terms and conditions of any awards
granted, the number of shares of common stock covered by the awards, the
exercise price of options and the term thereof.
The exercise price, term and exercise period of each stock option shall be
fixed by the committee at the time of grant. Notwithstanding the fixed
option price, no incentive stock option shall (i) have an option price which
is less than 100% of the fair market value of the common stock on the date of
the award of the stock option and, in the case of an Incentive Stock Option
granted to a 10% shareholder, the per share exercise price will not be less
than 110% of the fair market value, (ii) be exercisable more than ten years
after the date such incentive stock option is awarded, or (iii) be awarded
more than ten years after the plan is adopted by the board.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, Intraco has loaned funds to and sold products to
Intraco, Ltd., which is owned by Jack Berger, Intraco's president. In 1997
Intraco sold $216,000 and received cash payments of $82,590 and in 1998 sold
$235,255 and received cash payments of $199,126. The remaining $123,059 was
converted in a note receivable bearing interest at 6% per annum and payable
in 36 monthly installments. This note is current.
In May 1997, Intraco entered into a consulting agreement with Vestar
Capital Corporation pursuant to which Vestar provides organizational and
strategic planning services. Vestar has assisted Intraco with an internal
reorganization in 1998 and assisted in the identification of potential
acquisitions. The compensation under this agreement provided for monthly fees
of $3,000 through February 1998, and $1,650 per week thereafter. Vestar was
also issued 891,000 shares of common stock, which represented 9.9% of the
then-outstanding shares, and had the right to be issued warrants to maintain
its 9.9% interest for all issuances of capital stock until May 2000 as an
anti-dilution provision. During March 1999, Intraco issued to Vestar
warrants to purchase 150,000 shares of common stock at $0.25 per share in
exchange for the cancellation of the anti-dilution clause of its 1997
agreement.
In April 1999, Intraco completed an exchange agreement with Custom Touch
Electronics, Inc. ("CTE"), a Nevada corporation with no material operations
whose common stock traded on the OTC Bulletin Board, pursuant to which all
outstanding shares of Intraco capital stock were exchanged for 10,531,500 CTE
shares. The prior shareholders and promoters of CTE hold 2,429,489 shares and
the Intraco shareholders at the time of the exchange hold 10,531,500 shares.
As a result, Intraco Systems became a wholly-owned subsidiary of CTE and CTE
changed its name to Intraco Systems, Inc. A total of 1,487,298 shares were
issued to Jensen Services and Associates for services associated with the
exchange agreement.
In April 1999, Intraco entered into an agreement with H&J Investments to sell
on its behalf 866,000 shares of Common Stock at $1.00 per share to non-U.S.
investors. H&J issued to Intraco a 12-month note in the principal amount of
$866,000, of which $325,000 has been paid as of August 1, 1999.
ITEM 8. DESCRIPTION OF SECURITIES
Intraco's authorized capital stock consists of 100,000,000 shares of common
stock, par value $0.001 per share, 12,960,989 shares of which are issued and
outstanding. The outstanding shares of Common Stock are fully paid and
non-assessable. Intraco is further authorized to issue up to 10,000,000
shares of "blank check preferred stock," par value $0.001 per share, 748,500
shares of which are issued and outstanding as of the date hereof.
Common Stock
The holders of Common Stock are entitled to one vote per share for the
election of directors and with respect to all other matters submitted to a
vote of stockholders. Shares of Common Stock do not have cumulative voting
rights, which means that the holders of more than 50% of such shares voting
for the election of directors can elect 100% of the directors if they choose
to do so and, in such event, the holders of the remaining shares so voting
will not be able to elect any directors. Current holders of Intraco's Common
Stock, will have majority voting control. As a result, such persons will be
in the position to effectively control the affairs of Intraco.
Upon any liquidation, dissolution or winding-up of Intraco, the assets of
Intraco, after the payment of Company debts and liabilities and any
liquidation preferences of, and unpaid dividends on, any class of preferred
stock which may then be outstanding, if at all, will be distributed pro-rata
to the holders of the Common Stock. The holders of the Common Stock do not
have preemptive rights to subscribe for any securities of Intraco and have no
right to require Intraco to redeem or purchase their shares.
Holders of Intraco's Common Stock are entitled to receive such dividends as
the board of directors may from time to time declare to be paid in accordance
with Nevada law and if Intraco has sufficient surplus or net earnings.
Intraco has never paid cash dividends. Intraco seeks growth and expansion of
its business through the reinvestment of profits, if any, and does not
anticipate that it will pay dividends in the foreseeable future.
Intraco may issue substantial additional shares of its Common Stock in the
future for such valid corporate purposes, as management may, in its sole
discretion, determine, which would then cause substantial dilution to
Intraco's then Common Stockholders.
Preferred Stock
Intraco's Board of Directors are authorized to issue such preferred stock in
one or more series and to fix the voting powers and the designations,
preferences and relative, participating, optional or other rights and
restrictions thereof. Accordingly, Intraco may issue one or more series of
preferred stock in the future that will have preference over its Common Stock
with respect to the payment of dividends and upon its liquidation,
dissolution or winding up or have voting or conversion rights which could
adversely affect the voting power and percentage ownership of the holders of
the Common Stock.
Intraco has designated 10,000,000 shares of Preferred Stock as Series A
Convertible Redeemable Preferred Stock, of which 748,500 shares are currently
outstanding. Each share is convertible into one share of Common Stock,
subject to adjustment in certain circumstances. Each share of Series A
Preferred Stock is entitled to receive a cumulative dividend of 7% per annum,
payable quarterly. Each share has a liquidation value of $1.00. The shares
may be redeemed at Intraco's option at any time for $1.00 per share. Each
share of Preferred Stock is entitled to one vote per share, and the Series A
Preferred Stock will vote as a class with the Common Stock except as required
by law.
Warrants
Intraco has issued warrants to purchase 150,000 shares of common stock at
$0.25 per share to Vestar Capital Corporation which represent all currently
issued warrants.
PART II
ITEM 1. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(A) MARKET INFORMATION
Intraco's Common Stock has been listed for trading on the OTC Bulletin Board
under the symbol "INSY" since April 29, 1999. Intraco does not believe that
there was any trading activity in the CTE Common Stock in 1997 and 1998. The
following table shows the high and low bid prices for the Common Stock during
the period from April 29 , 1999 (the date of initial quotation on the OTC
Bulletin Board) through June 30, 1999. Intraco believes that these quotations
reflect inter-dealer prices, without retail mark- up, mark-down or
commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
<S> <C> <C>
HIGH LOW
April 29 through June 30, 1999 $7.75 $1.50
July 1 through August 5, 1999 $5.00 $1.125
</TABLE>
(B) HOLDERS
At June 30, 1999, there were approximately 365 holders of record of
Intraco's common stock. Intraco believes the number of beneficial owners of
its common stock is in excess of 360. There were 63 holders of Series A
Preferred Stock.
(C) DIVIDENDS
Intraco has paid $1,092 of dividends on the Series A Preferred Stock in
1999. Intraco has not paid dividends on its common stock and does not intend
to pay dividends for the foreseeable future. Intraco intends to retain
earnings, if any, to finance the development and expansion of its business.
Payment of dividends in the future will depend, among other things, upon
Intraco's ability to generate earnings, its need for capital and its overall
financial condition. As part of the Preferred Stock sold during 1999, Intraco
created a capital pool to assure investors of dividend payments during the
first year regardless of profitability or other circumstances.
ITEM 2. LEGAL PROCEEDINGS
Intraco is not a party to any legal proceedings which individually or in the
aggregate, is believed to be material to Intraco's business.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on accounting
or financial disclosure matters.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In November 1998, Intraco sold an aggregate of 665,,200 shares of Common
Stock for gross proceeds of $166,300 to 33 accredited investors in an
offering exempt from registration pursuant to Rule 504 promulgated pursuant
to the Securities Act of 1933. From December 1998 through April, 1999, Intraco
sold an aggregate of 748,500 shares of Series A Preferred Stock for gross
proceeds of $748,500 to 63 accredited investors in an offering exempt from
registration pursuant to Rule 506 and Regulation S promulgated pursuant to
the Securities Act of 1933. Primex Securities, Inc. acted as placement agent
and received $97,305 for commissions.
In April 1999, Intraco entered into an agreement with H&J Investments to sell
on its behalf 866,300 shares of Common Stock at $1.00 per share to non-U.S.
investors. H&J issued to Intraco a 12-month note in the principal amount of
$866,300, of which $300,000 has been paid as of July 31, 1999.
In May 1997 Intraco issued 891,000 shares to Vestar Capital in exchange for
services pursuant to a consulting agreement. In April 1999, in connection
with the transaction pursuant to which Intraco became a subsidiary of CTE, an
aggregate of 1,487,298 shares of Common Stock was issued to Jensen Services
and Associates for services rendered in connection with the transaction.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In 1996, CTE issued an aggregate of 3,600,000 shares of Common Stock for
services to Terry Nish (3,000,000) and Duane Ford (600,000) and 10,000,000
shares for cash at a purchase price of $.001 per share.
In 1997, CTE issued an aggregate of 5,000,000 shares of Common Stock for
services to Terry Nish.
In 1998, CTE issued an aggregate of 5,200,000 shares of common stock for
services to Terry Nish (4,000,000) and Cecil McCray (1,200,000).
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Intraco may agree to the terms and conditions upon which any director,
officer, employee or agent accepts an office or position and in its By-laws,
by contract or in any other manner may agree to indemnify and protect any
director, officer, employee or agent of Intraco, or any person who serves at
the request of Intraco as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, to the fullest extent permitted by the Nevada Revised
Statutes (including, without limitation, the statutes, case law and
principles of equity) of the State of Nevada. If the NRS (including without
limitation, the statutes, case law or principles of equity, as the case may be)
of the State of Nevada are amended or changed to permit or authorize broader
rights of indemnification to any of the persons referred to in the immediately
preceding sentence, then Intraco shall be automatically authorized to agree
to indemnify such respective persons to the fullest extent permitted or
authorized by such law, as so amended or changed, without the need for
amendment or modification of the Articles of Intraco and without further
action by the Directors or stockholders of Intraco.
Without limiting the generality of the foregoing provision of this item, to
the fullest extent permitted or authorized by the NRS as now in effect and as
the same may from time to time hereafter be amended, no director of Intraco
shall be personally liable to Intraco or to its stockholders for monetary
damages for breach of fiduciary duty as a director. Any repeal or
modification of the immediately preceding sentence shall not adversely affect
any right or protection of a director of Intraco existing hereunder with
respect to any act or omission occurring prior to or at the time of such
repeal or modification.
INTRACO SYSTEMS, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
TABLE OF CONTENTS
Independent Auditor's Report
Financial Statements:
Balance Sheets as of December 31, 1998 and 1997,
and Unaudited at June 30, 1999 and 1998
Statements of Operations for the Years Ended December 31, 1998
and 1997, and Unaudited for the Six Months Ended June 30, 1999 and 1998
Statements of Changes in Stockholders' Deficit for the Years Ended
December 31, 1998 and 1997, and Unaudited for the Six Months Ended
June 30, 1999 and 1998
Statements of Cash Flows for the Years Ended December 31, 1998
and 1997, and Unaudited for the Six Months Ended June 30, 1999 and
1998
Notes to Financial Statements
<PAGE>
DASZKAL, BOLTON & MANELA CPAS
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
240 WEST PALMETTO PARK ROAD, SUITE 300 BOCA RATON, FLORIDA 33432
TELEPHONE (561) 367-1040 FAX (561) 750-3236
JEFFREY A. BOLTON, CPA, P.A. MEMBER OF THE AMERICAN INSTITUTE
MICHAEL I. DASZKAL, CPA, P.A. OF CERTIFIED PUBLIC ACCOUNTANTS
ROBERT A. MANELA, CPA, P.A.
TIMOTHY R. DEVLIN. CPA, P.A.
MICHAEL S. KRIDEL, CPA, P.A.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Intraco Systems, Inc.
We have audited the accompanying balance sheets of Intraco Systems, Inc., as
of December 31, 1998 and 1997, and the related statements of operations,
changes in stockholders' deficit and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Intraco Systems, Inc., as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Boca Raton, Florida
February 26, 1999, except for
Notes 12 and 13 as to which the date is
March 3, 1999
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
BALANCE SHEETS
ASSETS
December 31, June 30,
(Unaudited)
<S> <C> <C> <C> <C>
1998 1997 1999 1998
Current assets:
Cash $ 32,245 $ 255,034 $ 49,264 $ 44,363
Accounts receivable 49,900 235,627 321,000 186,585
Notes receivable - - 125,000 -
Inventory 65,840 - 86,251 -
Interest receivable - - 16,722 -
Prepaid expenses 125,945 127,265 53,866 123,915
------- ------- ------- -------
Total current assets 273,930 617,926 652,103 354,863
------- ------- ------- -------
Property and equipment, net 113,076 73,444 114,865 73,906
Other assets:
Due from related party 46,480 133,410 - 152,858
Note receivable
- related party 123,059 - 48,096 -
Goodwill - - 83,910 -
Due from shareholder 20,500 - - -
Deposits 13,819 2,708 21,064 2,708
------- ------- ------- -------
Total other assets 203,858 136,118 153,070 155,566
------- ------- ------- -------
Total assets $ 590,864 $ 827,488 $ 920,038 $ 584,335
========= ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31, June 30,
(Unaudited)
<S> <C> <C> <C> <C>
1998 1997 1999 1998
Current liabilities:
Accounts payable $ 332,476 $ 716,146 $ 641,002 $ 289,800
Deferred revenue 152,174 593,733 63,897 515,386
Accrued expenses - - 33,973 -
Customer deposits 172,195 - 31,373 -
Note payable 306,526 50,000 298,890 238,000
Due to shareholder 17,700 - - -
--------- -------- -------- --------
Total current
liabilities 981,071 1,359,879 1,069,135 1,043,186
--------- --------- --------- ---------
Note payable 113,686 - - -
Stockholders' deficit:
Convertible redeemable preferred stock, $.001 par
value, 10,000,000 shares authorized and
52,500 shares issued and outstanding, 7%
cumulative, with a $1.00 per share preference
value
53 - 749 -
Common stock, $.001 and $.001 par value
100,000,000 shares authorized, 9,665,200 and
9,000,000 shares issued and outstanding
9,665 9,000 13,020 9,000
Additional paid-in capital 131,797 23,822 1,352,539 23,822
Subscription receivable - - (566,300) -
Accumulated deficit (645,408) (565,213) (949,105) (491,673)
--------- --------- --------- ---------
Total stockholders'
deficit (503,893) (532,391) (149,097) (458,851)
--------- --------- --------- ---------
Total liabilities
and stockholders'
deficit $ 590,864 $ 827,488 $ 920,038 $ 584,335
========= ========== ========= =========
</TABLE>
See accompanying notes to financial statements
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
STATEMENTS OF OPERATIONS
Years ended Six months ended
December 31, June 30,
(Unaudited)
1998 1997 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Systems/networks $1,248,824 $2,287,861 $1,383,474 $ 693,299
Service contracts 1,456,107 1,268,316 318,139 718,330
--------- --------- --------- --------
Total revenues 2,704,931 3,556,177 1,701,613 1,411,629
--------- --------- --------- ---------
Cost of revenues:
Systems/networks 638,885 1,443,080 1,033,293 313,676
Service contracts 1,073,835 1,163,589 206,687 542,967
--------- --------- --------- --------
Total cost
of revenues 1,712,720 2,606,669 1,239,980 856,643
--------- --------- --------- --------
Gross profit 992,211 949,508 461,633 554,986
General and
administrative 1,037,829 1,116,198 764,007 463,267
--------- --------- --------- --------
Income (loss)
from operations (45,618) (166,690) (302,374) 91,719
Interest income 2,490 1,432 17,018 2,046
Interest expense (37,067) (6,005) (18,341) (20,225)
Income (loss)
before income taxes (80,195) (171,263) (303,697) 73,540
Provision (benefit)
for income taxes - - - -
---------- ---------- --------- --------
Net income (loss) $ (80,195) $ (171,263) $ (303,697) $ 73,540
=========== ========== =========== ========
Net income (loss) per share
(basic and diluted) $ (.009) $ (.019) $ (.03) $ .008
=========== ========== ========== ========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Preferred Common Add'l
Stock Stock Paid-in Subscr. Accum.
Shares Amount Shares Amount Capital Rec. Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996
- $ - 100 $ - $ - $ - $ 32,023 $ -
Common stock split
(90,000 to 1)
- - 8,999,900 8,900 (8,900) - - -
Prior period
adjustments
- - - - - - (425,973)(425,973)
- -----------------------------------------------------------------------------
Balance at
December 31, 1996
as adjusted
- - 9,000,000 9,000 (8,900) - (393,950)(393,850)
Conversion of
shareholder note
- - - - 32,722 - - 32,722
Net loss for
the year
- - - - - - (171,263)(171,263)
- -----------------------------------------------------------------------------
Balance at
December 31, 1997
- - 9,000,000 9,000 32,822 - (565,213)(532,391)
Issuance of common
stock for cash
- - 665,200 665 165,635 - - 166,300
Costs associated
with issuance
of stock
- - - -(110,107) - - (110,107)
Issuance of
preferred stock
for cash
52,500 53 - - 52,447 - - 52,500
Net loss for
the year
- - - - - - (80,195) (80,195)
- -----------------------------------------------------------------------------
Balance at
December 31, 1998
52,500 53 9,665,200 9,665 131,797 - (645,408) (503,893)
Net Loss,
June 30, 1999
- - - - - - (303,697) (303,697)
Costs associated with
recapitalization
- - - -(283,153) - - (283,153)
Issuance of
common stock
- - 1,631,300 1,631 902,894 - - 904,525
Costs associated
with issuance
of stock
- - - -(202,964) - - (202,964)
Dividends paid
- - - - (1,092) - - (1,092)
Issuance of preferred
stock for cash
696,000 696 - - 695,304 - - 696,000
Acquisition of
assets of CTE
- - 1,664,489 1,664 1,773 - - 3,437
Issuance of stock
for acquisition
- - 60,000 60 107,980 - - 108,040
Subscriptions
receivable
- - - - - (566,300) - (566,300)
- -----------------------------------------------------------------------------
Balance at
June 30, 1999
748,500 749 13,020,989 13,020 1,352,539(566,300)(949,105)(149,097)
------- --- ---------- ------ --------- ------- ------- -------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Years ended Six months ended
December 31, June 30,
(Unaudited)
<S> <C> <C> <C> <C>
1998 1997 1999 1998
Net (loss) $ (80,195) $(171,263) $(303,697) $ 73,540
Adjustments to reconcile
net loss to net cash
provided (used) by
operating activities:
Depreciation 18,426 16,099 9,602 13,365
Changes in assets
and liabilities:
(Increase) decrease in:
Inventory (65,840) - (20,411) -
Accounts receivable 185,727 (34,855) (271,100) 49,042
Interest receivable - - (16,722) -
Note receivable - related - - 74,963 -
Prepaid expenses 1,320 107,569 72,079 3,350
Due from related
parties (38,929) (133,410) 46,480 (19,448)
Due from Shareholder - - 2,800 -
Security deposits (11,111) - (7,245) -
Increase (decrease) in:
Accounts payable 143,236 609,544 308,526 (152,346)
Accrued expenses - - 33,973 -
Deferred revenue (441,559) 109,094 (88,277) (78,347)
Customer deposits 172,195 - (140,822) -
-------- ------- -------- -------
Net cash provided (used)
by operating activities (116,730) 502,778 (299,851) (110,844)
-------- ------- -------- -------
Cash flows from investing activities:
Purchase of property
and equipment (58,058) (13,931) (5,391) (13,827)
-------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance
of common stock 166,300 - 234,792 -
Proceeds from issuance
of preferred stock 52,500 - 696,000 -
Costs associated with
issuance of stock (110,107) - (202,964) -
Dividends paid - - (1,092) -
Repayment of long-term debt (156,694) (290,124) (121,322) (86,000)
Increase stockholder loans - 1,739 - -
Costs associated with
recapitalization - - (283,153) -
--------- -------- -------- -------
Net cash provided (used) by
financing activities (48,001) (288,385) 322,261 (86,000)
--------- -------- -------- -------
Net increase (decrease) in cash (222,789) 200,46 17,019 (210,671)
Cash, beginning of year 255,034 54,572 32,245 255,034
-------- ------- ------- -------
Cash, end of year $ 32,245 $ 255,034 $ 49,264 $ 44,363
========= ========= ========= ========
Supplemental disclosure of
cash flow information:
Cash paid during the year for:
Interest paid $ 37,067 $ 6,005 $ 18,341 $ 20,225
========= ========= ========= ========
Non-cash transactions affecting
investing activities:
Property and equipment
acquired in acquisition $ - $ - $ 6,000 $ -
========= ========= ========= ========
Non-cash transactions affecting
financing activities:
Conversion of shareholder note
into common stock $ - $ 32,722 $ - $ -
========= ========= ========= ========
Conversion of accounts payable
to note payable $ 438,906 $ - $ - $438,906
========= ========= ========= ========
Common stock issued for note $ - $ - $ 691,300 $ -
========= ========= ========= ========
Issuance of common stock
for acquisition $ - $ - $ 90,000 $ -
========= ========= ========= ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Intraco Systems, Inc., (the "Company") specializes in providing a full range
of computer solutions worldwide based on its software products, complete
systems, complex networks, and Internet solutions. These include hardware
and/or software technical services such as custom software and software
migrations, as well as technical support both on-site and remote as may be
required.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment is recorded at cost and is depreciated using the
straight-line method over their estimated useful lives.
Use of Estimates
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
Revenue Recognition
Generally, revenues from sales of products are recognized when products are
shipped unless the Company has obligations remaining under a sales or
licensing agreement, in which case revenue is either deferred until all
obligations are satisfied or recognized ratably over the term of the
contract. Revenues from sales of maintenance contracts in 1998 and 1997 were
$1,456,407 and $1,268,316, respectively.
Inventory
Inventory consists primarily of computer equipment purchased for resale, and
is stated at the lower of cost or market, with cost determined on the
first-in, first-out (FIFO) method.
Unaudited Interim Information
The information presented as of June 30, 1999 and 1998, and for the six month
periods ended June 30, 1999 and 1998, has not been audited. In the opinion of
management, the unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of June 30, 1999 and 1998,
and the results of its operations and its cash flows for the six months ended
June 30, 1999 and 1998, and the stockholders deficit for the six months ended
June 30, 1999.
Earnings Per Share
Earnings per share are computed based on the weighted average number of common
shares outstanding during the year. Stock warrants and options outstanding
are common stock equivalents and are included in the calculation of earnings
per share to the extent they are dilutive using the treasury-stock method.
Basic and diluted earnings per share are the same.
NOTE 3 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
<S> <C> <C>
1998 1997
Leasehold improvements $ 50,282 $ -
Equipment 111,696 103,919
Furniture and fixtures 22,260 22,260
-------- --------
Total property and equipment 184,238 126,179
Less: accumulated depreciation (71,162) (52,735)
--------- --------
Property and equipment, net $ 113,076 $ 73,444
========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1997, was
$18,426 and $16,099, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company is affiliated with various companies through common ownership.
During the years ended December 31, 1998 and 1997, the Company had the
following transactions with a related party (Intraco, Ltd.):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
Due from related party - beginning of year $ 133,410 $ -
Sales to related party 235,255 216,000
Cash received (199,126) (82,590)
Less: Amount converted to note receivable
(Due in 36 monthly installments, with
an interest rate of 6%) 123,059 -
---------- ----------
Due from related party - end of year $ 46,480 $ 133,410
=========== ==========
</TABLE>
The Company paid a minority shareholder of the Company $90,000 during 1998
pursuant to a consulting agreement.
NOTE 5 - OPERATING LEASES
The Company leases facilities and equipment under operating leases, with terms
from three to five years, payable in monthly installments. Total lease
expense for the years ended December 31, 1998 and 1997, was $67,860 and
$45,711, respectively.
Future minimum lease payments for leases with a term in excess of one year are
as follows:
Years ended
December 31,
1999 $157,000
2000 161,000
2001 151,000
2002 130,000
2003 127,000
NOTE 6 - LONG-TERM DEBT
At December 31, 1998 and 1997, long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Note payable, due on demand,
with an interest rate of 13.5%,
with remaining balance due January 31, 1998. $ - $ 50,000
Note payable due in monthly installments
ranging from $12,000 to $39,000 plus interest at
10%, with remaining balances due March 2000.
Secured by all assets of the Company. 420,212 -
------- --------
Less current portion 306,526 50,000
-------- --------
$ 113,686 $ -
======== ========
</TABLE>
Aggregate maturities of long-term debt are as follows:
1999 $306,526
2000 113,686
-------
Total $420,212
========
Total interest expense for the years ended December 31, 1998 and 1997, was
approximately $37,000 and $6,000, respectively.
NOTE 7 - CONCENTRATION OF CREDIT RISK
The Company maintains its cash bank deposit at various financial
institutions. Accounts at these institutions are insured by the Federal
Deposit Insurance Corporation up to $100,000 and the balance, at times, may
exceed federally insured limits. At December 31, 1998, the Company's cash
balance did not exceed the insured limit. The balance exceeded the insurance
limit by approximately $155,000 at December 31, 1997.
NOTE 8 - MAJOR CUSTOMER
Sales to one customer in 1998 and 1997, represented approximately 29% and 64%
of total sales, respectively.
NOTE 9 - PRIOR PERIOD ADJUSTMENTS
During 1997, an adjustment was made to correct the Company's revenue and
expense recognition method relating to its service contracts. In previous
years the Company recognized the revenue and expense on the cash basis. This
error was corrected and revenue and expenses are now recognized when earned or
incurred, respectively. The effect of this adjustment, when reported in the
appropriate year was to decrease stockholders' equity as reported at December
31, 1996 by $(254,653).
The Company also adjusted the financial statement to correct the overstatement
of the capitalized software costs. During 1997, it was determined that the
capitalized software costs had no future benefit as of December 31, 1996. The
effect of this adjustment, when reported in the appropriate year was to
decrease stockholders' equity as reported at December 31, 1996 by $(171,320).
The total effect of these adjustments was to decrease the stockholders'
equity balance as reported at December 31, 1996 by $(425,973).
NOTE 10 - STOCKHOLDERS' DEFICIT AND STOCK OPTION PLAN
In August and in November 1998, the Company amended and restated the Articles
of Incorporation. The Company increased the aggregate number of shares to
60,000,000 consisting of 50,000,000 shares of common stock, par value $.001
per share and 10,000,000 shares of preferred stock, par value $.001 per share,
7% cumulative dividend, payable quarterly starting February 1, 1999. The
preferred stock is redeemable at any time at the option of the Company at
$1.00 per share. Five years from the date of issuance or 180 days after the
effective date of the Company's initial public offering, the holders of at
least 51% of the Series A preferred stock will have one demand registration
right. The Company will be contractually required to use its best efforts to
file a registration statement and to have such registration statement become
effective.
In November of 1998, the Company commenced a Regulation D 504 stock offering
and as a result of the offering the Company issued 665,200 shares of common
stock for $166,300 or $.25 per share. Also in November of 1998, the Company
began a preferred stock offering and as a result of the offering, the Company
issued 52,500 shares of preferred stock of which 12,500 shares were issued
under Regulation D 506 and 40,000 shares under Regulation S, at $1.00 per
share which totals $52,500. Costs incurred associated with these offerings
totaled $110,000. The Company is continuing these offerings of common and
preferred stock and during the period January 1, 1999 through March 3, 1999,
raised additional capital of approximately $328,000.
Holders will have the right to convert the Series A preferred stock, in whole
or in part, at any time, or from time to time, into the common stock, par
value $0.001, of the Company. The initial conversion rate shall be on a
one-to-one basis and shall be subject to proportional stock splits, stock
dividends and reverse stock splits, and to standard weighted average
price-based anti-dilution provisions as well as specific anti-dilution
provisions with respect to any future series of preferred stock.
Stock Option Plan
Under the Company's stock option plan, 2,000,000 shares of common stock were
reserved for issuance upon exercise of options granted to directors, officers
and employees of the Company. Options issued through December 31, 1998, carry
exercise prices equal to that of the fair market value on the date of the
grant. The options vest equally over a period of two years following the date
of grant and the unexercised portion of the options expires and ceases to be
exercisable on the earlier of the tenth year after the date of the grant or
specified date following termination of employment.
The Company has elected to account for the stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, no compensation expense has been
recognized on the stock options.
Had compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the
methodology prescribed under Statement of Financial Standards No. 123,
"Accounting for Stock Based Compensation," the Company's 1998 net loss would
have increased by $6,649. The fair value of each option is estimated on the
date of grant using fair market option pricing model with the following
assumption:
Risk-free interest rate 5.28%
Expected life (years) 10
Expected volatility n/a
Expected dividends None
Weighed average remaining contractual life 1.75 years
A summary of option transactions during the years ended December 31, 1998 and
1997, is shown below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Options Per Option
<S> <C> <C>
Outstanding at December 31, 1997 - $ -
Granted 900,000 .25
Exercised - -
Forfeited (85,000) .25
------- ------
Outstanding at December 31, 1998 815,000 $ .25
======= ======
</TABLE>
NOTE 11 - INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Taxes currently payable $ - $ -
Deferred income tax benefit 27,485 229,897
Change in beginning valuation allowance (27,485) (229,897)
------- --------
Provision (benefit) for income taxes $ - $ -
======== =========
</TABLE>
Reconciliation of the Federal statutory income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Computed at the statutory rates (34%) $(27,266) $(58,229)
Increase (decrease) resulting from:
Non-deductible expenses 2,692 678
State income taxes, net of federal income
tax benefit (2,911) (6,216)
Reinstatement of deferred tax asset at 5/7/97 - (188,554)
Reinstatement/change in deferred tax asset
valuation allowance 27,485 229,897
Other - 22,424
--------- ---------
Tax provision (benefit) $ - $ -
========= =========
</TABLE>
<TABLE>
<CAPTION>
The components of the deferred tax asset were as follows at December 31:
1998 1997
<S> <C> <C>
Net operating loss carryforward $ 249,648 $ 59,519
Deferred revenue 57,263 223,422
------- -------
Total deferred tax asset 306,911 282,941
Deferred tax liabilities:
Deferred costs (41,239) (46,807)
Depreciation expense (8,290) (6,237)
-------- -------
Net deferred tax asset 257,382 229,897
-------- -------
Valuation allowance:
Beginning of year (229,897) -
Decrease (increase) during year (27,485) (229,897)
-------- --------
Ending balance (257,382) (229,897)
-------- --------
Net deferred taxes $ - $ -
========== ==========
</TABLE>
At December 31, 1998 and 1997, the Company has unused net operating
loss carryforwards of approximately $663,000 and $158,000, respectively,
expiring primarily in 2013 and 2012, which are available for use on its future
corporate Federal and State tax returns.
NOTE 12 - SUBSEQUENT EVENTS
During the period from January 1, 1999 to March 3, 1999, the Company raised
additional capital, from stock offerings, totaling, approximately $328,000.
Unaudited
In April of 1999, CTE, a public shell, acquired all of the outstanding common
stock of the Company. For accounting purposes, the acquisition has been
treated as an acquisition of CTE by the Company and as a recapitalization of
the company. As a result of the recapitalization, the Company is now
authorized to issue 100,000,000 shares of common stock.
NOTE 13 - MANAGEMENT'S PLAN
As shown in the accompanying financial statements, the Corporation incurred a
net loss of $80,195 during the year ended December 31, 1998, and $171,263 for
the year ended December 31, 1997. The Company's current liabilities exceeded
its current assets by $707,141 and $741,953, respectively. The ability of the
Corporation to continue as a going concern is dependent on increasing sales
and obtaining additional capital and financing. The financial statements do
not include any adjustments that might be necessary if the Corporation is
unable to continue as a going concern.
Management's plan to increase sales and obtain additional capital includes
several specific actions. On the sales side, greater emphasis will be placed
on systems, web development and services as these areas have higher profit
margins and represent a market which is growing much more rapidly than the
company's traditional contract services. Management is also pursuing an
aggressive acquisition strategy which is expected to add significantly to
revenues and profits while strengthening the organization.
For capital sourcing, management will continue the private placement offerings
of common and preferred stock, which during the period from January 1, 1999
through March 3, 1999 have raised $328,000. In addition, in April 1999 the
Company completed a merger with CTE, a public shell. This merger was
accounted for as a reverse merger.
No estimate has been made should management's plan be unsuccessful.
PART III
EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
<S><C> <C>
EX-27 Financial Data Schedule
</TABLE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
INTRACO SYSTEMS, INC.
Date: September __, 1999 By: /s/ Jack S. Berger
-------------------------
Jack S. Berger, President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 49,264
<SECURITIES> 0
<RECEIVABLES> 462,722
<ALLOWANCES> 0
<INVENTORY> 86,251
<CURRENT-ASSETS> 652,103
<PP&E> 114,865
<DEPRECIATION> 0
<TOTAL-ASSETS> 920,038
<CURRENT-LIABILITIES> 1,069,135
<BONDS> 0
0
749
<COMMON> 13,020
<OTHER-SE> (162,866)
<TOTAL-LIABILITY-AND-EQUITY> 920,038
<SALES> 1,701,613
<TOTAL-REVENUES> 1,701,613
<CGS> 1,239,980
<TOTAL-COSTS> 764,007
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,341
<INCOME-PRETAX> (303,697)
<INCOME-TAX> 0
<INCOME-CONTINUING> (303,697)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (303,697)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
