U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT ISSUED UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file Number 0-027073
September 30, 1999
INTRACO SYSTEMS, INC.
--------------------
(Exact name of registrant as specified in its charter)
Nevada 65-0180519
----------------------- ---------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation) Number)
3998 FAU Blvd., Suite 210, Boca Raton, Florida 33431
-----------------------------------------------------
(Address of principal executive offices)
(561) 367-0600
--------------
Registrant's telephone number, including area code:
___________________________________________
(Former name or address if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or such
shorter period that the Registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes ________ No ___X____
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13, or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes _______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS
On September 30, 1999, the Registrant had outstanding 13,020,989 shares
of common stock, $.001 par value and 763,500 shares of class A preferred
stock, par value $.001.
INTRACO SYSTEMS, INC.
INDEX TO THE FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Page
Number
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheet -
as of September 30, 1999 3-4
Unaudited Consolidated Statements of Operations -
for the three and nine months ended September 30,
1999 and 1998 5
Unaudited Consolidated Statements of Cash Flows -
for the nine months ended September 30, 1999
and 1998 6
Notes to Unaudited Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults from Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
PART III. EXHIBITS 12
SIGNATURES 13
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999
(UNAUDITED)
ASSETS
------
<S> <C>
Current assets:
Cash $ 4,103
Accounts receivable, net 185,975
Inventory 29,941
Interest receivable 25,208
Prepaid expenses 44,921
-------
Total current assets 290,148
-------
Property and equipment, net 199,449
Other assets:
Note receivable - related party 48,096
Goodwill, net 89,438
Deposits 18,064
-------
Total other assets 155,598
-------
Total assets $ 645,195
=========
</TABLE>
See accompanying notes to condensed financial statements.
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C>
Current liabilities:
Accounts payable $ 776,552
Deferred revenue 127,257
Accrued expenses 43,656
Customer deposits 20,022
Note payable 221,061
---------
Total current liabilities 1,188,548
---------
Stockholders' deficit:
Convertible redeemable preferred stock, $.001 par
value, 10,000,000 shares authorized and
763,500 shares issued and outstanding, 7%
cumulative, with a $1.00 per share preference
value 764
Common stock, $.001 par value 100,000,000
shares authorized, 13,020,989 shares
issued and outstanding 13,020
Additional paid-in capital 1,343,304
Subscription receivable (446,300)
Accumulated deficit (1,454,141)
---------
Total stockholders' deficit (543,353)
---------
Total liabilities and stockholders' deficit $ 645,195
=========
</TABLE>
See accompanying notes to condensed financial statements.
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
1998 1997 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Systems/networks $ 209,726 $ 267,359 $1,597,149 $ 914,096
Service contracts 114,030 599,379 426,078 1,344,327
-------- -------- --------- ---------
Total revenues 323,756 866,738 2,023,227 2,258,423
-------- -------- --------- ---------
Cost of revenues:
Systems/networks 178,864 116,289 1,201,129 447,251
Service contracts 38,855 454,818 246,346 999,168
-------- -------- --------- ---------
Total cost
of revenues 217,719 571,107 1,447,475 1,446,419
-------- -------- --------- ---------
Gross profit 106,037 295,631 575,752 812,004
General and
administrative 619,841 336,303 1,381,038 787,337
-------- -------- --------- ---------
Income (loss)
from operations (513,804) (40,672) (805,286) 24,667
-------- -------- --------- ---------
Interest income 8,487 142 27,647 880
Interest expense (12,753) (7,495) (31,094) (27,721)
-------- -------- --------- ---------
Income (loss)
before income taxes (518,070) (48,025) (808,733) (2,174)
Provision (benefit)
for income taxes - - - -
-------- -------- --------- --------
Net loss $ (518,070) $ (48,025) $ (808,733) $ (2,174)
========== ========== ========== ========
Net loss per share
(basic and diluted) $ (.09) $ (.01) $ (.07) $ (0.01)
========== ========== ========== ========
Weighted average number
of shares outstanding
to be issued 11,830,739 9,000,000 11,830,739 9,000,000
========== ========== ========== =========
</TABLE>
See accompanying notes to condensed financial statements.
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended September 30,
1999 1998
------------ -----------
<S> <C> <C>
Cash Flows from operating activities:
Net cash used by operating activities $ (407,946) $ (200,760)
Cash flows from investing activities:
Purchase of property and equipment (97,118) (15,483)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 458,717 -
Proceeds from issuance of preferred stock 711,000 -
Costs associated with issuance of stock (212,199) -
Dividends paid (1,092) -
Repayment of long-term debt (196,351) (32,150)
Costs associated with recapitalization (283,153) -
---------- ----------
Cash flows from financing activities 476,922 (32,150)
---------- ----------
Net decrease in cash (28,142) (248,393)
Cash at beginning of year 32,245 255,034
---------- ----------
Cash at end of year $ 4,103 $ 6,641
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid $ 31,094 $ -
========== ==========
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 $ - $ 17,850
========== ==========
Conversion of accounts payable
to note payable $ - $ 438,906
========== ==========
Common stock issued for note $ 446,300 $ -
========== ==========
Issuance of common stock
for acquisition $ 90,000 $ -
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
INTRACO SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required for complete
financial statements. In the opinion of management, all adjustments
necessary for a fair presentation of the results for the interim periods
presented have been included.
These results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with those used in
the preparation of the Company's audited Financial Statements for the year
ended December 31, 1998. Operating results for the nine months ended
September 30, 1999, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
It is recommended that the accompanying condensed financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Form 10SB.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30, 1999
Leasehold improvements $ 51,971
Equipment 212,391
Furniture and fixtures 22,995
-----------
Total property and equipment 287,357
Less: accumulated depreciation (87,908)
-----------
Property and equipment, net $ 199,449
===========
Depreciation expense for the nine months ended September 30, 1999 was $16,746.
NOTE 3 - RELATED PARTY TRANSACTIONS
The company is affiliated with various companies through common ownership.
During the period ended September 30, 1999, the Company had the following
transactions with a related party (Intraco, Ltd.):
September 30, 1999
Note receivable - related party - beginning $ 123,059
Cash received (74,963)
(Due in 36 monthly installments,
With an interest rate of 6%) -----------
Note receivable - related party - end $ 48,096
===========
NOTE 4 - STOCKHOLDERS' DEFICIT
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 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 1998, the Company
began a preferred stock offering, and as a result of the offering, the
Company issued 763,500 shares of preferred stock, of which 183,000 shares
were issued under Regulation D 506, and 580,500 under Regulation S, at $1.00
per share, which totals $763,500. Costs incurred associated with these
offerings totaled $212,000. The Company is continuing the offering of
preferred stock.
Holders 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.
In March 1999, the Company sold 866,300 shares of $.001 par value common
stock to an investment company at $1.00 per share for an interest bearing
note. At September 30, 1999, the Company held $446,300 of this note from the
investment company.
In April 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.
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The following discussion regarding the Company and its business and
operations contains "forward-looking statements" within the meaning of Private
Securities Litigation Reform Act 1995. These statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The reader is cautioned that all forward-looking
statements are necessarily speculative and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward looking statements, including no
history of profitable operations, competition, risks related to acquisitions,
difficulties in managing growth, dependence on key personnel and other
factors discussed under "Factors That May Affect Future Results" in the
Company's Form 10SB. The Company does not have a policy of updating or revising
forward-looking statements and thus it should not be assumed that silence by
management over time means that actual events are bearing out as estimated in
such forward looking statements.
The following discussion and analysis should be read in conjunction with
the financial statements appearing as Item 1 to this Report. These financial
statements reflect the operations of Intraco Systems, Inc. (the "Company")
for the quarter and nine month periods ended September 30, 1999 and 1998.
Results of Operations
General
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.
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
midsize 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 seeking to
acquire companies in the Telecommunications, Internet Development and Network
Systems Integration areas. Additionally, Intraco, through relationships it
intends to establish with Motorola, Microsoft, Unisys and Phonetic Systems,
will incorporate new products and technologies into its product offering
including phone access to Internet websites and voice recognition driven
auto-attendant products. 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 is increasing Intraco's focus on computer telephony
integration and allows 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.
Results of Operations
Revenues for the quarter ending September 30, 1999 are down 62.6% from the
same period in 1998. The Company has had a contract with Compaq Computer
(previously Digital Equipment Corp.) for many years to resell support
services. The profit margins on these contracts are below management's
targets and therefore more Company resources are being directed toward
developing businesses with higher profit margins and less emphasis is being
placed on replacing those contracts that are not being renewed. The impact
in the third quarter and nine month periods respectively were $438,529 and
$871,450, accounting for most of the year-over-year shortfalls. The other
major revenue source for the Company is the sale, installation and support of
computer systems and networks. These sales tend to be one-time projects
often of large dollar amount and, as a result, can contribute to significant
quarterly swings. Although revenues are down $84,000 in the third quarter,
this category is up $632,836 for the nine month period.
Gross profit margins are down for both the quarter and year-to-date periods.
This reflects the margin pressure on hardware being experienced throughout
the industry. The Company does not expect this situation to improve in its
traditional product offerings and thus has begun migrating into related
technological areas in which its expertise will allow it to begin offering
products and services with substantially higher margins. Although there can
be no assurances that this strategy will prove successful, management
believes it is necessary for the Company's long term viability.
General and administrative expenses for the quarter and nine month period are
up $283,538 (84.3%) and $593,701 (75.4%) respectively. Most of the increase
is in salaries, facilities, and the decision to aggressively pursue an
acquisition strategy. Although there can be no assurance that these
investments will result in increased revenues or profits, management believes
they are necessary for the Company's long term financial health.
Liquidity and Capital Resources
The Company has incurred significant losses and has substantial negative cash
flow from operations. The Company's independent auditors have included a
footnote in their annual report for the year ended December 31, 1998, which
expresses concern about the Company's ability to continue as a going concern
unless sales increase and/or additional investment capital is raised. The
Company expects significant operating losses to continue in 1999 and at least
during the first half of 2000. The Company is currently offering its
preferred stock and has received approximately $450,000 through November 1,
1999. The Company will require additional funding to cover current
operations, which require approximately $200,000 per month at current levels
of sales, until revenues from operations are sufficient. There can be no
assurance that additional funds will be raised through this offering or
otherwise.
The Company's current assets are $290,148 and current liabilities, $1,188,548
resulting in a negative current ratio. For the Company to continue to meet
its current obligations it will have to secure additional capital.
Management is aggressively seeking additional investment capital, both for
working capital (current obligations) as well as to finance its growth and
acquisition strategy. Although there can be no assurance that management
will be successful in securing the needed capital, management is in
discussion with potential investors and is optimistic that additional funding
will be available.
The Company had $4,103 of cash on hand at September 30, 1999, versus $32,245
at the beginning of 1999. Net cash used in operations for the period ending
September 30, 1999, was $407,946. This deficit was funded by the sale of
common and preferred stock. The Company also repaid $196,351 of debt and
incurred costs of $283,153 recapitalizing and merging with CTE.
The Company intends to pursue expansion and acquisition plans, which may
include the opening of additional facilities, both domestically and
internationally, as well as the acquisition of additional facilities and/or
companies. The success and timing of any such plans and required capital
expenditures are unpredictable and the Company has no current arrangements
with respect to any such acquisition. Funding for such plans could be a
combination of issuance of additional equity, additional borrowings and
profits from operations. The Company cannot make any assurances that such
funding would become available for such plans. Also, because the Company is
operating at a loss, it will need to secure additional funding to continue
existing operations. No assurance can be made that such funding will be
forthcoming and if forthcoming, be available at reasonable rates.
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).
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None during the current quarter. In October 1999 the Company sold
455,600 shares of convertible Series B, preferred stock, par value $.001,
preference value $1.00 for gross proceeds of $454,350. Each share of Series
B Preferred Stock is convertible into 1 share of common stock, par value
$.001. The shares are callable by the Company. The sale of Series B
Preferred Stock was exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof, as a transaction not
involving a public offering.
Item 3. Defaults from senior securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
In October 1999, the Company hired a new CEO, Walt Nawrocki, and a
new Director of Marketing, David May. In November 1999, the Company hired a
new Vice President of Sales, Philip Sencer and a new Internet business unit
manager, Jonathan Cosci.
Item 6. Exhibits and Reports on Form 8-K
Exhibits required by Item 601 of Regulation S-B - none
None
PART III
EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
<S><C> <C>
EX-27 Financial Data Schedule
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on behalf by the
undersigned thereunto duly authorized.
INTRACO SYSTEMS, INC.
Dated: November 12, 1999 By: /s/ Jack Berger
-------------------
Jack Berger, President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,103
<SECURITIES> 0
<RECEIVABLES> 185,975
<ALLOWANCES> 0
<INVENTORY> 29,941
<CURRENT-ASSETS> 290,148
<PP&E> 287,356
<DEPRECIATION> (87,907)
<TOTAL-ASSETS> 645,195
<CURRENT-LIABILITIES> 1,188,548
<BONDS> 0
0
764
<COMMON> 13,020
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 645,195
<SALES> 2,023,227
<TOTAL-REVENUES> 2,023,227
<CGS> 1,447,475
<TOTAL-COSTS> 2,828,513
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,094
<INCOME-PRETAX> (808,733)
<INCOME-TAX> 0
<INCOME-CONTINUING> (808,733)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (808,733)
<EPS-BASIC> 0
<EPS-DILUTED> (.07)
</TABLE>
