U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number
INTRACO SYSTEMS, INC.
(Name of Small Business issuer in its charter)
Nevada 87-0381511
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3998 FAU Boulevard
Boca Raton, Florida 33431
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (561) 367-0600
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for 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 [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $2,925,268.
The aggregate market value of the issuer's Common Stock, $.01 par value, held by
non-affiliates on March 28, 2000 was approximately $57,735,000.
As of March 28, 2000, there were 18,169,969 shares of the issuer's Common Stock,
$.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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FORWARD-LOOKING STATEMENTS
Intraco Systems, Inc. ("Intraco") cautions readers that certain
important factors may affect Intraco's actual results and could cause such
results to differ materially from any forward-looking statements which may be
deemed to have been made in this Report or which are otherwise made by or on
behalf of Intraco. For this purpose, any statements contained in this Report
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "expect," "believe," "anticipate," "intend," "could," "estimate," or
"continue" or the negative other variations thereof or comparable terminology
are intended to identify forward-looking statements. Factors which may affect
Intraco's results include, but are not limited to, dependence on sources of
inventories, dependence on the resale market for unsold goods, dependence on
charitable donations and a limited number of charities, reliance on management,
changes in trends in buyer preferences, competition with other retail sources,
general economic conditions and seasonality of the population in Intraco's
market areas. Intraco is also subject to other risks detailed herein or detailed
from time to time in Intraco's filings with the Securities and Exchange
Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Intraco is a leading application service provider or ASP and integrator
of speech recognition based products and services. Intraco's competitive
advantage lies in its unique ability to combine extensive in-house expertise
with leading speech recognition technologies (i.e. voice browsers, natural
language engines) to create first-to-market, comprehensive commercial solutions.
Intraco plans to deliver these high value, high margin advanced technology
solutions, on a business-to-business or B2B basis, to small- and mid-sized
businesses such as Websites/e-commerce companies and catalog-based retailers and
larger businesses such as telecommunications companies. Ultimately, these
solutions will voice enable a wide range of applications such as Websites,
e-commerce, catalog ordering, auctioning, paging, e-mail and unified messaging.
Due to the emergence of the Internet, especially relating to the B2B
marketplace and the subsequent expansion of the ASP business model, a large
market opportunity for Intraco's solutions exists. According to Forrester
Research, the B2B Internet market is anticipated to grow from $109 billion in
1999 to $1.3 trillion in 2003, representing a compounded annual growth rate of
approximately 87%. Additionally, the B2B market is estimated to be more than 12
times the size of the B2C market in 2003. According to International Data
Corporation and Dataquest, the ASP market has been estimated to be $4.5 billion
for pure ASP revenue and $22 billion for ASP and integration revenue in 2003. As
a leader in the speech recognition market, Intraco is well positioned to capture
substantial market share as companies become increasingly familiar with and
recognize the need for advanced speech recognition technologies which are most
easily deployed on an ASP basis.
Intraco currently offers several suites of comprehensive commercial
solutions for speech recognition based products and services designed to utilize
the Internet and telecommunications applications. These first-to-market
solutions include:
- - Voice ASP: the voice enablement of Websites, which will be offered on
an ASP basis;
- - Virtual Office ASP: telephony solutions including basic telephony
services, unified messaging and voice driven e-mail facilitation, which
will also be offered on an ASP basis; and
- - Computer Telephony Integration: the provisioning of advanced voice
activated auto-attendants and other related services.
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Intraco has been able to create these first-to-market commercial
solutions based upon several advantages. Intraco has extensive knowledge of the
voice recognition industry. Intraco's Chief Executive Officer, Walt Nawrocki,
spent over 30 years with IBM pioneering new technologies where he was ultimately
responsible for the creation and ongoing management of their speech recognition
business. Subsequent to IBM, Mr. Nawrocki founded and served as Chief Executive
Officer and President of Registry Magic Inc. where he established the Virtual
Operator as the industry standard for speech driven auto attendants. Intraco's
extensive knowledge of the voice recognition industry also gives Intraco the
ability to identify which vendors supply the most advanced and effective
technological components. Intraco's relationships with these vendors, which
include Motorola, Nuance and Unisys, have allowed it to forge long-term working
agreements in the form of joint ventures and licensing agreements. As a result,
Intraco is able to leverage off of the significant investments (hundreds of
millions of dollars) already made by these outside firms. Finally, Intraco's
infrastructure is that of a systems integrator, thus allowing it to utilize
proprietary middleware technology that integrates a multitude of disparate
technologies into one cohesive solution. Intraco also has a leading team of
engineers with the in-house expertise to install and service both the hardware
and software components of this solution as well as a dedicated sales force
already in place to sell the products.
Intraco intends to sell its products and services on an ASP basis
primarily through major national network service providers such as UUNET,
Intermedia Communications, Cable and Wireless, Level3 Communications and Verio
and portals which cater to small- and mid-sized businesses. In both cases, the
focus is on distributors instead of end-users. Within the framework of a
traditional B2B model, Intraco does not intend to service individual consumers
but instead is targeting other business customers through the network service
providers and portals. According to Forrester Research, the B2B model will
remain the most viable method to capture the rapidly growing eCommerce market.
Intraco intends to pursue these customers by utilizing a sales team that has
well over 150 years of combined experience in the technology industry. Most
importantly, the sales force possesses the ability to understand existing and
new technologies as well as the ability to determine how to create and deliver
value from integrating various technologies. Additionally, Intraco's strategic
relationships provide it with proven marketing partners, with a history of
successful hi-tech products and services. Intraco's partners have fully
committed their resources as their success depends on Intraco's ability to
integrate each piece into a marketable product solution.
The recent emergence of the Internet has stimulated the public's desire
for instant information. With over 150 million people currently linked by
computer to the Internet, the market for sellers of information and eCommerce
services is tremendous. By voice enabling Websites, this market could
potentially grow ten times larger by allowing the world's 1.5 billion telephone
users to voice access the same information. The primary demand driver is that
speech recognition technology has vastly improved, specifically with the
introduction of natural language engines, which incorporate "human factors"
technology. Previous products were often viewed as rigid, allowing users to get
easily "lost" in the technology. However, as a result of these advancements, a
greater acceptance of speech recognition technologies has emerged, which could
lead to the rapid growth of this cutting edge industry.
THE INTRACO SOLUTION
Intraco is a leading provider and integrator of speech recognition
based products and services that are designed to utilize the Internet and
standard telecommunications applications. The key components of the Intraco
solution include:
o FIRST-TO-MARKET. Intraco believes it has a substantial head start in the
development of language and speech recognition products and services. Due
to its relationships with firms that have been instrumental in the
development of critical speech recognition products such as Microsoft,
Motorola, Nuance and Unisys, Intraco has had special access and in some
cases has helped develop the critical software components which Intraco
uses in its speech recognition solutions. For example, Intraco is the only
speech recognition based applications vendor to possess demonstrated
expertise in both Microsoft's and Motorola's voice browser technologies.
These relationships, combined with Intraco's ability to integrate the
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critical software using its proprietary technology, has enabled Intraco to
produce superior, first-to-market, commercially viable solutions, with
little competition.
o AGREEMENTS AND STRATEGIC RELATIONSHIPS. Intraco has developed critical
relationships with companies such as Motorola, Microsoft, Emergin, Nuance
and Unisys, which have provided Intraco with access to cutting-edge speech
recognition and other technologies. Each of these firms has expended
significant amounts of resources developing these cutting-edge components,
such as voice browsers and natural language engines, but lacks the ability
to integrate these disparate pieces of software into a robust set of
products and services that can be delivered to the end user. Intraco has
unparalleled access to these products due to Intraco's expertise in the
speech recognition sector and because Intraco is currently the only firm
which can integrate these different applications into a commercially viable
product.
Intraco has recently signed the following agreements:
(i) Motorola: Definitive agreement for the joint marketing of
Motorola's VoxML Language Software, enabling voice access to
the Internet, using Intraco's Voice-Web service bureau
capability.
(ii) Unisys: Letter of intent for the joint marketing of Unisys'
Natural Language Engine as it pertains to Intraco's voice
enabling capabilities.
(iii) Emergin: Letter of intent for a strategic relationship for the
integration of Emergin's paging software and services and
Intraco's speech recognition technologies.
o TECHNOLOGICAL EXPERTISE. Intraco has extensive experience in speech
recognition technology as well as programming and software integration.
This experience allows Intraco to effectively create integrated
technologies and quickly bring them to market. Intraco has the ability to
identify which vendors supply the most advanced and effective technological
components. Additionally, Intraco has significant systems integration
experience which, when combined with its proprietary middleware technology,
allows Intraco to integrate the most advanced and effective technological
components into one cohesive solution. Intraco also has a leading team of
engineers with the in-house expertise to install and service both the
hardware and software components.
o MANAGEMENT EXPERTISE. Intraco's management team brings a highly qualified
and diverse background with extensive experience in identifying and
applying leading edge technology. Intraco intends to leverage its existing
corporate infrastructure, specifically its integration expertise, to
position Intraco to aggressively address these new opportunities and become
a market leader for speech recognition based products and services that are
designed to utilize the Internet and standard telecommunications
applications. This effort is spearheaded by Mr. Nawrocki who previously was
the Chief Executive Officer and founder of RMI, a company specializing in
the development and integration of voice automation technologies. Prior to
RMI, Mr. Nawrocki spent over 30 years with IBM where he became Manager for
Worldwide Product Development and Business Management overseeing a number
of business areas, including speech recognition products, and was
responsible for acquisitions, joint development and OEM licensing programs.
o PRODUCTS WORK TODAY. Intraco currently has fully operational prototypes of
their speech recognition solutions with some of these prototypes in the
client evaluation phase. By leveraging its existing programming
infrastructure and its speech recognition expertise, Intraco believes it is
the first to offer commercially viable speech recognition solutions for the
use in Internet applications. As such, Intraco is well positioned to
capture substantial market share as companies become increasingly familiar
with, and realize the need for, advanced speech recognition technologies.
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INDUSTRY OVERVIEW
Intraco provides a suite of solutions, on an ASP basis, which take
advantage of the convergence of speech recognition technologies and the
Internet.
Speech Recognition Technologies
While various types of speech recognition technologies have existed for
several years and the number of commercially available speech enabled products
continues to grow, until recently, speech recognition products have been
technologically deficient and costly, thereby limiting widespread acceptance.
Historically, emphasis in the speech recognition industry was placed on
the development of core speech recognition engine technology, a set of
algorithms that interpret speech patterns. Many companies, including Lernout &
Hauspie, IBM, Dragon Systems, Voice Control Systems, Nuance, Nortel, SpeechWorks
and Lucent, have spent vast sums of money over the last quarter century in
developing core speech recognition engine technology for the telephone. The
skill set required to develop speech recognition engine technologies include
speech algorithms, statistics, digital signal processing algorithms, digital
signal processing programming, phonetics, linguistics, information theory and
coding theory. For the most part, these speech recognition engine manufacturers
have relegated the development of commercial speech applications to others.
As new technologies emerge in the marketplace, their accessibility and
simplicity of operation has a direct effect on their frequency of use and market
acceptance. The advent of the Internet combined with recent advances in speech
recognition technology has provided both the accessibility and simplicity to
increase the popularity of speech recognition products. As of a few years ago,
the integration of speech recognition within a call center environment required
extensive systems integration expertise, money and time. Now, with the advent of
new mark up languages, the ability to turn Websites into speech-driven call
centers can be achieved with the right speech recognition and Internet
development skills.
Speech is the most natural, efficient and simple means of human
communication. With the increase in the power and capability of speech
recognition engine technologies and the increase in speed and reduction in the
cost of computer processors, the integration of human speech as an interface to
the Internet via a telephone is now feasible.
Growth of the Internet
Internet usage and online commerce continue to grow worldwide. IDC
estimates that there were 142 million Web users worldwide at the end of 1998.
IDC anticipates that number will grow to approximately 502 million users by the
end of 2003. IDC also estimates that revenue generated worldwide from online
commerce will grow from $50 billion in 1998 to exceed $1.3 trillion by 2003.
Application Service Provider Market
ASPs are service-oriented firms that provide contractual service,
offering to deploy, host, manage and enhance what is usually packaged
application software from a centrally managed facility. The roots of the ASP
model can be found in the Server Based Computing ("SBC") market, which grew in
the last four years to bring single point technology management solutions to
businesses of all sizes in all industries.
The ASP provides services remotely, either online, over the Internet
and/or over dedicated telecommunication bandwidth. Unlike the SBC industry, the
ASP hosts the software, builds and maintains the network servers necessary to
store and run the software application, provides the infrastructure necessary to
deliver the software application directly to the user's desktop, and provides
the necessary IT staff to implement upgrades and provide support and maintenance
functions. The ASP takes all administrative and technical responsibilities from
the client company, thereby further cutting costs from the SBC model. Clients
can utilize leading applications without the cost and the burden of owning the
leading business software applications.
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According to IDC, the definition of an ASP includes the following
characteristics:
1. Application centric. ASPs provide access to, and management of, an
application that is commercially available. This service is different from
business process outsourcing (BPO), where the outsourcing contract encompasses
the management of entire business processes such as human resources or finance.
2. Selling" application access. ASP services offer customers access to
a new application environment without making up-front investments in the
application licenses, servers, people and other resources. The ASP either owns
the software or has a contractual agreement with the software vendor to license
access to the software.
3. Centrally managed. ASP services are managed from a central location
rather than at each customer's site. Customers access applications remotely,
such as over the Internet or via leased lines.
4. One-to-many service. ASP services are designed to be one-to-many
offerings. The ASP partners with other vendors to package standardized offerings
(providing for minimal or no customization) that many companies will subscribe
to over a specific contract period.
5. Delivering on the contract. The ASP is the firm that is responsible,
in the customer's eyes, for delivering on the customer contract, ensuring that
the application service is provided as promised.
The ASP industry is ideally suited for small- to mid-sized businesses.
Unable to afford the huge fixed costs of network servers and IT staff to support
them, small- and mid-sized businesses can turn to an ASP to take care of the
responsibility, financial and staffing aspects. They pay a flat rate per user
per month and are equipped with the latest and most sophisticated software
applications that otherwise may be economically unfeasible. The ASP model is
also easily scaleable and adaptable to the growth of the business it supports.
With the help of ASPs, small- to mid-sized businesses will be able to better
compete with their larger competitors.
The ASP industry has many strengths that could make it very successful
with resellers. First, more customers than ever have remote and/or mobile
workgroups with specific functions that are more easily automated using Internet
technologies. Second, the increasing costs of IT are making outsourcing a
popular alternative. Third, the privacy of networks is much more secure using an
ASP server than individual in-house servers. Finally, large vendors such as
Oracle (which has set up a $100 million fund) have shown great confidence in
fledgling ASPs. The ASP industry offers products and services that provide
recurring revenue streams to resellers, a rarity for VARs.
According to IDC, the number of customers of high-end ASPs (companies
that provide hosting services for discrete applications) is expected to double
or triple in the next few years as they become more familiar with the benefits
of the ASP model and more confident in its reliability. According to IDC and
Dataquest, the ASP market has been estimated to be $4.5 billion for pure ASP
revenue and $22 billion for ASP and integration revenue in 2003.
Today the area of computer telephony and voice technologies in general
are becoming increasingly important for small- and mid-size businesses to
embrace in order to survive and to successfully compete in their respective
industries. At the same time the demand for these integrated solutions is
growing rapidly, they are also becoming increasing complex to design, implement
and support, thereby further helping to justify the outsourcing of the
implementation and support of these solutions.
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TECHNOLOGY
The driving force behind Intraco's vision and technology is the
telephone, which should remain the preferred means of communication for the
foreseeable future. Statistically, there are ten times as many telephones as Web
browsers, and phones, especially cell phones, are much more convenient to use.
Via voice and speech recognition technologies, users will be able to communicate
by simply speaking, without having to press keys, talk to an operator or agent
(unless desired) or use a visually based Web browser. The communication will be
completely automated and interactive, allowing for the ease and practicality of
voice recognition without sacrificing the functionality of traditional services.
Intraco's technology enables individuals to access the Internet using a
phone. Being collocated at the ISP hosting the Website, database access to the
visual Website multimedia is not delayed through "thin" or "traffic choked"
"pipes" or router hop delays. This provides many advantages to the voice based
Web access scenario. One example is audio files playback (e.g. - music clips,
recorded news interviews, audio books). Playback is in the client server at the
ISP where the audio media is located. Subsequently, there is no need for
download across the slow network, no need to maintain continually outdated media
players and no need for expensive higher bandwidth network access lines (i.e.
ISDN, ADSL). This provides high performance and simple and low cost access.
The infrastructure, typically rack mounted, has multiple voice circuit
trunks lines coming in from the local exchange carriers central office. This
receives the incoming calls and can originate outgoing calls (e.g. - event
alerts). The software functions are:
(i) Voice Browser - this is the "voice gateway" through which the
computer based conversation is managed.
(ii) Authentication, billing and accounting - to track all system
usage from which bills are created.
(iii) Voice recognition - to recognize and interpret your responses
to prompts.
(iv) TTS (Text-to-Speech) - a next generation variety to playback
text based information retrieved from the network in response
to your commands.
The underlying technology that powers this capability was developed by
firms such as Microsoft, Motorola, Nuance and Unisys, all having been
instrumental in the development of speech recognition software. For example,
Motorola and Microsoft each offers their own proprietary voice browser software
enabling voice access to the Web. Companies such as Unisys and Nuance provide an
extremely proficient natural language engine. Each of these firms offers
important technology components of the overall solutions but lacks the overall
expertise to integrate these pieces. Intraco has recognized this opportunity and
as an early adopter and leader in this technology, intends to leverage its
strategic relationships and apply its extensive technological expertise to
integrate each separate capability into a single product solution.
SERVICE OFFERINGS
In a very competitive global marketplace, businesses must focus on
their core competencies and outsource non-strategic areas. Intraco's ASP model
allows businesses to outsource certain information technology needs by allowing
Intraco to provide the most advanced fundamental building blocks for small- to
mid-size companies. Initially, Intraco will build an infrastructure of hardware
and software to focus on the basic technology requirements of a business: Web
services, phone services, messaging and networks. This offering is unique in the
ASP market because almost all other ASPs are offering desktop or vertical
applications.
Voice ASP
The explosion of the Internet, especially the B2B market, along with
the expansion of the ASP market has led to the rapid expansion of the number of
commercial Websites and the hosting/co-location data centers that serve the
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Websites. Through the Voice ASP suite of services, Intraco will provide a
solution which will provide speech and voice recognition services to these
Websites on an ASP basis through network service providers ("NSPs") such as
Verio and Exodus Communications which host the Websites. These NSPs can
incorporate Intraco's Voice ASP capabilities with their own value added services
which they provide to Websites in addition to the standard Web hosting services.
Intraco will also offer their Voice ASP services to B2B portals, which will
subsequently offer the Voice ASP service as part of their standard service
offerings. Additionally, Intraco plans to provide this new service themselves by
hosting a mirrored site for customers or scripting and maintaining the voice
enabled Website either on the customer's premise or at an Intraco site.
Within the Voice ASP service line, Intraco intends to focus on three
categories of products. The first is voice information that would enable a user
to call into a Website and have specific information read to them over the
telephone. For example, a traveling sales executive can access his company's
Website from a cell phone and get order status or pricing information for his
next customer call. The second product is voice commerce, which would enable a
user with a traditional paper catalog to call a retailer's Website from a
standard telephone and order products without involving a person in the
transaction unless there is a need to do so. Not only does speech recognition
provide increased convenience for the end consumer but also allows businesses to
expand its distribution channels by providing customers Website access via
standard telephones from anywhere on earth. This capability substantially
reduces "missed or dropped" calls due to hold times and busy signals while
simultaneously reducing personnel costs. The last product that stems from the
voice browser is voice alerts. This product will be utilized to provide
information alerts for a variety of users. One potential area which Intraco
intends to target is construction and machinery auction sites. As these users
are typically onsite, without computer access, they must be able to quickly
react to pending contracts or competitors' bids. This automated process would
allow users, via cell phones, to not only receive real time alerts and critical
information but respond as well.
Virtual Office ASP
With the Virtual Office ASP suite, Intraco is offering the basic
building blocks for a business' telecommunications needs. Amongst the basic
services offered will be: voice enabled e-mail, a service which allows a person
to access their e-mail and have it read to them over the phone; unified
messaging services including fax, e-mail and voicemail to a single voice-enabled
message box and global follow-me/find-me; and basic telephony services such as
call waiting and forwarding. This product offering will be extremely useful to a
small- to mid-sized company that does not want to expend resources to hire
operators and/or secretaries. Instead, a start-up can portray a hi-tech image by
subscribing to these services, which provides them with voice enabled
professional call center abilities. Intraco intends to expand its suite of
service offerings through partnerships with providers of other applications
typically needed by a business. Intraco intends to offer these services through
B2B portals.
CTI and Other
Intraco's CTI unit will continue offering speech recognition products
that function as automated call centers or auto attendants. Callers, by stating
the name of the person or department they are trying to reach, will be connected
without human intervention. An auto attendant can handle multiple calls
simultaneously without putting callers on hold; and works 24 hours a day, 365
days per year allowing access to people or their voicemail at any time. The
product line can be delivered in English as well as most of the major non-U.S.
languages.
While at RMI, Walt Nawrocki, the Chief Executive Officer of Intraco,
developed the best selling auto attendant product with the largest distribution
network in the speech recognition industry with large corporate customers such
as Merrill Lynch and Morgan Stanley Dean Witter. Intraco will leverage Mr.
Nawrocki's strategic technology relationships and grow this product line into a
solution many larger corporations could incorporate in their businesses.
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SALES AND MARKETING
Intraco's strategy is to focus its sales efforts on the large and
growing B2B e-commerce market. Within the B2B model framework, Intraco intends
to focus its sales and marketing efforts on the small- and mid-size business
market sector in the U.S. Intraco will specifically rely on indirect marketing
by utilizing established distribution channels, which ultimately offer Intraco's
integrated products and services to end users. Intraco will also generate
additional sales leads by utilizing its own sales staff and by leveraging off of
its joint marketing agreements.
Through its strategic agreements, Intraco has built solid relationships
with many of the industry's leading technology companies, including Motorola,
Microsoft, Emergin, Nuance and Unisys. Intraco's partners are fully committed to
the success of Intraco's speech recognition and voice enabling products and
should provide a significant source of leads for Intraco, augment technical
sales expertise, and offer superb 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.
The marketing group also intends to promote Intraco as a leading
provider of voice enabled services through an on-going public relations program
including trade shows, professional seminars and other promotional venues.
COMPETITION
The new and rapidly changing ASP market is comprised of as many as 200
individual ASPs. In the near future however, analysts do not expect a great deal
of head-to-head competition amongst ASPs in the small- and mid-sized business
market. The speech recognition for Internet applications sector is even further
in its infancy. This becomes a tremendous advantage for Intraco as they are the
only speech recognition based applications vendor to have application
development expertise for both Microsoft's and Motorola's products. By combining
this technology with their own in-house expertise, Intraco maintains a unique
advantage over any current competitor or potential market entrant.
Considering the extensive experience and advanced technology required
to successfully penetrate this market segment, barriers to entry are relatively
high. Current and new competitors do not have the ability to offer comparable
products and/or services without significant speech recognition and systems
integration expertise. As a result, Intraco's current corporate and engineering
infrastructure has provided a substantial time-to-market advantage.
Intraco could potentially compete with a variety of competitors,
including:
o Voice enabling companies (primarily Websites) - Tellme Networks,
@Motion and Online Anywhere (recently acquired by Yahoo! Inc.);
o Virtual assistant companies - General Magic, Wildfire
Communications and Webley Systems. These companies are developing
applications for interactive response and voice verification for
the Internet;
o Communication services providers - AccessLine Technologies, Call
Sciences and Intellivoice Communications; and
o Large manufacturers and developers - Motorola, Microsoft, IBM and
Lucent Technologies, all of which have significantly greater
financial, technical and marketing resources but lack the
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expertise to integrate each of the components into a single
source commercial solution.
o Intraco believes the principal competitive factors in this
segment of the industry include:
o Scope of services;
o Service delivery approach;
o Technical and industry expertise;
o Perceived value;
o Objectivity; and
o Results orientation.
INTELLECTUAL PROPERTY
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.
EMPLOYEES
As of March 20, 2000 Intraco had a total staff of 37 employees,
comprised of 14 technical professionals, 15 sales and marketing personnel and 8
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.
ITEM 2. 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 3. LEGAL PROCEEDINGS
Banker's Leasing Association filed a suit against Intraco and Jack
Berger in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm
Beach County, Florida for breach of a Master Lease Agreement and personal
guaranty related to computer equipment, software and services leased by Intraco
for the amount of $71,608. Intraco has filed a counterclaim based on Banker's
failure to provide services agreed to in the lease and breach of fiduciary duty.
Banker has answered Intraco's counterclaim and has now filed suit against AIM
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Solutions, Inc., as successor to Enterprises Solutions Group, Inc., the third
party responsible for setting up the computer equipment and software and
providing services. AIM has not responded to the claims against it. Discovery
has not yet commenced.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Intraco's Common Stock is quoted on the OTC Bulletin Board under the
symbol INSY. The following table sets forth the average of the high and low bid
prices of the Intraco's Common Stock as reported on the OTC Bulletin Board for
each quarter from April 29, 1999 through December 31, 1999. The quotations are
over-the-market quotations and, accordingly, reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not represent actual
transactions.
High Bid Low Bid
-------- -------
1999
April 29, 1999 through June 30, 1999 $7.75 $1.50
July 1, 1999 through September 30, 1999 2.25 1.75
October 1, 1999 through December 31, 1999 2.625 .875
On March 28, 2000, the closing bid price for the Common Stock as
reported on the OTC Bulletin Board was $5.75. As of March 28, 2000, there were
441 holders of record of the Intraco's Common Stock.
The quotations in the foregoing table represent prices between dealers
and do not include retail markup, markdown, or commissions paid and may not
represent actual transactions. Such quotations are not necessarily
representative of actual transactions or of the value of Intraco's securities.
DIVIDEND POLICY
Intraco paid aggregate dividends of $8,483 on its preferred stock in
1999. Intraco is obligated under an agreement with it series A preferred holders
to pay dividends for the first twelve months regardless of earnings. The
remaining obligation is approximately $26,000 which Intraco will pay in April
2000.
Intraco has not paid any cash dividends on its Common Stock since its
inception. Intraco presently intends to retain future earnings, if any, to
finance the expansion of its business and does not anticipate that any cash
dividends will be paid in the foreseeable future. Future dividend policy will
depend on Intraco's earnings, capital requirements, expansion plans, financial
condition and other relevant factors.
SALES OF UNREGISTERED SECURITIES
In March 1999, Intraco entered into an agreement with H&J Investments
to buy 866,300 shares of common stock at $1.00 per share. H&J issued to Intraco
a 12-month note in the principal amount of $866,300, of which $446,300 has been
paid as of December 31, 1999 and March 30, 2000. The due date has been extended
an additional year.
In 1998 and 1999 the Company sold 714,900 shares of convertible Series
A, preferred stock, par value $.001, preference value $1.00 for gross proceeds
of $714,900. Each share of Series A Preferred Stock is convertible into 1 share
of common stock. The shares are callable by the Company. The sale of Series A
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.
After completion of the Series A Preferred Stock offering in 1999,
Intraco began a Series B Preferred Stock offering at $1.00 per share, and,
issued 989,000 shares under Regulation S of preferred stock, for a total of
$989,000. 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
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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.
In June 1999, Intraco acquired the assets of Page Telecomputing and
issued 60,000 shares of its common stock as consideration to Paul Baron
In 1999 the Company issued 2,429,489 shares of common stock as part of
the merger with CTE.
In the first quarter of 2000, the Company sold 3,474,667 units for
$4,805,799 net of cash fees to a total of 11 accredited investors. Each unit
consisted of one share of common stock and one warrant to purchase one share of
common stock at $1.50. The sale of the units 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.
In the first quarter of 2000, the Company sold 160,000 shares of
restricted common stock for $200,000 to one accredited investor. The sale 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.
In the first quarter of 2000, the Company issued 196,560 shares of
restricted common stock as payment of fees.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction
with Intraco's Consolidated Financial Statements and the Notes thereto included
in Part II, Item 7 of this Report.
The following discussion regarding Intraco 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 the 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 this report. Intraco does not have a policy
of updating or revising forward-looking statements and thus it should not be
assumed that silence by management of the Intraco over time means that actual
events are bearing out as estimated in such forward looking statements.
RESULTS OF OPERATIONS
OVERVIEW
Intraco is an integrator of advanced speech recognition technologies
and believes it is well positioned to remain a leading provider of voice enabled
solutions. Intraco's competitive advantage lies in its unique ability to combine
extensive in-house expertise with leading speech recognition technologies (i.e.
voice browsers, natural language engines) to create first-to-market,
comprehensive commercial solutions. Intraco plans to deliver these high value,
high margin advanced technology solutions to small- and mid-sized businesses
such as Websites/e-commerce companies and catalog-based retailers and larger
businesses such as telecommunications companies. Ultimately, these solutions
will voice enable a wide range of applications such as Web sites, e-commerce,
catalog ordering, auctioning, paging, e-mail and unified messaging.
Intraco is currently seeking to execute an aggressive growth strategy
which includes both internal (product, sales and marketing expansion) and
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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 web sites and voice recognition driven auto-attendant
products.
Intraco 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
Revenues. Revenues increased 8.1% from $2,704,931 for the year ended
December 31, 1998 to $2,925,268 for the year ended December 31, 1999. This
increase was primarily due to a $1,296,716 increase in systems/networks
revenues, offset by a $1,076,379 decrease in service contract revenues. 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 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.
Cost of revenues. Cost of revenues increased 26.4% to $2,165,581 for
the year ended December 31, 1999 as compared to $1,712,720 for 1998. Cost of
systems were $1,852,443 or 72.8% of systems revenues for the year ended December
31, 1999, compared to $638,885 or 51.2% of systems revenue for the corresponding
period in 1998. Cost of service contracts were $313,138 or 82.5% of service
contract revenue for the year ended December 31, 1999, compared to $1,073,835 or
73.7% for the corresponding period in 1998. As Intraco transitions into the
higher margin, higher growth area of telecommunications services from its
traditional hardware and network support services, Intraco has been impacted by
the margin pressure on hardware being experienced throughout the industry.
Intraco expects this situation to improve as a greater proportion of sales comes
from the newer product offerings. These include computer telephony, speech
recognition, application service provider (ASP) and others. Although there can
be no assurances that this strategy will prove successful, management believes
it is necessary for Intraco's long term viability.
Selling, general and administrative. Selling, general and
administrative expenses increased $1,159,663 or 111.7% to $2,197,492 for the
year ended December 31, 1999 from $1,037,829 for the corresponding period in
1998. Most of the increase was due to salaries, facilities and the decision to
aggressively pursue an acquisition strategy.
Interest expense. Interest expense, net of interest income, decreased
$33,487 from net interest expense of $34,577 in 1998 to $1,090 in 1999.
Net loss. Intraco reported a net loss of $1,438,895 for the year ended
December 31, 1999 and a net loss of $80,195 for 1998.
LIQUIDITY AND CAPITAL RESOURCES
Intraco has incurred significant losses and has substantial negative
cash flow from operations. Intraco's independent auditors have included a
footnote in their annual report for the year ended December 31, 1999, which
expresses concern about Intraco's ability to continue as a going concern unless
sales increase and/or additional investment capital is raised. Intraco expects
significant operating losses to continue at least during the first half of 2000.
Intraco recently received approximately $5.4 million from equity private
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placements and is currently offering preferred stock to institutional investors
in a private offering. Intraco will require additional funding to cover current
operations and the implementation of its business plan. There can be no
assurance that additional funds will be raised through these offerings or
otherwise.
At December 31, 1999, Intraco's current assets were $790,220 and
current liabilities, $1,330,725 resulting in a negative working capital ratio.
As adjusted for Intraco's recent financing, the Company's current assets and
current liabilities are $5,796,020 and $1,330,725, respectively. Management is
aggressively seeking to raise 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.
Intraco had $151,725 of cash on hand at December 31, 1999, compared
$32,245 at the same time last year. Net cash used in operations for the year
ended December 31, 1999, was $1,104,543. This deficit was funded by the sale of
common and preferred stock. The Company also repaid $294,147 of debt and
incurred costs of $283,153 in recapitalizing and merging with CTE.
Intraco 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 Intraco 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. Intraco cannot make any assurances that such funding would become
available for such plans. Also, because Intraco 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in evaluating
Intraco. The risks described below are not the only ones that we face.
Additional risks that we do not yet know of or that we currently think are
immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by any of
the following risks. The trading price of our common stock could decline due to
any of these risks, and you may lose all or part of your investment. You should
also refer to the other information set forth in this Report, including our
financial statements and the related notes.
Intraco cautions readers that certain important factors may affect Intraco's
actual results and could cause those results to differ significantly from any
forward-looking statements made in this report or otherwise made by or on behalf
of Intraco. For this purpose, any statements contained in this report that are
not statements of historical fact should be considered to be forward-looking
statements. Words such as "may," "expect," "believe," "anticipate," "intend,"
"could," "estimate," or "continue" or the negatives of those words, or other
comparable terminology, are intended to identify forward-looking statements.
These statements appear in a number of places in this report and include
statements as to the intent, belief or expectations of Intraco and its
management.
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
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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.
SHIFT IN FOCUS. With the recent hiring of Walt Nawrocki as Chief
Executive Officer, Intraco has shifted its business focus towards providing
speech recognition products and services. As a result of this recent shift in
focus, Intraco's business model is still in development. Although it is in
discussions with several prospective clients, Intraco has not yet sold any of
its newly developed speech recognition products and services and demand for
these products and services is uncertain. Additionally, Intraco's previous
financial history is not a good indication of how the business is doing or how
it is evolving. Because of these factors, an evaluation of Intraco's business is
difficult.
LOSSES AND ACCUMULATED DEFICIT; ABILITY TO CONTINUE AS A GOING CONCERN.
For the year ended December 31, 1999, Intraco reported a net loss of $1,438,895.
As of December 31, 1999, Intraco had an accumulated deficit of $2,084,303, and
stockholders' deficit of $237,635, although as a result of the recent private
offerings Intraco now has positive stockholders' equity. Intraco is not
currently profitable and there can be no assurance that Company will operate
profitably in the future and that Intraco will not continue to sustain losses.
Continued losses could materially and adversely affect Intraco's business.
NEED FOR ADDITIONAL CAPITAL. Intraco cannot be certain that additional
financing will be available to it on favorable terms when required, or at all.
If Intraco raises additional funds through the issuance of equity,
equity-related or debt securities, the securities may have rights, preferences
or privileges senior to those of the rights of the Preferred Shares, and its
purchasers may experience additional dilution. Intraco requires substantial
working capital to build its ASP infrastructure, for marketing and promotion,
and to fund its general business operations. Without any outside borrowing,
Intraco currently anticipates that the net proceeds of this Offering, together
with its available funds, will be sufficient to meet its anticipated needs for
working capital and capital expenditures through at least the next 15 months.
After that, Intraco may need to raise additional funds.
RAPID GROWTH. If Intraco is successful in implementing its business
plan, its operations will expand rapidly. This rapid expansion could place
significant strain on Intraco's management, financial and other resources.
Intraco's ability to manage future growth, if it occurs, will depend upon its
ability to control costs, significantly expand Intraco's financial and operating
capabilities, maintain Intraco's operations support systems and expand, train
and manage Intraco's employee base. If Intraco is unable to do this
successfully, its prospects, financial condition and results of operations could
be materially adversely affected.
DEPENDENCE ON STRATEGIC SOFTWARE RELATIONSHIPS. Intraco obtains
software products pursuant to agreements with Motorola, Unisys, Nuance and
Lernout and Hauspie and intends to enter into additional agreements in the
future. Intraco offers services based on the integration of these software
packages to clients as part of their ASP solution. The provision of such
software, as well as any additional software offerings, is critical to Intraco's
ASP expansion strategy. If one or more of Intraco's existing relationships with
its key software partners were to be terminated or not renewed, Intraco could be
faced with discontinuing products or services or delaying or reducing
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introduction of services unless Intraco could find, license and offer equivalent
software packages.
All of Intraco's third party agreements are non-exclusive. Intraco's
competitors could also license and offer software products that Intraco offers
as part of its ASP services. Intraco cannot be sure that its current strategic
vendors will continue to support the software Intraco currently licenses from
them in current form, nor can Intraco be sure that it will be able to adapt its
systems to changes in such software. Furthermore, Intraco cannot be sure that
financial or other difficulties will not be faced by such vendors which would
have a material adverse effect on the software offered by these vendors.
DEPENDENCE ON INFRASTRUCTURE PROVIDERS. Intraco depends on certain
third party suppliers, including telecommunications and network management
software providers, to supply key infrastructure components for the provision of
Intraco's ASP services. Some of these components or applications are only
available from limited sources or sole providers in the quality and quantity
Intraco demands. Any failure to obtain necessary products or services in a
timely manner and at an acceptable cost could have a material adverse affect on
Intraco's business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL. The success of Intraco is dependent on the
services of Walt Nawrocki, its Chief Executive Officer, Jack Berger its
President, Secretary and Director and other key personnel. The loss of the
services of Mr. Nawrocki, 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. Nawrocki
and Mr. Berger. Intraco does not currently maintain key man life insurance
policies for any of its officers or other personnel.
INTELLECTUAL PROPERTY. Intraco's success is dependent, in part, on
methodologies used in designing, installing and integrating computer software
and systems and other proprietary intellectual property. Intraco relies on a
combination of nondisclosure and other contractual arrangements and trade
secret, copyright and trademark laws to protect Intraco's proprietary rights and
the proprietary rights of third parties. Intraco also enters into
confidentiality agreements with its key employees and limits 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.
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.
DEPENDENCE ON MAJOR CUSTOMERS. To date, Intraco's sales have been
highly concentrated. During 1998, approximately 29% of Intraco's total revenues
were derived from one customer and 65% from its top 10 customers. If Intraco
were to lose any of its major customers, its operating results and financial
conditions could be adversely affected.
ATTRACTION AND RETENTION OF EMPLOYEES. Intraco's success depends, in
large part, on its ability to attract, develop, motivate and retain technical
professionals. At December 31, 1999, approximately 30% 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.
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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. Intraco's success will depend in part on
its ability to develop solutions that keep pace with continuing changes in
speech recognition technology, 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.
RELIANCE ON JOINT MARKETING AGREEMENTS. Intraco currently has a joint
marketing agreement with Motorola and intends to enter into additional
agreements in the future. Intraco utilizes these agreements for its advertising
and promotional programs. 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.
DEPENDENCE ON THE INTERNET AND ON THE GROWTH OF ONLINE COMMERCE.
Intraco's future revenues substantially depend upon the increased acceptance and
use of the Internet and other online services as a means to access information
and as a medium for commerce. Rapid growth in the use of the Internet, the Web
and online services is a recent phenomenon. As a result, acceptance and use may
not continue to develop at historical rates and a sufficiently broad base of
customers may not adopt and/or continue to use the Internet and other online
services as a means to access information and as a medium for commerce. Demand
and market acceptance for recently introduced services and products over the
Internet are subject to a high level of uncertainty, and there exist few proven
services and products.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. If the Internet continues to
experience significant expansion in the number of users, frequency of use or
bandwidth requirements, the infrastructure for the Internet may be unable to
support the demands placed upon it. In addition, the Internet could lose its
viability as a commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in, or
insufficient availability of, telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet.
FUTURE COMPETITORS. The market for IT services is very competitive
because of the large number of competitors and the rapidly changing environment.
Although the speech recognition market is still in its relative infancy, primary
competitors could include participants from a variety of market segments,
including voice enabling companies, communication services providers, virtual
assistant companies and large manufacturers and developers. Many of these
competitors have significantly greater financial, technical and marketing
resources and greater name recognition than Intraco. There can be no assurances
that Intraco will compete successfully with its existing competitors or with any
new competitors.
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 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.
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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.
SECURITY RISKS. Questions surrounding the secure transmission of
confidential information to and from Intraco's secure data center form a barrier
to the growth of Intraco's ASP services. Intraco's ASP services rely on
encryption and authentication technology licensed from third parties to provide
the security required to safely transmit confidential information. While Intraco
has implemented a variety of state of the art network security systems to
protect against unauthorized access, computer viruses, other intentional acts
and accidents and disruptions may occur. Intraco's clients may experience
service interruptions or delays as a result of accidental or intentional
disruptions. Such acts could jeopardize the security of confidential client
information. This could potentially result in liability to Intraco, loss of
existing clients or the loss of reputation leading to difficulties in attracting
new clients. Although Intraco plans to continuously upgrade its security
systems, such measures have been circumvented in the past and Intraco's security
could be circumvented in future. The costs required to avoid the intrusion of or
to eliminate computer viruses or to alleviate other potential or real security
threats could be expensive and any additional efforts required to address
security issues could result in service interruptions or delays to clients which
would have a material adverse effect on Intraco's business, results of
operations and financial condition.
PROJECT RISKS. Many of the engagements Intraco plans to undertake
involve projects that are critical to the operations of its clients' businesses
and provide benefits that may be difficult to quantify. Intraco's failure or
inability to meet a client's expectations in the performance of its services
could result in a material adverse change to the client's operations and
therefore could give rise to claims against Intraco or damage Intraco's
reputation, adversely affecting its business, operating results and financial
condition.
ACQUISITION GROWTH AND INTEGRATION. Intraco believes that acquisitions
are one of the methods it can use to increase its presence in existing markets,
expand into new geographic markets, add experienced service personnel, gain new
product offerings and services, obtain more competitive pricing as a result of
increased purchasing volumes of particular products and improve operating
efficiencies through economies of scale. 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.
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 success of new services, 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.
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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.
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 beyond the Series C Preferred Shares, 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.
VOLATILITY OF STOCK PRICE
The trading price of our Common Stock has been, and in the future is
expected to be, volatile and we expect to experience further market fluctuations
as a result of a number of factors, including:
|X| current and anticipated results of operations;
|X| changes in our business, operations or financial results;
|X| general market and economic conditions;
|X| competition;
|X| the number of shares outstanding;
|X| the number of market makers in our stock;
|X| lumber prices; and
|X| other factors.
WE DO NOT ANTICIPATE PAYING DIVIDENDS
We have never paid any cash dividends on our Common Stock and we do not
anticipate paying cash dividends on our Common Stock in the foreseeable future.
The future payment of dividends is directly dependent upon our future earnings,
capital requirements, financial requirements and other factors to be determined
by our Board of Directors. For the foreseeable future, it is anticipated that
earnings, if any, which may be generated from our operations will be used to
finance our growth. See "Dividend Policy."
SALES BY EXISTING STOCKHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR COMMON
STOCK
If our stockholders sell substantial amounts of our Common Stock
(including shares issued upon the exercise of outstanding options), the market
price of our Common Stock could fall. We have outstanding 18,169,969 shares of
Common Stock, of which 1,796,511 shares are freely tradable in the public
market, and of which 16,373,458 shares are "restricted securities" under the
Rule 144. In April 2000, approximately 3,500,000 shares of restricted securities
not owned by officers or directors become eligible for sale under Rule 144. Our
officers, directors and employees own options to purchase up to 8,244,800
additional shares of Common Stock. The exercise prices for some of these options
are substantially below the current market price.
18
<PAGE>
Restricted securities may only be sold pursuant to an effective
registration statement under the Securities Act or in compliance with Rule 144
under the Securities Act or other exemption from registration. Rule 144 provides
that a person holding restricted securities for a period of one year may sell
such securities during any three-month period, subject to certain exceptions, in
limited amounts. Rule 144 also permits, under certain circumstances, the sale of
shares without any quantity limitations by a person who is not our affiliate and
who has held the shares for a two year holding period. No predictions can be
made as to the effect, if any, that market sales of such shares or the
availability of such shares for future sale will have on the market price of the
Common Stock prevailing from time to time.
WE MAY ISSUE PREFERRED STOCK TO RESIST TAKEOVERS
Our Articles of Incorporation authorizes 10,000,000 shares of preferred
stock, of which 1,752,900 shares are issued and outstanding. As provided in our
Articles of Incorporation, preferred stock may be issued by resolutions of our
Board of Directors from time to time without any action of the stockholders.
These resolutions may authorize issuance of the preferred stock and set dividend
and liquidation preferences, voting rights, conversion privileges, redemption
terms and other privileges and rights. Accordingly, our Board of Directors may,
without stockholder approval, issue additional preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or the rights of the holders of our Common Stock. The preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of Intraco.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are attached a the end of this document.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following personnel serve as the directors and executive officers
of Intraco:
Name Age Position
- ---- --- --------
Walt Nawrocki 54 Chief Executive Officer
Jack Berger 45 President, Secretary and Director
Robert Marcus 56 Chief Financial Officer and Treasurer
Robert Hildreth, Jr. 66 Chairman of the Board of Directors
William D. Hager 53 Director
Benjamin W. Krieger 62 Director
WALT NAWROCKI joined Intraco in November 1999 as Chief Executive
Officer. Prior to joining Intraco, Walt served as President, Chief Executive
Officer and Director of Registry Magic Inc. Under Mr. Nawrocki's direction,
Registry Magic established the Virtual Operator as the industry leader in
product sales for speech driven auto attendants, while creating the largest
dealer network and garnering the most awards in the speech recognition industry.
The Virtual Operator is installed in Fortune 500 companies and is being sold
outside the U.S. in several languages. While at Registry Magic, Mr. Nawrocki
also entered into agreements with Microsoft and Motorola to speech enable
Internet Websites using technology from both companies. Mr. Prior to joining
Registry Magic, Mr. Nawrocki spent over 30 years at IBM where he was employed in
19
<PAGE>
positions of increasing responsibility, becoming Manager for Worldwide Product
Development and Business Management in August of 1992. In such capacity, he
oversaw a number of business areas, including speech products, and was
responsible for acquisitions, joint development and OEM licensing programs. His
working teams have been honored with five Byte Magazine awards for speech
recognition products and an IBM Market Driven Quality award for customer
requirements and customer satisfaction.
JACK BERGER, currently President, Secretary and Director, was the
founder and had been Chief Executive Officer of Intraco from its inception in
1990 until November 1999. Mr. Berger has over 20 years of experience in the
domestic and international computer systems industry. When he formed Intraco, it
initially specialized in exporting computer hardware and established strategic
relationships with some of the largest companies in Europe and the Pacific Rim.
Mr. Berger then refocused the product and marketing strategy into higher margin,
higher value added technology solutions and shifted focus to the domestic
market. Prior to Intraco, Mr. Berger worked for ten years at the Real Time
Products Division of Computer Products, Inc., where he held several key
positions. These included managing the Production Control activity, which
resulted in the division meeting its quarterly revenue goals ahead of schedule
for the first time, and establishing and managing the Sales Support department,
which was responsible for supporting all sales activity on a global basis. Mr.
Berger then became the International Sales Manager with responsibility for all
sales outside of the domestic U.S. During this time Mr. Berger was able to
utilize his entrepreneurial skills to establish and manage an effective
worldwide organization of distributors that continuously met its revenue goals.
This combination of management and entrepreneurial skills gives Mr. Berger a
unique set of experiences covering many strategic aspects of the computer
industry. Mr. Berger has a BSEE from the University of Miami.
ROBERT MARCUS joined Intraco in January 1999 as Chief Financial Officer
and Treasurer. Prior to Intraco 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;
and 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 Financial
Planning & Analysis, Assistant Controller and Manager of Business Development
with responsibility for mergers and acquisitions. During this time, Mr. Marcus
was instrumental in completing the acquisition of the microfilm business of the
New York Times. Mr. Marcus holds a BS from C.W. Post College and an MBA from the
University of Connecticut.
ROBERT HILDRETH, JR. is the Chairman of the Board of Directors and was
the first member of the Board of Advisors formed in May of 1998. Mr. Hildreth
brings a broad scope of experience to Intraco, with over 30 years in the
domestic and international financial community. 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. Mr.
Hildreth is also a director of MerchantOnline.com, Inc., a provider of
e-commerce services to merchants.
WILLIAM D. HAGER was elected a director in March 2000. He has been on
Intraco's Board of Advisors since its inception in 1998. He has been a principal
with Risk Metrics Corporation since 1998. Prior thereto, he was the president
and chief executive officer of NCCI, the nation's largest workers compensation
and health care informatics corporation. During his service with NCCI, it
employed 1,000 people in 15 national offices and generated annual revenues
approaching $150 million. He is currently chairman of the board and CEO of
Cenetec LLC, a technology accelerator located in Boca Raton, Florida.
BENJAMIN W. KRIEGER was elected a director in March 2000. He has been
on Intraco's Board of Advisors since its inception in 1998. He specializes in
the pulp and paper, packaging, graphic arts and distribution industries. From
1983 to 1990, he was president and chief executive officer of Ris Paper Company,
a private paper distribution company with 26 distribution centers and annual
sales of approximately $500 million.
20
<PAGE>
Messrs. Hager and Kreiger will serve on the audit committee.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
To Intraco's knowledge, based solely on a review of the copies of such
reports furnished to Intraco and on representations that no other reports were
required, Form 3s were not timely filed by Messrs. Berger, Nawrocki and Marcus.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes all compensation accrued by Intraco in
each of the last three fiscal years for Intraco's executive officers serving as
such whose annual compensation exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Compensation
Name and ----------------------------- -----------------
Principal Position Year Salary($) Bonus Other(1) Options
---------------------------- -------- -------------------- ----------- ---------- -----------------
<S> <C> <C> <C> <C>
Jack Berger, President 1999 137,800 0 $6,000 --
1998 137,800 0 0
1997 99,900 0 0
</TABLE>
- --------------
(1) Includes automobile expense.
EMPLOYMENT AGREEMENTS
Intraco entered into a three-year employment agreement with Jack S. Berger,
effective as of January 1, 1998 and amended effective January 1, 2000, pursuant
to which he serves as Intraco's president and secretary. The agreement now
expires December 31, 2002. The agreement provides for an annual salary of
$160,000., 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.
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 Walt Nawrocki,
effective as of September 24, 1999 and amended effective January 1, 2000,
pursuant to which he serves as Intraco's chief executive officer. The agreement
provides for an annual salary of $175,000. The base salary shall be adjusted at
the end of each year of employment at the discretion of the board of directors.
The agreement otherwise has similar terms to Mr. Berger's agreement.
21
<PAGE>
Intraco entered into a three-year employment agreement with Robert Marcus,
effective as of January 18, 1999, as amended in September and December 1999,
pursuant to which he serves as Intraco's Chief Financial Officer. The agreement
provides for a base salary of $145,000 commencing in January 2000. Further
increases will be at the discretion of the board of directors.
STOCK OPTION PLANS
Intraco has adopted a stock option plans to attract and to induce
officers, directors and key employees of Intraco to remain with Intraco. The
plan will provide for options which will qualify as incentive stock options
under Section 422(a) of the Internal Revenue Code of 1986, as amended, as well
as for nonstatutory options. No more than fifteen percent (15%) of the Common
Stock outstanding will be reserved for issuance upon exercise of options to be
granted from time-to-time. The 1998 Stock Option Plan (the "Plan") was approved
in 1998 and amended in 1999 to increase the number of shares available for grant
to 10,000,000 from 2,000,000.
As of March 22, 2000, an aggregate of 8,244,800 options were
outstanding under the Plan with exercise prices of $.25 to $3.94. These options
vest immediately to over a five-year period and expire from two years to ten
years. In 1999, an aggregate of 6,789,800 were granted in 1999, including
4,000,000 to Mr. Nawrocki and 2,000,000 to Mr. Marcus.
The Plan provides for options which will qualify as incentive stock
options under Section 422(a) of the Internal Revenue Code of 1986, as amended,
as well as for options which do not so qualify. The Board may terminate the Plan
or may amend the Plan in such respects, as it shall deem advisable. The Board
may unilaterally amend the Plan and Incentive Awards as it deems appropriate o
ensure compliance with Rule 16b-3 and to cause Incentive Awards to meet the
requirements of the Code, including Code section 422, and regulations
thereunder.
All present and future employees of Intraco or of any parent or
subsidiary of Intraco ("Employee") and any person retained to provide services
to Intraco (other than as an Employee, a member of the Board of Directors or a
member of the board of directors of any subsidiary or parent of Intraco), and
who is selected by the committee to be eligible to receive Incentive Awards
under the Plan ("Selected Advisors").
All present and future Non-Employee Directors are eligible to receive
Non-Statutory Options") under the Plan. Non-Employee Directors shall not be
entitled to receive any other form of Incentive Award under the Plan.
The exercise price of shares of Company Stock covered by an Incentive
Stock Option cannot be less than 100% of the fair market value of such shares on
the date of grant; provided that if an Incentive Stock Option is granted to an
Employee who, at the time of the grant, is a 10% Shareholder, then the exercise
price of the shares covered by the Incentive Stock Option will not less than
110% of the fair market value of such shares on the date of grant. The exercise
price of Nonstatutory Stock Options will not less than 85 % of fair market value
of such shares on the date of grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the close of business on March
28, 2000 (a) the name, address and number of shares of each person known by
Intraco to be the beneficial owner of more than 5% of Intraco's Common Stock and
(b) the number of shares of Common Stock owned by each director and all officers
and directors as a group, together with their respective percentage holdings of
such shares:
22
<PAGE>
AMOUNT OF
NAME AND BENEFICIAL
ADDRESS OF OWNERSHIP OF
BENEFICIAL OWNER(1) STOCK %
- ------------------------------------------ ------------------------ ---------
Jack Berger 8,109,000 (2) 44.6%
Walt Nawrocki 4,000,000 (3) 18.0
Robert Marcus 2,000,000 (4) 9.9
Robert Hildreth, Jr. 235,400 (5) 1.3
William D. Hager 170,000 (6) *
Benjamin W. Kreiger 90,000 (7) *
All Officers and Directors 14,604,400 59.6
as a Group (six persons)
* Less than 1%
(1) The address of all persons listed above is 3998 FAU Boulevard, Boca
Raton, Florida 33431.
(2) Messrs. Berger and Nawrocki have entered into a voting agreement with
respect to their shares. See "Item 12--Certain Relationships and
Related Transactions."
(3) Includes options to acquire 4,000,000 shares.
(4) Includes options to acquire 2,000,000 shares.
(5) Includes 20,400 shares of common stock, 20,000 shares issuable upon
conversion of preferred stock and options to acquire 195,000 shares.
(6) Includes options to acquire 70,000 shares.
(7) Includes options to acquire 70,000 shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, Intraco has loaned funds and sold products to
Intraco, Ltd., which is owned by Jack Berger, Intraco's President. In 1997,
Intraco sold products valued at $216,000 and received cash payments of $82,590
and in 1998 sold products valued at $235,255 and received cash payments of
$199,126. The remaining $169,539 was converted into a note receivable bearing
interest at 6% per annum and payable in 36 monthly installments. In 1999,
$74,000 was collected and the remaining $48,000 was determined to uncollectable.
In May 1997, Intraco entered into a consulting agreement with Vestar
Capital Corporation pursuant to which Vestar provides organizational and
strategic planning services. Vestar 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 CTE, a
Nevada corporation with no material operations whose common stock traded on the
Bulletin Board, pursuant to which all outstanding shares of Intraco capital
23
<PAGE>
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 held 10,531,500 shares. As a result, Intraco 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 Intraco's 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 $420,000 has been paid as of December 31, 1999.
In March 2000, Jack Berger and Walt Nawrocki entered into a voting
agreement pursuant to which they agreed to share equally in voting the shares
owned by each of them. They also agreed to vote all of the shares of Intraco
securities to which he is entitled to vote in favor of the other person in the
election of Intraco directors and to not take any action, directly or
indirectly, that will assist, facilitate, encourage or solicit another party in
the removal of the other from Intraco board or from their current positions as
executive officers of Intraco.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Exchange Agreement among Intraco Systems, Inc., Custom Touch
Electronics, Inc. (1)
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Bylaws(1)
10.1 Stock Option Plan(1)
10.2 Employment Agreement between Intraco and Jack Berger(1)
10.2(a) Amendment to Berger Employment Agreement
10.3 Employment Agreement between Intraco and Bob Marcus(1)
10.3(a) Amendment to Marcus Employment Agreement
10.4 Employment Agreement between Intraco and Carlos Munoz(1)
10.5 Agreement for Professional Consulting Services between
Intraco and Vestar Capital(1)
10.6 Letter Agreement between Intraco and Digital Equipment
Corporation(1)
10.7 Employment Agreement between Intraco and Walt Nawrocki
10.8 Voting Agreement between Jack Berger and Walt Nawrocki
27.1 Financial Data Schedule
(1) Incorporated by reference to the Registrant's Registration Statement on Form
10-SB.
*Management compensation plan or arrangement
(b) Intraco did not file any Reports on Form 8-K during the fourth quarter of
the year ended December 31, 1999.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has caused its Annual Report on Form 10-KSB to be signed
on its behalf by the undersigned, thereunto duly authorized.
INTRACO SYSTEMS, INC.
Date: March 31, 2000 By: /s/ JACK BERGER
-----------------------------------
Jack Berger, President
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/, ROBERT HILDRETH, JR. Chairman of the Board March 31, 2000
---------------------------
Robert Hildreth, Jr
/s/ JACK BERGER President and Director March 31, 2000
---------------------------
Jack Berger
/s/ WALT NAWROCKI Chief Executive Officer
--------------------------- and Director
Walt Nawrocki March 31, 2000
/s/ ROBERT MARCUS Chief Financial Officer March 31, 2000
--------------------------- (Principal Financial
Robert Marcus and Accounting Officer)
/s/ WILLIAM D. HAGER Director March 31, 2000
---------------------------
William D.Hager
/s/ BENJAMIN W. KREIGER Director March 31, 2000
---------------------------
Benjamin W. Kreiger
25
<PAGE>
INTRACO SYSTEMS, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<PAGE>
TABLE OF CONTENTS
Independent Auditor's Report..................................................1
Financial Statements:
Balance Sheets...........................................................2-3
Statements of Operations ..................................................4
Statements of Changes in Stockholders' Deficit.............................5
Statements of Cash Flows...................................................6
Notes to Financial Statements...........................................7-13
<PAGE>
DASZKAL BOLTON MANELA DEVLIN & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
2401 N.W. BOCA RATON BOULEVARD, SUITE 100 BOCA RATON, FLORIDA 33431
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, 1999 and 1998, 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 audit 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, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Daszkal, Bolton, Manela, Devlin & co., CPA's
Boca Raton, Florida
February 18, 2000, except for
Note 13, as to which the date
is March 16, 2000
<PAGE>
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------------
ASSETS
1999 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash $ 151,725 $ 32,245
Accounts receivable, net of allowance of $6,639 and $-0- 535,422 49,900
Inventory 16,678 65,840
Prepaid expenses 86,395 125,945
---------- ----------
Total current assets 790,220 273,930
---------- ----------
Property and equipment, net 233,914 113,076
---------- ----------
Other assets:
Goodwill, net of amortization of $1,125 and $-0- 82,785 --
Due from related party -- 46,480
Note receivable - related party -- 123,059
Due from shareholder 2,800 20,500
Deposits 15,064 13,819
---------- ----------
Total other assets 100,649 203,858
---------- ----------
Total assets $1,124,783 $ 590,864
========== ==========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
- -----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
1999 1998
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,025,952 $ 332,476
Deferred revenue 165,494 152,174
Customer deposits 3,900 172,195
Capital lease payable 9,314 --
Note payable 126,065 306,526
Due to shareholder -- 17,700
----------- -----------
Total current liabilities 1,330,725 981,071
----------- -----------
Capital lease payable 31,323 --
Note payable -- 113,686
----------- -----------
Total long term liabilities 31,323 113,686
----------- -----------
Stockholders' deficit:
Series A convertible redeemable preferred stock,
$.001 par value, 2,500,000 shares authorized and
767,400 and 52,500 shares issued and outstanding,
7% cumulative, with a $1.00 per share preference value 767 53
Series B convertible redeemable preferred stock,
$.001 par value, 1,700,000 shares authorized and
989,000 shares issued and outstanding, with a $1.00
per share preference value and $.997 for
subscriptions over $100,000 989 --
Common stock, $.001 and $.001 par value,
100,000,000 and 50,000,000 shares authorized, 13,020,989
and 9,665,200 shares issued and outstanding 13,021 9,665
Subscriptions receivable (446,300) --
Additional paid-in capital 2,251,561 131,797
Outstanding stock options 27,000 --
Accumulated deficit (2,084,303) (645,408)
----------- -----------
Total stockholders' deficit (237,265) (503,893)
----------- -----------
Total liabilities and stockholders' deficit $ 1,124,783 $ 590,864
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
INTRACO SYSTEMS, INC.
STATEMENTS OF OPERATIONS
AS OF DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
------------ ------------
Revenues:
Systems/networks $ 2,545,540 $ 1,248,824
Service contracts 379,728 1,456,107
------------ ------------
Total revenues 2,925,268 2,704,931
------------ ------------
Cost of revenues:
Systems/networks 1,852,443 638,885
Service contracts 313,138 1,073,835
------------ ------------
Total cost of revenues 2,165,581 1,712,720
------------ ------------
Gross profit 759,687 992,211
General and administrative 2,197,492 1,037,829
------------ ------------
(Loss) from operations (1,437,805) (45,618)
Interest income 39,311 2,490
Interest expense (40,401) (37,067)
------------ ------------
Net (loss) $ (1,438,895) $ (80,195)
============ ============
Net loss per share (basic & diluted) $ (0.12) $ (0.01)
============ ============
Weighted average number of shares
outstanding and to be issued 12,067,309 9,075,864
============ ============
See accompanying notes to financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK A PREFERRED STOCK B COMMON STOCK
------------------------- ------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 -- $ -- -- $ -- 100 $ 100
Common stock split -- -- -- -- 8,999,900 8,900
Issuance of common stock
for cash -- -- -- -- 665,200 665
Costs associated with issuance
of stock -- -- -- -- -- --
Issuance of preferred stock
for cash 52,500 53 -- -- -- --
Net loss for the year -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 52,500 53 -- -- 9,665,200 9,665
Issuance of preferred stock
for cash - Series A 714,900 714 -- -- -- --
Issuance of preferred stock
for cash - Series B -- -- 989,000 989 -- --
Stock options -- -- -- -- -- --
Costs associated with
issuance of stock -- -- -- -- -- --
Issuance of common stock -- -- -- -- 3,295,789 3,296
Issuance of common stock
for acquisition -- -- -- -- 60,000 60
Dividends paid -- -- -- -- -- --
Subscriptions receivable -- -- -- -- -- --
Net loss for the year -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 767,400 $ 767 989,000 $ 989 13,020,989 $ 13,021
=========== =========== =========== =========== =========== ===========
ADDITIONAL OUTSTANDING
SUBSCRIPTIONS PAID-IN STOCK ACCUMULATED
RECEIVABLE CAPITAL OPTIONS DEFICIT TOTAL
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ -- $ 32,722 $ -- $ (565,213) $ (532,391)
Common stock split -- (8,900) -- -- --
Issuance of common stock
for cash -- 165,635 -- -- 166,300
Costs associated with issuance
of stock -- (110,107) -- -- (110,107)
Issuance of preferred stock
for cash -- 52,447 -- -- 52,500
Net loss for the year -- -- -- (80,195) (80,195)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 -- 131,797 -- (645,408) (503,893)
Issuance of preferred stock
for cash - Series A -- 714,286 -- -- 715,000
Issuance of preferred stock
for cash - Series B -- 988,011 -- -- 989,000
Stock options -- -- 27,000 27,000
Costs associated with
issuance of stock -- (526,994) -- -- (526,994)
Issuance of common stock -- 863,004 -- -- 866,300
Issuance of common stock
for acquisition -- 89,940 -- -- 90,000
Dividends paid -- (8,483) -- -- (8,483)
Subscriptions receivable (446,300) -- -- -- (446,300)
Net loss for the year -- -- -- (1,438,895) (1,438,895)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 $ (446,300) $ 2,251,561 $ 27,000 $(2,084,303) $ (237,265)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -----------------------------------------------------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(1,438,895) $ (80,195)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 72,331 18,426
Stock options 27,000 --
Allowance for note receivable - related party 48,096 --
Changes in assets and liabilities:
(Increase) decrease in:
Inventory 49,162 (65,840)
Accounts receivable (485,522) 185,727
Prepaid expenses 39,549 1,320
Due from related parties 46,480 (38,929)
Security deposits (1,245) (11,111)
Increase (decrease) in:
Accounts payable 693,476 143,236
Deferred revenue 13,320 (441,559)
Customer deposits (168,295) 172,195
----------- -----------
Net cash used by operating activities (1,104,543) (116,730)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (145,316) (58,058)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 420,000 166,300
Proceeds from issuance of preferred stock 1,704,000 52,500
Costs associated with issuance of stock (526,994) (110,107)
Proceeds from capital lease 9,363 --
Repayment of capital lease (9,363) --
Proceeds from note receivable - related party 74,963 --
Dividends paid (8,483) --
Repayment of long-term debt (294,147) (156,694)
----------- -----------
Net cash provided (used) by financing activities 1,369,339 (48,001)
----------- -----------
Net increase (decrease) in cash 119,480 (222,789)
Cash, beginning of year 32,245 255,034
Cash, end of year $ 151,725 $ 32,245
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 40,401 $ 37,067
=========== ===========
Non-cash transactions affecting financing activities:
Common stock issued for note $ 446,300 $ --
=========== ===========
Conversion of accounts payable to note payable $ -- $ 438,906
=========== ===========
Issuance of common stock for acquisition $ 90,000 $ --
=========== ===========
Assets acquired under capital lease $ 50,000 $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Intraco Systems, Inc. (the "Company") was incorporated in Florida in March 1990.
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 a Nevada
Corporation. Intraco is a Communications Solution Provider, offering the
integration of voice, data and Internet based technology solutions to a wide
range of customers. Intraco offers complementary information technology
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, healthcare, financial services, manufacturing, professional
services and technology.
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.
ADVERTISING COSTS
Advertising costs, which are principally included in general and administrative
expenses, are expensed as incurred. Advertising expense was $16,231 and $10,742
for the years ended December 31, 1999 and 1998, respectively.
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 1999 and 1998 were $379,728 and $1,456,107,
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.
AMORTIZATION OF GOODWILL
Goodwill represents the amount by which the purchase price of a business
acquired exceeds the fair market value of the net assets acquired under the
purchase method of accounting. Goodwill is being amortized on a straight-line
basis over 15 years. Accumulated amortization at December 31, 1999 is $1,125.
-7-
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1999 1998
--------- ---------
Leasehold improvements $ 51,971 $ 50,282
Equipment 302,050 111,696
Furniture and fixtures 22,260 22,260
--------- ---------
Total property and equipment 376,281 184,238
Less: accumulated depreciation (142,367) (71,162)
--------- ---------
Property and equipment, net $ 233,914 $ 113,076
========= =========
Depreciation expense for the years ended December 31, 1999 and 1998 was $71,206
and $18,426, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company is affiliated with various companies through common ownership.
During the years ended December 31, 1999 and 1998, the Company had the following
transactions with a related party (Intraco, Ltd.):
1999 1998
--------- ---------
Due from related party - beginning of year $ 46,480 $ 133,410
Sales to related party -- 235,255
Cash received (46,480) (199,126)
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
========= =========
During the year ended December 31, 1999, the Company collected approximately
$74,000 of the note receivable balance. At December 31, 1999, the Company
determined that the remaining $48,000 was uncollectable.
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, 1999 and 1998, was $152,904 and $71,074,
respectively.
Future minimum lease payments for leases with a term in excess of one year are
as follows:
YEARS ENDED
DECEMBER 31,
-------------------------
2000 $ 123,231
2001 123,231
2002 107,068
2003 107,068
2004 --
--
---------
$ 460,598
=========
-8-
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - CAPITAL LEASE
Certain non-cancelable leases are classified as capital leases, and the leased
assets are included as part of "Property and equipment." Other leases are
classified as operating leases and are not capitalized. Details of the
capitalized leased assets are as follows:
1999 1998
-------- ---------
Equipment $ 50,000 $ --
Less: accumulated depreciation (10,000) --
-------- ---------
Total $ 40,000 $ --
======== =========
At December 31, 1999, the future minimum lease payments under the capital lease
are as follows:
YEARS ENDED CAPITAL
DECEMBER 31, LEASES
----------------------- ------------------
2000 $ 11,940
2001 11,940
2002 11,940
2003 10,945
--------
Total minimum lease payments 46,765
--------
Less: amount representing interest (6,128)
--------
Present value of net minimum
lease payments 40,637
Less: current maturities (9,314)
--------
Long-term obligation $ 31,323
========
NOTE 7 - LONG-TERM DEBT
At December 31, 1999 and 1998, long-term debt consists of the following:
1999 1998
--------- ---------
Note payable due in monthly installments
ranging from $12,000 to $39,000 including
interest at 10%, with remaining balances due
March 2000. Secured by all assets of the Company $ 126,065 $ 420,212
Less current portion (126,065) (306,526)
--------- ---------
Note payable - long term $ -- $ 113,686
========= =========
Total interest expense for the years ended December 31, 1999 and 1998, was
approximately $40,400 and $37,000, respectively.
-9-
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - CONCENTRATION OF CREDIT RISK
The Company maintains its cash bank deposits at various financial institutions.
Accounts at these institutions are insured by the Federal Deposit Insurance
Corporation up to $100,000 and the balances, at times, may exceed federally
insured limits. At December 31, 1999 the balance exceeding this limit was
approximately $147,000. At December 31, 1998, the Company's cash balance did not
exceed the insured limit. The Company routinely assesses the financial strength
of its customers, and, as a consequence, believes its trade accounts receivable
exposure is limited.
NOTE 9 - MAJOR CUSTOMERS
Sales to one customer in 1999 represented approximately 38% of total sales, and
sales to another customer represented approximately 29% of total sales in 1998.
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. 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 $0.25 per share. Also in November of 1998, the Company
began a preferred stock Series A offering and as a result of the offering, the
Company issued 767,400 shares of preferred stock of which $187,000 were issued
under Regulation D 506 and $580,400 under Regulation S at $1.00 per share. Costs
incurred associated with these offerings totaled $212,000. The Company is
continuing the offering.
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 $.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 October of 1999, the Company began a Series B preferred stock offering, and,
as a result of the offering, the Company issued 989,000 shares under Regulation
S of preferred stock, for a total of $989,000. Holders will have the right to
convert the Series B preferred stock, in whole or in part, at any time, or from
time to time, into the common stock, par value $.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. The shares
of Series B preferred stock shall be subject to redemption, in whole or in part,
at any time and from time to time, at the option of the Company, at the stated
Preference Value per share.
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
December 31, 1999, the Company held $446,300 of this note from the investment
company.
-10-
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' DEFICIT AND STOCK OPTION PLAN, CONTINUED
STOCK OPTION PLAN
Under the Company's stock option plan, 10,000,000 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, 1999 carry
exercise prices equal to that of the fair market value on the date of the grant.
The options vest immediately or equally over a period of one to three 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 1999 net loss would have increased by
$1,539,000. The fair value of each option is estimated on the date of grant
using fair market option pricing model with the assumption:
Risk-free interest rate 6%
Expected life (years) 10
Expected volatility n/a
Expected dividends None
Weighed average remaining contractual life 9.5 years
A summary of option transactions during the years ended December 31, 1999 and
1998, is shown below:
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
OPTIONS PER OPTION
---------- -----------------
Outstanding at December 31, 1998 815,000 $ 0.25
Granted 6,789,800 0.84
Exercised -- --
Forfeited -- --
-- --
---------- ------
Outstanding at December 31, 1999 7,604,800 $ 0.84
========== ======
WARRANTS
In April of 1999 the Company granted 150,000 stock options (warrants) to Vestar
Capital Corporation, a company controlled by a minority shareholder, as part of
a consulting agreement. Compensation expense for the warrants has 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". Compensation expense of $27,000 was
recorded in 1999. The fair value of each option is estimated on the date of
grant using fair market option pricing model with the assumptions as stated
above.
-11-
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES
The Company has an unused net operating loss carryforward of $1,917,667
available for use on its future corporate federal and state income tax returns.
The Company was taxed as an S corporation until May 7, 1997, when a
disqualifying event occurred and the Company began taxation as a C corporation.
The Company's evaluation of the tax benefit of its net operating loss
carryforward is presented in the following table. The tax amounts have been
calculated using the 34% federal and 5.5% state income tax rates.
1999 1998
--------- ---------
Taxes currently payable $ -- $ --
Deferred income tax benefit 530,952 27,485
Change in beginning valuation allowance (530,952) (27,485)
--------- ---------
Provision (benefit) for income taxes $ -- $ --
========= =========
Reconciliation of the Federal statutory income tax rate to the Company's
effective income tax rate is as follows:
1999 1998
--------- ---------
Computed at the statutory rates (34%) $(480,044) $ (27,266)
Increase (decrease) resulting from:
Non-deductible expenses 344 2,692
State income taxes, net of federal income
tax benefit (51,252) (2,911)
Reinstatement/change in deferred tax asset
valuation allowance 530,952 27,485
--------- ---------
Tax provision (benefit) $ -- $ --
========= =========
The components of the deferred tax asset were as follows at December 31:
1999 1998
--------- ---------
Deferred tax assets:
Net operating loss carryforward $ 721,619 $ 249,648
Deferred revenue 62,275 57,263
Deferred costs (10,591) (41,239)
--------- ---------
Total deferred tax asset 773,303 265,672
--------- ---------
Deferred tax liabilities:
Depreciation expense (5,464) (8,290)
Allowance for receivables 20,495 --
--------- ---------
Total deferred tax liabilities 15,031 (8,290)
--------- ---------
Net deferred tax asset 788,334 257,382
--------- ---------
Valuation allowance:
Beginning of year (257,382) (229,897)
Decrease (increase) during year (530,952) (27,485)
--------- ---------
Ending balance (788,334) (257,382)
--------- ---------
Net deferred taxes $ -- $ --
========= =========
-12-
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES, CONTINUED
The net operating loss carryover is summarized below:
YEAR LOSS ORIGINATED YEAR EXPIRING AMOUNT
------------------- ------------- -----------
December 31, 1997 2012 $ 583,231
December 31, 1998 2013 80,195
December 31, 1999 2014 1,254,241
-----------
Total available net operating loss $ 1,917,667
===========
NOTE 12 - ACQUISITIONS
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.
On June 7, 1999, the Company acquired the assets of Page Telecomputing. As
consideration, the Company issued 60,000 shares of its $.001 par value common
stock. The total value of the stock issued was $90,000. The acquisition was
accounted for using the purchase method of accounting. The results of operations
are included in the financial statements of operations from the date of
acquisition. Goodwill of $83,910 was recorded in the transaction, which is being
amortized over 15 years using the straight-line method.
NOTE 13 - MANAGEMENT'S PLAN
As shown in the accompanying financial statements, the Company incurred a net
loss of $1,438,895 during the year ended December 31, 1999, and $80,195 for the
year ended December 31, 1998. The Company's current liabilities exceeded its
current assets by $540,505 and $707,141, respectively. The ability of the
Company 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 Company 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
emerging technologies such as speech-to-text, voice recognition, ASP services,
and web development as these areas have higher profit margins and represent a
market which is growing much more rapidly than the Company's traditional
services. In the last quarter of 1999 and the first quarter of 2000 several
employees, were added, which are expected to have a significant effect on sales.
For capital sourcing, management will continue the private placement offerings
of common and preferred stock, which during the period from January 1, 2000
through March 16, 2000 have raised approximately $4,400,000.
No estimate has been made should management's plan be unsuccessful.
NOTE 14 - LITIGATION
The Company is party from time to time to various legal proceedings. None of
these proceedings are expected to have a material impact on its financial
position or results of operations.
-13-
Exhibit 10.2 (a)
AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT
JACK BERGER
EFFECTIVE JANUARY 1, 2000
3. Compensation.
Base salary is increased to $160,000 per year. The effective date of
this increase is January 1, 2000.
Further, until the earlier of the Company raising $2 million or March
17, 2000, Executive will continue to receive the current salary with
the difference accrued to be paid at the earlier of the two events
described above.
Further increases will be at the discretion of the board of directors
4. Benefits.
Executive will be entitled to all benefits according to the regular
policies of the Company except as follows:
A. Vacation. Executive will be entitled to at least 4 weeks vacation
each year.
B. Medical, dental, disability and other group insurance provided by
the Company to any other employee(s), will be provided to Executive at
no cost. This includes any coverage of dependents.
5. Term and Termination.
The initial term is three years ending December 31, 2000. This Addendum
adds two years to this initial term which now ends December 31, 2002.
Nothing in this Addendum is to be interpreted as to reduce any benefit
due Executive under the original Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of January 1,
2000.
Intraco Systems, Inc.
By: /s/ WALT NAWROCKI
-------------------------------------
Walt Nawrocki, CEO
By: /s/ JACK BERGER
-------------------------------------
Jack Berger
Exhibit 10.3(a)
AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT
ROBERT MARCUS
EFFECTIVE SEPTEMBER 20, 1999
SECTION 3. COMPENSATION
Effective September 20, 1999 Executive's base salary will be $120,000 per year.
Due to the staging of Executive's prior salary, the increase of $36,000 per year
will be added to the current bi-weekly rate until January 14, 2000 at which time
the bi-weekly payroll will be adjusted to $4,615.00. Until then, the bi-weekly
rate will be $4,965.00
Further, until the earlier of:
Company raising $2 million or,
March 17, 2000
Employee will be paid at the rate of $105,600 per year or $4,062.00 bi-weekly
plus the adjustment for a total of $4,412.00. The difference between $4,615 and
$4,062 or $553.00 per bi-weekly pay period will be accrued and repaid at the
earlier of the two events listed above.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Intraco Systems, Inc.
By: /s/ WALT NAWROCKI
------------------------------
Walt Nawrocki, CEO
By: /s/ ROBERT MARCUS
-----------------------------
Robert Marcus, CFO
<PAGE>
ROBERT MARCUS
6341 Via Venetia North
Delray Beach, FL 33484
(561) 496-5252 fax (561) 496-1152
[email protected]
December 29, 1999
Jack Berger
Walt Nawrocki
Intraco Systems, Inc.
3998 FAU Boulevard
Boca Raton, FL 33431
Jack & Walt:
As agreed, below are the revisions to my Employment Agreement. Please sign where
indicated.
3. Compensation.
Base salary is increased to $145,000 per year effective with the
payroll period beginning January 17, 2000. Any agreed temporary
reduction will be accrued and paid upon the terms of any such separate
agreement. Further increases will be at the discretion of the board of
directors.
4. Benefits. I will be entitled to all benefits according to the
regular policies of the Company except as follows:
A. Vacation. I will be entitled to at least 4 weeks vacation each year.
B. Medical, dental, disability and other group insurance provided by
the Company to any other employee(s), will be provided to me at no
cost. This includes any coverage of dependents.
5. Term and Termination. The current term is three years ending January
19, 2002. The new term adds two years and ends January 19, 2004.
In addition to the above there will be a bonus of $12,000.00 paid per my
instructions. This bonus is contingent on GKM raising at least $3 million for
Intraco.
Jack Berger, President /s/ JACK BERGER Date: 1/4/00
------------------------------------
Walt Nawrocki, CEO /s/ WALT NAWROCKI Date: 1/4/00
------------------------------------
Robert Marcus /s/ ROBERT MARCUS Date: 1/4/00
------------------------------------
Exhibit 10.7
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement ("Agreement") is made and effective
September 24, 1999, by and between Intraco Systems, Inc., a Florida Corporation
("Company") and Walt Nawrocki ("Executive").
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT.
Company hereby agrees to employ Executive as its Chief Executive Officer and
Executive hereby accepts such employment in accordance with the terms of this
Agreement and the terms of employment applicable to regular employees of the
Company. In the event of any conflict or ambiguity between the terms of this
Agreement and terms of employment applicable to regular employees of the Company
as set forth in ADDENDUM A appended hereto and made a part of this Agreement,
the terms of this Agreement shall control.
2. TERM.
The term of this Agreement shall commence as of September 24, 1999 and shall
continue until terminated as provided in Section 7 below.
3. DUTIES OF EXECUTIVE.
The duties of Executive shall include the performance of all of the duties
typical of a Chief Executive Officer as described in the bylaws of the Company
and such other duties and projects as may be assigned by the Board of Directors
of the Company, as long as such duties are consistent with and typical to the
position of Chief Executive Officer. Executive shall devote his entire
productive time, ability and attention to the business of the Company and shall
perform all duties in a professional, ethical and businesslike manner. Executive
will not, during the term of this Agreement, directly or indirectly engage in
any other business, either as an employee, employer, consultant, principal,
officer, director, advisor, or in any other capacity, either with or without
compensation, without the prior written consent of Company. The Company shall
not unreasonably deny approval of Executive to sit as a director for up to three
(3) other companies.
4. BOARD OF DIRECTORS.
Immediately upon the effective date of this Agreement and securing of DNO
insurance, the Board of Directors of the Company shall meet and shall elect
Executive to the Board of Directors of the Company. Executive shall remain on
the Board of Directors throughout the term of this Agreement.
5. COMPENSATION.
Executive will be paid compensation during this Agreement as follows:
<PAGE>
A. A base annual salary of One Hundred Seventy Five Thousand Dollars
($175,000) per year, payable in installments according to the Company's
regular payroll schedule. The base annual salary shall be increased at
the end of each year of employment by the greater of (a) 3% of the
prior year's annual salary; or (b) the percentage increase in the
Consumer Price Index (CPI) as published by the United States Department
of Labor at the end of each year. The Company shall provide the
Executive the CPI Information by September 1st of each year to permit
Executive to confirm such information.
B. For an initial period of Employment, the salary will be reduced to an
annual rate of $135,000.00. The difference between $175,000.00 and
$135,000.00, i.e., $40,000.00, will be accrued and shall be paid as a
lump sum to the Executive, less taxes, at the earlier of:
1. successfully raising $2.0 million of investment capital or,
2. the six month anniversary of the effective date of this
Agreement, i.e., by March 24, 2000.
C. An option to purchase 4,000,000 (Four Million) shares of Intraco
Systems common stock will be furnished to Executive as per terms of the
"Stock Option Agreement" set forth in ADDENDUM B, appended to and made
part of this Agreement.
6. BENEFITS.
A. HOLIDAYS. Executive shall be entitled to Holiday, Vacation & Sick Leave and
Emergency leave according to the regular policies and procedures of Company per
ADDENDUM A with the exception of vacation. Executive shall receive four (4)
weeks of paid vacation annually. Additional sick leave or emergency leave over
and above paid leave provided by the Company, if any, shall be unpaid and shall
be granted at the discretion of the Board of Directors.
B. MEDICAL AND GROUP LIFE INSURANCE. Company agrees to include Executive in the
group of executives provided group life insurance. The Company shall provide
group life insurance for Executive at no charge to Executive in the amount of
Five Hundred Thousand ($500,000) during the term of this Agreement. Executive
shall be responsible for payment of any federal or state income tax imposed upon
these benefits.
C. PENSION AND PROFIT SHARING PLANS. Executive shall be entitled to participate
in any pension or profit sharing plan or other type of plan adopted by Company
for the benefit of its officers and/or regular employees.
D. AUTOMOBILE. Company will provide to Executive the use of an automobile of the
Executive's choice. Company will pay all automobile expenses incurred by
Executive in the performance of an Executive's company duties. Company will
procure and maintain in force an automobile liability policy for the automobile
with coverage, including Executive, in the amount as it currently exists in
combined single limit on bodily injury and property damage.
E. EXPENSE REIMBURSEMENT. Executive shall be entitled to reimbursement for all
reasonable expenses, including travel and entertainment, incurred by Executive
in the performance of Executive's duties. Executive will maintain records and
<PAGE>
written receipts as required by the Company policy and reasonably requested by
the board of directors to substantiate such expenses.
7. TERM AND TERMINATION.
A. The Initial Term of this Agreement shall commence on September 24, 1999 and
it shall continue in effect for a period of Three (3) years on an annual basis.
Thereafter, the Agreement shall be renewed upon the mutual agreement of
Executive and Company. This Agreement and Executive's employment may be
terminated at Company's discretion during the Initial Term, provided that
immediately upon the Executive's termination, Company shall pay to Executive in
a lump sum an amount equal to Executive's base salary for the remaining period
of the Initial Term, plus an amount equal to Fifty percent 50% of Executive's
then applicable base annual salary for the remaining period of the Initial Term.
In the event of such termination, Executive shall not be entitled to any
incentive salary payment or any other compensation then in effect, prorated or
otherwise, except as provided in Addendum C, appended hereto and made a part of
this Agreement..
B. This Agreement and Executive's employment may be terminated by Company at its
discretion at any time after the Initial Term, provided that immediately upon
the Executive's termination, the Company shall pay to the Executive in lump sum
an amount equal to Executive's base annual salary in effect for the remainder of
the annual term plus an amount equal to Fifty percent (50%) of Executive's then
applicable base salary. In the event of such a discretionary termination,
Executive shall not be entitled to receive any incentive salary payment or any
other compensation then in effect, prorated or otherwise, except as provided in
ADDENDUM C.
C. This Agreement may be terminated by Executive at Executive's discretion by
providing at least thirty (30) days prior written notice to Company. In the
event of termination by Executive pursuant to this subsection, Company may
immediately relieve Executive of all duties and immediately terminate this
Agreement, provided that Company shall pay Executive at the then applicable base
annual salary rate to the termination date included in Executive's original
termination notice, and any additional payment in accordance with ADDENDUM C.
D. In the event that Executive (a) engages in any tortious conduct with respect
to any matter involving the Company which has a material adverse impact on the
Company, (b) repeatedly and habitually fails after written notice by the Board
of Directors to follow instructions of the Board of Directors consistent with
the Executive's title and duties of employment as provided in Section 3 herein,
or (c) is convicted of any criminal act if it relates to the Executive's
employment or the business of the Company, then Company may terminate this
Agreement upon sixty (60) days written notice to Executive. In event of
termination of this agreement pursuant to this subsection, Executive shall be
paid only at the then applicable base annual salary rate up to and including the
date of termination. Executive shall not be paid any incentive salary payments
or other compensation then in effect, prorated or otherwise.
<PAGE>
E. This Agreement shall be fully assumed for its full Initial term and,
thereafter, for any subsequent annual term, by any successor, assign or, in the
event Company is acquired, or is the non-surviving party in a merger, or sells
all or substantially all of its assets, by any successor entity.
8. NONDISCLOSURE AND NONCOMPETITION.
The Executive and Company will comply with the terms of the Non-Compete and
Non-disclosure Agreement appended hereto as ADDENDUM C and made a part of this
Agreement as if fully set forth herein.
9. NOTICES.
Any notice required by this Agreement or given in connection with it, shall be
in writing and shall be given to the appropriate party by personal delivery or
by certified mail, postage prepaid, or recognized overnight delivery services;
If to Company:
Intraco Systems, Inc.
3998 FAU Blvd #210
Boca Raton, FL 33431
If to Executive:
Walt Nawrocki
551 N.W. 14th Avenue
Boca Raton FL 33486
10. FINAL AGREEMENT.
This Agreement terminates and supersedes all prior understandings or agreements
on the subject matter hereof This Agreement may be modified only by a further
writing that is duly executed by both parties.
11. GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with the laws of
the state of Florida with venue in Palm Beach County.
12. HEADINGS
Headings used in this Agreement are provided for convenience only and shall not
be used to construe meaning or intent.
13. NO ASSIGNMENT.
Neither this Agreement nor any or interest in this Agreement may be assigned by
Executive without the prior express written approval of Company, which may be
withheld by Company at Company's absolute discretion.
<PAGE>
14. SEVERABILITY. If any term of this Agreement is held by a court of competent
jurisdiction to be invalid or unenforceable, then this Agreement, including all
of the remaining terms, will remain in full force and effect as if such invalid
or unenforceable term had never been included.
15. ARBITRATION.
Any and all disputes regarding the application, breach and/or interpretation of
this Agreement, with the sole and exclusive exception of the Company's right to
injunctive relief under the Nondisclosure and Noncompetition Agreement referred
to herein and appended as Addendum C, herein shall be exclusively determined by
arbitration. In the event a dispute arises between the parties, the party
asserting such a claim shall serve a Complaint on the other party. Within
fifteen (15) days thereafter, the parties shall agree upon a mediator and submit
to mediation within ten (10) days thereafter. In the event the parties cannot
agree as to the identity of a mediator or the dispute cannot be resolved through
mediation, the parties shall proceed to arbitration in accordance with the then
applicable Employment Dispute Arbitration Rules of the American Arbitration
Association and request a panel of seven (7) arbitrators located in South
Florida within ten (10) days after mediation. Within ten (10) days of receipt of
the list of arbitrators, the parties shall select one arbitrator from the list
to hear the dispute. In the event the parties cannot agree to an arbitrator then
the parties shall meet and alternatively cross out names on the list, and the
remaining name shall be the arbitrator. A coin shall be tossed to determine who
shall cross out first. The arbitration shall be conducted within sixty (60) days
of the date of issuance of the initial arbitrators' list. In the event that the
arbitrator jointly selected is unavailable, the parties shall request an
alternate list of seven (7) arbitrators and select a single arbitrator from that
list upon agreement or utilizing the method identified above. The arbitrator
shall issue his decision within thirty (30) days from the close of the
arbitration hearing. The parties shall have the right to file post-arbitration
briefs within fifteen (15) days after the close of the hearing. It is further
agreed that in the event of a determination against one of the parties, that
party shall pay all arbitration costs, including the arbitrator's fees, court
reporter's fees, arbitration transcript fees, expert witness fees and any and
all costs associated with arbitration including room rental. Further, the
parties agree the prevailing party shall be entitled to attorney's fees for the
arbitration and all related court litigation, including all appeals.
Notwithstanding any dispute arising under this Agreement, if requested by the
other party, each party will continue its obligations under this Agreement
pending the arbitration decision. The venue of mediation and arbitration shall
be in and for Palm Beach County, Florida. The decision of the arbitrator shall
be final and binding upon both parties. Either party may enforce the terms of
this provision, including but not limited to the time periods set forth, in a
court of competent jurisdiction in and Palm Beach County, Florida and take any
appeals therefrom. The parties agree upon venue of any court litigation is in
Palm Beach County, Florida, and waive all rights to contest such venue or claim
the right to any other venue. In any arbitration regarding this Agreement, the
arbitrator shall be required to determine a prevailing party and shall be
required to award that prevailing party all attorney's fees and costs for any
such arbitration. This provision will survive the termination of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
Intraco Systems, Inc. Walt Nawrocki
3998 FAU Blvd. 551 N.W. 14th Avenue
Suite 210 Boca Raton, Florida 33486
Boca Raton, Florida 33431
By: /s/ JACK BERGER By: /s/ WALT NAWROCKI
------------------------------- ------------------------
Jack S. Berger Walt Nawrocki
President
<PAGE>
ADDENDUM A
STANDARD TERMS OF EMPLOYMENT
Walt Nawrocki
Holidays: Employee will be entitled to at least six (6) paid
holidays each calendar year. The Company will notify
Employee at the beginning of each year of the holiday
schedule for the coming year.
Vacation: Employee will be entitled to vacation time according
to the regular policies of the Company:
Date of Hire- 14 Years - 20 business days
15+Years - Board of Directors
Medical: The Company will include Employee in the group
medical plan of the Company at the Company's expense.
Spouse and or Dependents of the Employee may be added
at One Hundred percent (100%) of the Employer's
expense as a payroll deduction.
Sick Leave: Employee will be entitled to sick leave according to
the regular policies of the Company.
Expense
Reimbursement: Employer will reimburse Employee for any and all
pre-approved necessary, customary, and usual expenses
incurred by him while traveling for and on behalf of
the Employer pursuant to Employer's directions.
Employee will provide appropriate receipts in a
timely manner for all reimbursed expenses.
<PAGE>
ADDENDUM C
INTRACO SYSTEMS, INC.
NONDISCLOSURE AND NONCOMPETITION AGREEMENT
As an employee of Intraco Systems, Inc., I, Walt Nawrocki, hereby agree
to observe all the provisions of this Agreement, as well as all other rules and
policies that Intraco Systems, Inc. may announce from time to time. Furthermore,
this AGREEMENT is provided by me for the benefit of Intraco Systems, Inc., its
subsidiaries, affiliates, successors and assigns (collectively referred to
"Intraco Systems" or the "Company"). This Agreement serves as a legally binding
acknowledgment and assignment of the ownership of all "Work Product" (as defined
below) that Company may encounter.
SECTION 1. AVOIDANCE OF CONFLICT OF INTEREST
While employed by Intraco Systems, I will not engage in. any other
business activity that conflicts with my duties to Intraco Systems. Under no
circumstances win I work for any competitor or have any financial interest in
any competitor of Intraco Systems; provided, however, that this Agreement does
not prohibit investment of a reasonable part of my assets in the stock or
securities of any competitor whose stock or securities are publicly traded on a
national exchange.
SECTION 2. OWNERSHIP AND RIGHTS IN WORK PRODUCT
For purposes of this Agreement, "Work Product" shall mean all
intellectual property rights, including all trade secrets, U.S. and
international copyrights, patentable inventions, and other intellectual property
rights in any programming, documentation, technology, or other work product that
is created in connection with my Work. In addition, all rights in any
preexisting programming, documentation, technology, or other Work Product
provided to Company during the course of my employment or engagement shall
automatically become part of the Work Product. hereunder, whether or not it
arises specifically out of my "Work." For purposes of this Agreement, "Work"
shall mean (1) any direct assignments and required performance by or for
Company, and (2) any other productive output that relates to the business of
Company and is produced during the course of my engagement by Company. For this
purpose, Work may be considered present even after normal working hours, away
from Owner's premises, on an unsupervised basis, alone or with others. Unless
otherwise provided in a subsequent writing signed by Company, this Agreement
shall apply to all Work Product created in connection with all Work conducted
before or after the date of this Agreement.
<PAGE>
Intraco Systems, Inc. shall own all rights in the Work Product. To this
end, all Work Product shall be considered Work made by me for hire for Company.
If any of the Work Product may not, by operation of law or agreement be
considered Work made by me for hire for Company (or if ownership of all rights
therein do not otherwise vest exclusively in Company), I agree to assign, and
upon creation thereof automatically assign, without further consideration, the
ownership thereof to Company. I hereby irrevocably relinquish for the benefit of
Company and its assigns any moral rights in the Work Product recognized by
applicable law. Company shall have the right to obtain and hold, in whatever
name or capacity it selects, copyrights, registrations, and any other protection
available in the Work Product.
I agree to perform upon the request of Company, during or after my
Work, such Further acts as may be necessary or desirable to transfer, perfect,
and defend Owner's ownership of the Work Product, including by (1) executing,
acknowledging, and delivering any requested affidavits and documents of
assignment and conveyance, (2) obtaining and/or aiding in the enforcement of
copyrights, trade secrets, and (if applicable) patents with respect to the Work
Product in any countries, and (3) providing testimony in connection with any
proceeding affecting the rights of Company in any Work Product.
I warrant that my Work for Company does not and will not in any way
conflict with any remaining obligations I may have with any prior employer or
contractor. I also agree to develop all Work Product in a manner that avoids
even the appearance of infringement of any third party's intellectual property
rights.
SECTION 3. CONFIDENTIALITY AND NON-DISCLOSURE
During the course of my engagement and afterwards, I agree not to use
or disclose any "trade secrets" of Company as defined by law at any time except
as necessary to perform my duties for Company. Under the law, a "trade secret"
- -is a type of intangible property, the theft (i.e., misappropriation) of which
is a tort and crime in most states. It does not have to be in written form to be
protected. A trade secret generally consists of valuable, secret information or
ideas that Company collects or uses in order to keep its competitive edge,
including confidential information supplied to Company by its customers,
clients, vendors, or agents. Examples of trade secrets are such technical
information as manufacturing or operating processes, equipment design, product
specifications, computer software in source code form, and other proprietary
technology, and such business information as selling and pricing information and
procedures, customer lists, business and marketing plans, ideas and plans for
products, services or other business development, and internal financial
statements. These restrictions do not apply to any information generally
available to the public or any information properly obtained from a completely
independent source.
Furthermore, I agree to maintain in strict confidence, and agree not to
use and disclose except as authorized by Intraco Systems, any information of a
competitively sensitive or proprietary nature that I receive from Intraco
Systems, Inc. or its clients or contractors in connection with my services
hereunder. Intraco Systems agrees to take reasonable steps to identify, and
<PAGE>
cause its clients and contractors to identify, for my benefit such information,
including by using confidentiality notices in written material where
appropriate. These restrictions shall not be construed to apply to (1)
information generally available to the public, (2) information released by
Intraco Systems or its clients or contractors, as the case may be, generally
without restriction, (3) information independently developed or acquired by me
without reliance in any way on other protected information of Intraco Systems or
its clients or contractors, or (4) information approved by Intraco Systems or
its clients or contractors, as the case may be, for my use and. disclosure
without restriction.
SECTION 4. RETURN OF MATERIALS
Upon the request of Intraco Systems and, in any event, upon termination
of -my employment, I will leave with Intraco Systems all memoranda, notes,
records, drawings, manuals, disks, or other documents and media pertaining to
Intraco Systems business, including all copies thereof
SECTION 5. COVENANT NOT TO COMPETE
During the term of my employment with Intraco Systems and for a period
of one year after termination of my employment, in exchange for payment to me by
Intraco Systems within fourteen (14) days of my termination of employment for
any reason in lump sum, less appropriate taxes, of my then applicable one year's
annual base salary in addition to any other payment owed or due to me at that
time, I shall not compete, directly or indirectly, with the Company, interfere
with, disrupt or attempt to disrupt the relationship, contractual or otherwise,
between the Company and any customer, client, supplier, consultant or employee
of the Company, including, without limitation, employing or being an investor
(representing more than a 5% equity interest) in, or officer, director or
consultant to, any person or entity which employs any former key or technical
employee whose employment with the Company was terminated after the date which
is one year prior to the date of termination of the employee's employment
therewith. An activity competitive with an activity engaged in by the Company
shall mean performing services specifically in the computer systems integration
industry (whether as an employee, officer, consultant, director, partner or sole
proprietor) for any person or entity engaged in the business engaged in by the
Company during the time of my relationship with the Company or at the time of my
termination of my relationship with the Company. The Company understands my
agreement not to compete after termination of my employment - for any reason -
requires separate, additional payment to me in the amount of one year's annual
base salary then in effect, regardless of the reason for my termination and/or
any other obligation by the Company to provide payment to me. In the event of
any conflict between my Employment Agreement and this Section 5 - Covenant Not
to Compete - this provision shall prevail.
<PAGE>
It is the desire and intent of the parties that the provisions of this
Section shall be enforced to the fullest extent permissible under the laws and
public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of this Section shall be adjudicated to
be invalid or unenforceable, this Section shall be deemed amended to delete
therefrom the portion thus adjudicated to be invalid or unenforceable, such
deletion to apply only with respect to the operation of this Section in the
particular jurisdiction in which such adjudication is made.
Nothing in this Section shall reduce or abrogate the employee's
obligations during the term of this Agreement..
SECTION 6. NONINTERFERENCE WITH PERSONNEL RELATIONS
During my employment with Intraco Systems and for a period of twelve
months afterwards, I will not knowingly solicit, entice, or persuade any other
employees of Intraco Systems to leave the services of Intraco Systems, Inc. for
any reason.
SECTION 7. REMEDIES
If there is a breach or threatened breach of the provisions of this
Agreement, the Company shall be entitled to an injunction restraining the
employee from such breach. Nothing herein shall be construed as prohibiting the
Company from pursuing any other remedies for such breach or threatened breach.
SECTION 8. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the Laws of the State of Florida with venue in Palm Beach County.
SECTION 9. MISCELLANEOUS
This Agreement shall inure to the benefit of, and be binding upon,
Intraco Systems and its subsidiaries and affiliates, together with their
successors and assigns, and me, together with my executor, administrator,
personal representative, heirs, and legatees.
This Agreement merges and supersedes all prior and contemporaneous
agreements, undertakings, covenants, or conditions (including specifically all
prior confidentiality and noncompetition agreements I have entered), whether
oral or written, express or implied, to the extent they contradict or conflict
with the provisions hereof.
Although it is understood that my employment is contingent on the
acceptance and observance of this Agreement, this Agreement shall not be
construed to make my employment other than -terminable at will at any time by me
or Intraco Systems in the sole discretion of either party.
<PAGE>
IN WITNESS WHEREOF, I have accepted and executed this Agreement under
seal as of the 24th day of September 1999.
Intraco Systems, Inc. Walt Nawrocki
3998 FAU Blvd. 551 N.W. 14th Avenue
Suite 210 Boca Raton, Florida 33486
Boca Raton, Florida 33431
By: /s/ JACK BERGER By: /s/ WALT NAWROCKI
---------------------------- ---------------------------
Jack S. Berger Walt Nawrocki
President
VOTING AGREEMENT
VOTING AGREEMENT, dated as of February 1, 2000 (this "Agreement"),
between Jack Berger ("Berger") and Walt Nawrocki ("Nawrocki").
WHEREAS, Berger and Nawrocki are executive officers of Intraco Systems,
Inc., a Nevada corporation ("Intraco"); and
WHEREAS, as of the date hereof, Berger is the beneficial owner of
8,109,000 shares of Intraco's issued and outstanding common stock ("Intraco
Common Stock") and Nawrocki owns options to purchase an aggregate of 4,000,000
shares of Intraco Common Stock;
WHEREAS, Berger and Nawrocki have agreed, among other things, to enter
into this Agreement with respect to all of the shares of Intraco Stock now owned
and which may hereafter be acquired by either of them (the "Shares").
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein, and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
ARTICLE 1
VOTING OF SHARES
1.1 VOTING AGREEMENT. (a) During the term of this Agreement, each party
agrees to grant the other party an irrevocable proxy to vote (or cause to be
voted) fifty percent (50%) of all Shares, and any other voting securities of
Intraco, whether issued heretofore or hereafter, that either party beneficially
owns or has the right to vote for all matters subject to a stockholder vote.
(b) Except as provided in this Agreement and during the term of this
Agreement, each party shall not, directly or indirectly, grant any proxy or
power of attorney with respect to the Shares, deposit any of such Shares into a
voting trust or enter into any voting agreement or arrangement inconsistent with
this Agreement.
(c) Berger and Nawrocki each agree that during the term of this
Agreement that he will
(i) vote all of the shares of Intraco securities to which he is
entitled to vote in favor of the other person in the election of Intraco
directors.
(ii) not take any action, directly or indirectly, that will
assist, facilitate, encourage or solicit another party in the removal of
Berger or Nawrocki from Intraco Board of Directors or from their current
positions as executive officers of Intraco.
1.2 IRREVOCABLE PROXY. During the term of this Agreement and in the
event either party shall fail to comply in all material respects with the
provisions of Section 1.1 hereof as determined by the other party in its
reasonable discretion, the complying party agrees that such failure shall
result, without any further action by the noncomplying party, in the irrevocable
appointment of the complying party, until termination of this Agreement, as the
noncomplying party's attorney and proxy pursuant to the provisions of the Nevada
Business Corporation Law, with full power of substitution, to vote, and
otherwise act (by written consent or otherwise) with respect to the Shares which
such party is entitled to vote at any stockholder meeting (whether annual or
special and whether or not an adjourned or postponed meeting) or consent in lieu
<PAGE>
of any such meeting or otherwise, only on the specific matters and in the manner
specified in Section 1.1 hereof. THIS PROXY AND POWER OF ATTORNEY IS IRREVOCABLE
AND COUPLED WITH AN INTEREST.
ARTICLE 2
MISCELLANEOUS
2.1 INJUNCTIVE RELIEF. The parties agree that any violation by either
party of this Agreement may cause irreparable or indeterminate damage or injury
to the other parties, and both parties expressly stipulate and agree that the
other party shall be entitled, upon ten (10) days written notice, to obtain an
injunction from any court of competent jurisdiction restraining any violation or
threatened violation of this Agreement. Such right to an injunction shall be in
addition to, and not in limitation of, any other rights or remedies that a party
may have for damages.
2.2 TERMINATION. This Agreement shall terminate upon the earliest of
(i) the sale or merger of Intraco in which Intraco is not the surviving company,
(ii) the resignation or termination of either Berger or Nawrocki as an officer
and director of Intraco, or (iii) January 31, 2003.
2.3 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction to prevent any breach of this Agreement and to enforce specifically
the terms and provisions hereof in any Delaware Court, this being in addition to
any other remedy to which they are entitled at law or in equity.
2.4 SUCCESSORS AND AFFILIATES. This Agreement shall inure to the
benefit and shall be binding upon the parties hereto and their respective
successors, assigns, heirs, executors, administrators and representatives.
2.5 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter hereof.
2.6 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
2.7 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
2.8 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
2
<PAGE>
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
2.9 GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Florida regardless of the laws that
might otherwise govern under applicable principles of conflicts of law.
2.10 COUNTERPARTS. This Agreement may be executed in counterparts by
manual or facsimile signature of each undersigned party, and all such
counterparts shall be deemed to constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date hereof.
/s/ JACK BERGER
-------------------------------
Jack Berger
/s/ WALT NAWROCKI
-------------------------------
Walt Nawrocki
3
DASZKAL, BOLTON, MANELA, DEVLIN & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
2401 N.W. BOCA RATON BOULEVARD, SUITE 100 BOCA RATON, FLORIDA 33431
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.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use of our audit report dated February 18, 2000, except
for Note 13, as to which the date is March 16, 2000, in the form 10-KSB of
Intraco Systems, Inc., for the years ended December 31, 1999 and 1998.
/s/ Daszkal, Bolton, Manela, Devlin & co., CPA's
Boca Raton, Florida
March 31, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH UNAUDITED FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001075907
<NAME> INTRACO SYSTEMS, INC.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 151,725
<SECURITIES> 0
<RECEIVABLES> 542,061
<ALLOWANCES> 6,639
<INVENTORY> 16,678
<CURRENT-ASSETS> 790,220
<PP&E> 376,281
<DEPRECIATION> (142,367)
<TOTAL-ASSETS> 1,124,783
<CURRENT-LIABILITIES> 1,330,725
<BONDS> 0
0
1,756
<COMMON> 13,021
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,124,783
<SALES> 2,925,268
<TOTAL-REVENUES> 2,925,268
<CGS> 2,165,581
<TOTAL-COSTS> 4,363,073
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 40,401
<INCOME-PRETAX> (1,438,895)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,438,895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,438,895)
<EPS-BASIC> 0
<EPS-DILUTED> (.12)
</TABLE>
