As filed with the Securities and Exchange Commission on August 22, 2000
Registration No. 333-______
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTRACO SYSTEMS, INC.
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(Name of Small Business Issuer in its Charter)
Nevada 7389 87-0381511
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(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
3998 FAU Boulevard
Suite 210
Boca Raton, Florida 33431
(561) 367-0600
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(Address and Telephone Number of Principal Executive Offices)
3998 Florida Atlantic University Boulevard, Suite 210, Boca Raton, Florida 33431
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(Address of Principal Place of Business or Intended Principal Place of Business)
Robert Marcus
Chief Financial Officer
3998 FAU Boulevard
Suite 210
Boca Raton, Florida 33431
(561) 367-0600
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(Name, Address and Telephone Number of Agent for Service)
Copies to:
Nina S. Gordon, P.A.
Broad and Cassel
201 South Biscayne Blvd., Suite 3000
Miami, Florida 33131
(305) 373-9400
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Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practicable after the effective date of this Registration Statement.
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If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<PAGE>
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of Shares to be Amount to Be Offering Price Per Aggregate Offering Registration Fee
Registered Registered Unit(1) Price
----------------------- ------------------- -------------------------- ------------------------ -------------------
<S> <C> <C> <C> <C>
Common stock, .... 3,004,560 shares $ 1.609 $4,834,337 $ 1,276.26
$.001 par value
Common stock, .... 3,208,246 shares $ 1.50 $4,812,369 $ 1,270.47
$.001 par value(2)
Common stock, .... 362,765 shares $ 2.00 $ 725,530 $ 191.54
$.001 par value(3)
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TOTAL FEE: $ 2,738.27
==========
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457.
(2) Includes 3,208,246 shares issuable upon the exercise of warrants having
an exercise price of $1.50 per share, which was used as the proposed
maximum offering price per share. Also includes additional shares
issuable under the anti-dilution provisions of these warrants.
(3) Includes 362,765 shares issuable upon the exercise of warrants having
an exercise price of $2.00 per share, which exercise price was used as
the proposed maximum offering price per share. Also includes additional
shares issuable under the anti-dilution provisions of these warrants
The Registration Statement also includes an indeterminate number of
shares of common stock that may become issuable to prevent dilution resulting
from stock splits, stock dividends or exercise price adjustments, which are
included pursuant to Rule 416 under the Securities Act of 1933.
================================================================================
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as SEC, acting pursuant to said Section 8(a), may
determine.
================================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
PROSPECTUS
SUBJECT TO COMPLETION DATED AUGUST 22, 2000
6,575,571 SHARES OF COMMON STOCK
INTRACO SYSTEMS, INC.
We are registering the following shares:
o 3,004,560 shares of common stock held by unaffiliated third
parties; and
o 3,571,011 shares of common stock issuable upon exercise of
warrants held by unaffiliated third parties.
We will pay the expenses of registering these shares.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"INSY." On August 18, 2000, the last reported price for our common stock on the
OTC Bulletin Board was $1.75 per share.
YOU SHOULD CAREFULLY CONSIDER THE SECTION TITLED "RISKS OF INVESTING IN
INTRACO SHARES" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS _______________, 2000
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<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY.....................................................................1
FORWARD-LOOKING STATEMENTS..................................................3
RISKS OF INVESTING IN INTRACO SHARES........................................4
DIVIDEND POLICY............................................................10
PRICE RANGE OF OUR COMMON STOCK............................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................11
ABOUT INTRACO SYSTEMS, INC.................................................14
MANAGEMENT.................................................................23
PRINCIPAL SHAREHOLDERS.....................................................27
SELLING SHAREHOLDERS.......................................................29
CERTAIN TRANSACTIONS.......................................................29
OUR SECURITIES.............................................................30
SHARES ELIGIBLE FOR FUTURE SALE............................................32
HOW THE SHARES MAY BE DISTRIBUTED..........................................33
LEGAL MATTERS..............................................................34
EXPERTS....................................................................34
WHERE YOU CAN FIND MORE INFORMATION........................................34
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SUMMARY
BECAUSE THIS IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE MORE DETAILED INFORMATION
CONTAINED IN THIS PROSPECTUS. UNLESS THE CONTEXT REQUIRES OTHERWISE, ALL
REFERENCES IN THIS PROSPECTUS TO "INTRACO," "WE," "OUR" AND "US" REFER TO
INTRACO SYSTEMS, INC.
INTRACO SYSTEMS, INC.
GENERAL
Intraco is a full-service information technology and telephony service
provider. Intraco delivers its turnkey advanced technology solutions on a
business-to-business basis, to small and midsized businesses such as
website/e-commerce companies. In addition, it is targeting larger businesses
such as those in the telecommunications industry. Management believes that
Intraco's solutions can be used to voice-enable a wide range of applications
such as websites, e-commerce, auctioning, paging and e-mail.
INTRACO'S PRODUCTS
Intraco currently offers several suites of comprehensive commercial
solutions that will enable customers to eliminate or replace all on-site
telephone, data systems and server applications. It has fully operational
prototypes of its solutions, some of which are in the client evaluation stage.
The products include:
o VOICE ASP. This solution will provide voice enablement of
websites on an application service provider, or "ASP," basis
through network service providers for businesses.
o VIRTUAL VOICE ASP. This solution will provide a business with
the basic building blocks for its telecommunication needs,
with voice-powered features such as voice-enabled e-mail and
unified messaging.
INTRACO'S HISTORY
Intraco was incorporated in Florida in March 1990. In April 1999, it
completed an exchange offer with Custom Touch Electronics, Inc., a Nevada
corporation. Following the exchange, Custom Touch, changed its name to Intraco
Systems, Inc. Our executive offices are located at 3998 FAU Boulevard, Suite
210, Boca Raton, Florida 33431, telephone number (561) 367-0600.
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THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the Selling Shareholders.........................3,004,560 shares of common stock and 3,214,560
shares of common stock underlying warrants owned by
these shareholders. See "Our Securities."
Shares Outstanding.....................................................17,334,250 shares of common stock
1,420,900 shares of preferred stock
Risk Factors...........................................................The shares offered under this prospectus involve a
high degree of risk. See "Risk of Investing in
Intraco Shares."
Use of Proceeds........................................................We will receive no proceeds from the sale of the
shares being offered by the selling shareholders
under this prospectus.
OTC Bulletin Board Symbol..............................................INSY
</TABLE>
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of our consolidated financial statements,
which are included elsewhere in this prospectus, and should be read in
conjunction with those financial statements.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
---------------------------------------- -------------------------------
2000 1999 1999 1998
---------------- -------------- ------------- -------------
(unaudited)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Net sales................................. $ 3,092,349 $ 1,701,613 $ 2,925,268 $ 2,704,931
Gross profit.............................. 707,939 461,633 759,687 992,211
(Loss) from operations.................... (1,455,515) (302,374) (1,437,805) (45,618)
------------- ----------- ------------ -----------
Net (loss) ............................... $ (1,436,226) $ (303,696) $ (1,438,895) $ (80,195)
============= =========== ============ ===========
SHARE DATA:
Loss per common share - basic and
diluted................................. $ (0.08) $ (0.03) $ (0.12) $ (0.01)
============= =========== ============ ===========
Weighted average number of
common shares outstanding - basic
and diluted............................. 17,162,855 12,067,309 12,067,309 9,075,864
============= =========== ============ ===========
</TABLE>
AS OF AS OF
JUNE 30, DECEMBER 31,
2000 1999
---------- -----------
(unaudited)
BALANCE SHEET DATA:
Cash ....................................... $2,178,639 $ 151,725
Total current assets ....................... $3,301,358 $ 790,220
Total assets ............................... $4,300,199 $ 1,124,783
Total current liabilities .................. $ 904,123 $ 1,330,725
Shareholders' equity (deficit) ............. $3,369,667 $ (237,265)
FORWARD-LOOKING STATEMENTS
Certain important factors may affect our actual results and could cause
those results to differ materially from any forward-looking statements made in
this prospectus or that are otherwise made by us or on our behalf.
"Forward-looking statements" are not based on historical facts and are typically
phrased using words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate" or "continue" and similar expressions or
variations.
Differences in actual results may be caused by factors such as those
discussed in "Risks of Investing in Intraco Shares" below as well as those
discussed elsewhere in this prospectus and in our filings with the SEC.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee that they will be
achieved. Except as we are required by applicable law, we do not intend to
update any of the forward-looking statements to conform these statements to
actual results.
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RISKS OF INVESTING IN INTRACO SHARES
THE SHARES OFFERED ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING MATTERS, AS WELL AS THE OTHER
INFORMATION IN THIS PROSPECTUS, BEFORE INVESTING. THE RISKS DESCRIBED BELOW ARE
NOT THE ONLY ONES INTRACO FACES. ADDITIONAL RISKS THAT WE DO NOT YET KNOW OF OR
THAT WE CURRENTLY THINK ARE IMMATERIAL MAY ALSO IMPAIR OUR OPERATIONS.
WE RECENTLY SHIFTED OUR BUSINESS FOCUS AND OUR BUSINESS MODEL IS STILL
UNDER DEVELOPMENT. With the hiring of Walt Nawrocki in 1999 as our chief
executive officer, we have shifted our business focus towards providing speech
recognition products and services. As a result of this shift in focus, our
business model is still in development. Although we are in discussions with
several prospective clients, we have not yet sold any of our newly developed
speech recognition products and services and demand for these products and
services is uncertain. Additionally, our previous financial history is not a
good indication of how the business is doing or how it is evolving. There can be
no assurance that our new business model will be successful.
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND THESE LOSSES ARE EXPECTED TO
CONTINUE IN THE FUTURE. For the year ended December 31, 1999 and the six months
ended June 30, 2000, we reported net losses of $1,438,895 and $1,436,226
respectively. As of December 31, 1999, we had an accumulated deficit of
$2,084,303, and shareholders' deficit of $237,635, although as a result of
certain private offerings, we have positive shareholders' equity of $3,369,667
as of June 30, 2000. Our business has never been profitable. There can be no
assurance that we will operate profitably in the future and that we will not
continue to sustain losses. Continued losses could materially and adversely
affect our business.
WE WILL NEED ADDITIONAL CAPITAL IN ORDER TO CONTINUE OUR OPERATIONS. We
require substantial working capital to build our ASP infrastructure, for
marketing and promotion, and to fund our general business operations. Without
any outside funding, we currently anticipate that we will have sufficient funds
to meet our anticipated needs for working capital and capital expenditures
through at least the next four months. After that, we are likely to need to
raise additional funds. We cannot be certain that any additional financing will
be available to us when needed and if available, whether it will be on favorable
terms. In addition, if we raise 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 our current shareholders and our
shareholders may experience additional dilution.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH SUCCESSFULLY. If we are
successful in implementing our business plan, our operations will expand
rapidly. This rapid expansion could place significant strain on our management,
financial and other resources. Our ability to manage future growth, if it
occurs, will depend upon our ability to control costs, significantly expand our
financial and operating capabilities, maintain our operations support systems
and expand, train and manage our employee base. If we are unable to do this
successfully, our prospects, financial condition and results of operations could
be materially adversely affected.
WE ARE DEPENDENT ON PRODUCTS PROVIDED THROUGH RELATIONSHIPS WITH THIRD
PARTIES. We obtain software products pursuant to agreements with Motorola,
Unisys, Nuance, and Lernout
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<PAGE>
and Hauspie. We intend to enter into additional agreements as may be necessary
in the future. We offer services based on the integration of these software
packages to clients as part of our ASP solution. The provision of such software,
as well as any additional software offerings, is critical to our ASP expansion
strategy. If one or more of our existing relationships with our key software
partners were to be terminated or not renewed, we could be faced with
discontinuing products or services or delaying or reducing introduction of
services unless we could find, license and offer equivalent software packages.
All of our third-party agreements are non-exclusive. Our competitors
could also license and offer software products that we offer as part of our ASP
services. We cannot be sure that our current strategic vendors will continue to
support the software we currently license from them in current form, nor can we
be sure that we will be able to adapt our systems to changes in such software.
Furthermore, we cannot be sure that financial or other difficulties will not be
faced by our vendors so as to have a material adverse effect on the software
offered by these vendors.
WE DEPEND ON THIRD PARTY SUPPLIERS FOR CERTAIN KEY INFRASTRUCTURE
COMPONENTS. We depend on certain third-party suppliers, including
telecommunications and network management software providers, to supply key
infrastructure components for the provision of our ASP services. Some of these
components or applications are only available from one or limited sources in the
quality and quantity we demand. Any failure to obtain necessary products or
services in a timely manner and at an acceptable cost could have a material
adverse affect on our business, results of operations and financial condition.
WE DEPEND ON CERTAIN KEY EMPLOYEES. Our success is dependent on the
services of Walt Nawrocki, our chief executive officer, and Jack Berger, our
president, as well as on other key personnel. The loss of the services of Mr.
Nawrocki, Mr. Berger or other key personnel could have a material adverse effect
on our business. We have entered into employment agreements with certain of our
key personnel, including Mr. Nawrocki and Mr. Berger. We do not currently
maintain key man life insurance policies for any of our officers or other
personnel.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY INFORMATION.
Our success is dependent, in part, on methodologies used in designing,
installing and integrating computer software and systems and other proprietary
intellectual property. We rely on a combination of nondisclosure and other
contractual arrangements and trade secret, copyright and trademark laws to
protect our proprietary rights and the proprietary rights of third parties. We
also enter into confidentiality agreements with our key employees and limit
distribution of proprietary information. There can be no assurance, however,
that the steps we take 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 our intellectual property rights.
WE MAY BE SUBJECT TO CLAIMS OR LIABILITY IF WE INFRINGE ON OTHERS'
INTELLECTUAL PROPERTY RIGHTS. Although we believe that our services do not
infringe on the intellectual property rights of others and that we have all
rights necessary to use the intellectual property employed in our business, we
are subject to the risk of claims alleging infringement of third-party
intellectual property rights. These claims, if made, could require us 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.
5
<PAGE>
Although our various dealer agreements do not generally allow us to use
the trademarks and trade names of these various manufacturers, the agreements do
permit us to refer to ourselves 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. We consider the use of
these trademarks and trade names in our marketing efforts to be important to our
business.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF
OUR REVENUES. For the first six months of 2000, approximately 23% of our total
revenues were derived from one customer and 68% from our top 10 customers. If we
were to lose any of our major customers, our operating results and financial
conditions could be adversely affected.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED TECHNICAL
PROFESSIONALS. Our success depends, in large part, on our ability to attract,
develop, motivate and retain technical professionals. As of June 30, 2000,
approximately 31% of our employees were technical professionals. Qualified
technical professionals are in great demand and are likely to remain a limited
resource for the foreseeable future.
There can be no assurance that we 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 our business, including
our ability to obtain new business, and adequately perform under existing
contracts, which could have a material adverse effect on our operating results
and financial condition.
WE MAY NOT BE ABLE TO SUCCESSFULLY ADJUST TO THE RAPID CHANGES TAKING
PLACE IN OUR INDUSTRY. Our success will depend in part on our ability to develop
solutions that keep pace with the continuing changes in speech recognition
technology, evolving industry standards and changing client preferences. There
can be no assurance that we will be successful in adequately addressing these
developments on a timely basis or that, if these developments are addressed, we
will be successful in the marketplace. In addition, there can be no assurance
that products or technologies developed by others will not render our services
noncompetitive or obsolete. Our failure to address these developments could have
a material adverse effect on our operating results and financial condition.
WE DEPEND ON JOINT MARKETING AGREEMENTS FOR THE ADVERTISING AND
PROMOTION OF OUR PRODUCTS. We currently have a joint marketing agreement with
Motorola and intend to enter into additional agreements in the future. We use
these agreements for our advertising and promotional programs. While these
programs have been available to us in the past, there is no assurance that these
programs will be continued. Any discontinuance or significant reduction of these
programs could have a material adverse effect on our operations and financial
results.
WE DEPEND ON THE FUTURE GROWTH AND ACCEPTANCE OF THE INTERNET AS A WAY
TO ACCESS INFORMATION AND TO CONDUCT BUSINESS FOR THE SUCCESS OF OUR BUSINESS
MODEL. Our 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,
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<PAGE>
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 a limited number of 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 of 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.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN OUR INDUSTRY. The market
for information technology 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 developers. Many of these competitors have significantly
greater financial, technical and marketing resources and greater name
recognition than we have. There can be no assurances that we will compete
successfully with our existing competitors or with any new competitors.
WE MAY NOT BE ABLE TO ADEQUATELY UPGRADE OR MODIFY OUR MANAGEMENT
INFORMATION SYSTEMS TO KEEP PACE WITH OUR GROWTH. We rely upon the accuracy and
proper use of our management information system to provide timely distribution
services, manage our inventory and track our financial information. To manage
our growth, we are continually evaluating the adequacy of our existing systems
and procedures and continue to update and integrate critical functions. We
anticipate that we will regularly need to make capital expenditures to upgrade
and modify our management information system, including software and hardware,
as we grow and the needs of our business change.
There can be no assurance that we will anticipate all of the demands
that our expanding operations will place on our management information system.
The occurrence of a significant system failure or our failure to expand or
successfully implement our systems could have a material adverse effect on our
operations and financial results.
BREACHES IN SECURITY COULD LEAD TO SERVICE INTERRUPTIONS OR DELAYS AND
LIABILITY AS A RESULT OF RELEASED CONFIDENTIAL CLIENT INFORMATION. Questions
surrounding the secure transmission of confidential information to and from our
secure data center form a barrier to the growth of our ASP services. Our ASP
services rely on encryption and authentication technology licensed from third
parties to provide the security required to safely transmit confidential
information. While we have implemented a variety of state-of-the-art network
security systems
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<PAGE>
to protect against unauthorized access, computer viruses, other intentional acts
and accidents, disruptions may nonetheless occur. Our clients may experience
service interruptions or delays as a result of accidental or intentional
disruptions, which could jeopardize the security of confidential client
information. This could potentially result in liability to us, loss of existing
clients, or the loss of reputation leading to difficulties in attracting new
clients. Although we plan to continuously upgrade our security systems, security
measures have been circumvented in the past and our security could be
circumvented in the future. The costs required to prevent or eliminate computer
viruses or to alleviate other security threats could be significant. Any
additional efforts required to address security issues could result in service
interruptions or delays, which would have a material adverse effect on our
business, results of operations and financial condition.
WE COULD BE SUBJECT TO LIABILITY FOR FAILURE TO PROVIDE OUR PRODUCTS
AND SERVICES TO OUR CLIENTS. Many of the engagements we plan to undertake
involve projects that are critical to the operations of our clients' businesses
and provide benefits that may be difficult to quantify. Our failure or inability
to meet a client's expectations in the performance of our services could
materially adversely affect our client's operations and therefore could give
rise to claims against us or damage our reputation, adversely affecting our
business, operating results and financial condition.
WE MAY NOT BE ABLE TO INTEGRATE ANY ACQUISITION CANDIDATES. We believe
that acquisitions are one of the methods we can use to increase our 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 our operating results and financial condition, including:
restructuring charges associated with the acquisitions; non-recurring
acquisition costs and expenses 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. There can be no assurances that we will be able to adequately
manage these risks.
OUR QUARTERLY RESULTS OF OPERATIONS FLUCTUATE SIGNIFICANTLY FROM
QUARTER TO QUARTER. We have experienced, and may in the future continue to
experience, fluctuations in our quarterly operating results. Factors that may
cause our quarterly operating results to vary include the success of new
services, the number of active client projects, the requirements of client
projects, the termination of major client projects, the loss of major clients,
the timing of new client engagements, and the timing of personnel cost
increases. The timing of revenues is difficult to forecast because our sales
cycle is relatively long and our services are impacted by both the financial
condition and management decisions of our clients, as well as by general
economic conditions. Because a high percentage of our expenses are relatively
fixed at the beginning of any period and our general policy is to not adjust our
staffing levels based upon what we view 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 our engagements are, and may be in the
future, terminable by our clients
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without penalty. A termination of a major project could require us to maintain
under-utilized employees, resulting in a higher than expected percentage of
unassigned professionals, or to terminate the employment of excess personnel.
Therefore, there can be no assurance that our results of operations will not be
below the expectations of investors for any given fiscal period or periods.
THE BOARD OF DIRECTORS MAY DESIGNATE PREFERRED STOCK WITH SUPERIOR
RIGHTS TO THOSE OF HOLDERS OF OUR COMMON STOCK. Our 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 our shareholders. The rights of the holders of our common stock will
be subject to, and may be adversely affected by, the rights of the holders of
preferred stock. Issuing shares of preferred stock, while providing flexibility
in connection with possible acquisitions or other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of us and
entrenching current management. In addition, the preferred stock may have other
rights, including economic rights senior to those of our common stock, and, as a
result, the issuance of preferred stock could have a material adverse effect on
the market value of our common stock.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION, BY-LAWS AND NEVADA
CORPORATE LAW MAY HAVE THE EFFECT OF DELAYING OR PREVENTING A CHANGE OF CONTROL.
A number of provisions of our Amended and Restated Certificate of Incorporation
and By-Laws and of the Nevada general corporation law relating to matters of
corporate governance, certain rights of directors, and the issuance of preferred
stock without shareholder approval, 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 shareholders
other than our management or principal shareholders consider such a transaction
to be in their best interest.
OUR STOCK PRICE IS VOLATILE. 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:
o current and anticipated results of operations;
o changes in our business, operations or financial results;
o general market and economic conditions;
o competition;
o the number of shares outstanding;
o the number of market makers in our stock; and
o 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
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Board of Directors. For the foreseeable future, it is anticipated that earnings,
if any, generated by our operations will be used to finance our growth.
SALES BY EXISTING SHAREHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK. If our shareholders sell substantial amounts of our common stock
(including shares issued upon the exercise of outstanding options and warrants),
the market price of our common stock could fall. We have outstanding 17,334,250
shares of common stock, of which 14,988,139 shares are "restricted securities"
under Rule 144. Our officers, directors and employees own options to
purchase up to 8,904,800 additional shares of common stock. The exercise prices
for some of these options are substantially below the current market price.
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.
DIVIDEND POLICY
We do not currently anticipate paying cash dividends for the
foreseeable future, but instead we plan to retain any earnings to fund our
growth. The decision to pay dividends on our common stock in the future will
depend on our ability to generate earnings, our need for capital, our overall
financial condition and such other factors as our Board of Directors deems
relevant.
PRICE RANGE OF OUR COMMON STOCK
Our common stock began trading under the symbol "INSY" on the OTC
Bulletin Board operated by the NASDAQ Stock Market, Inc. on April 29, 1999.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions, and may not represent actual transactions.
QUARTER ENDED HIGH LOW
---------------------------------- ---------- ----------
June 30, 1999 .................... $ 7.750 $ 1.500
September 30, 1999 ............... $ 2.250 $ 1.750
December 31, 1999 ................ $ 2.625 $ 0.875
March 31, 2000 ................... $ 8.850 $ 1.500
June 30, 2000 .................... $ 5.687 $ 1.562
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HOLDERS
As of August 18, 2000, there were approximately 469 holders of
record of our common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction
with our consolidated financial statements and the notes included elsewhere in
this prospectus.
OVERVIEW
We are a full-service information technology and telephony service
provider. We believe that our competitive advantage lies in our ability to
combine our in-house expertise with leading third party speech recognition
technologies (i.e., voice browsers and natural language engines) to create
comprehensive commercial solutions. We plan to deliver these advanced technology
solutions to small and midsized businesses such as websites/e-commerce companies
and larger businesses such as telecommunications companies. Ultimately, these
solutions will voice-enable a wide range of applications such as websites,
e-commerce, auctioning, paging, e-mail and unified messaging.
We are currently seeking to execute an aggressive growth strategy that
includes both internal growth through product, sales and marketing expansion and
external growth through mergers, acquisitions, joint ventures and similar
transactions. We are currently seeking to acquire companies in the
telecommunications, Internet service provider and network systems integration
areas. Additionally, we will incorporate new products and technologies into our
products including phone access to Internet websites and voice recognition
driven auto-attendant products, through relationships we are establishing with
Motorola, Microsoft, Unisys and Phonetic Systems.
We were incorporated in Florida in March 1990. In April 1999, we
completed an exchange offer with Custom Touch Electronics, Inc., 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 Custom Touch shares. Thereafter, Custom
Touch changed its name to Intraco Systems, Inc.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED 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. We have
had a contract with Compaq Computer (previously Digital
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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 revenues for the
corresponding period in 1998. Cost of service contracts were $313,138, or 82.5%,
of service contract revenues for the year ended December 31, 1999, compared to
$1,073,835, or 73.7%, for the corresponding period in 1998. As we transitioned
into the higher margin, higher growth area of telecommunications services from
its traditional hardware and network support services, we have been less
impacted by the margin pressure on hardware being experienced throughout the
industry.
We expect this situation to continue to improve as a greater proportion
of sales comes from our newer product offerings. 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 EXPENSES. 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 costs and the
decision to aggressively pursue an acquisition strategy.
INTEREST EXPENSE. Interest expense, net of interest income, decreased
$33,487 to $1,090 for 1999 from net interest expense of $34,577 in 1998.
NET LOSS. We reported a net loss of $1,438,895 for the year ended
December 31, 1999 and a net loss of $80,195 for 1998.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased 81.7% to $3,092,349 for the six months
ended June 30, 2000 from $1,701,613 for the six months ended June 30, 1999. This
increase was primarily due to a $1,320,306 increase in systems/networks
revenues. Systems/networks revenues accounted for approximately 87% of revenues
in the 2000 period compared to approximately 81% for the corresponding period in
1999.
COST OF REVENUES. Cost of revenues increased 92.3% to $2,384,410 for
the six months ended June 30, 2000 as compared to $1,239,980 for the six months
ended June 30, 1999. Cost of systems were $2,171,839, or 80.3%, of systems
revenues for the six months ended June 30, 2000, compared to $1,033,293, or
74.7%, of systems revenue for the corresponding period in 1999. Cost of service
contracts were $212,571, or 54.7%, of service contract revenue for the six
months ended June 30, 2000, compared to $206,687, or 65%, for the corresponding
period in 1999. Although Intraco continues to be impacted by the margin pressure
on hardware being experienced throughout the industry, Intraco expects this
situation to improve as a greater proportion of sales come from its newer
product offerings. These products include computer telephony, speech
recognition, information technology outsourcing and others. Although there can
be no assurance that this strategy will prove successful, management believes it
is necessary for Intraco's long-term viability.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended June 30, 2000 were $2,163,454,
compared to $764,007 for the six months ended June 30, 1999, an increase of
$1,399,447, or 183.2%. Of the dollar increase, $940,169 represented increased
payroll and commission costs in connection with the hiring of additional
personnel to prepare Intraco to enter new markets and to deliver the new
products and services, $58,803 primarily represented increased professional
fees, $56,804 represented increased public relations costs in connection with
engaging a public relations firm, $48,144 represented increased advertising
expenses, and $75,243 represented increased insurance costs. The remaining
increase was attributable to additional selling, general and administrative
expenses.
INTEREST INCOME. Interest income, net of interest expense, increased by
$16,431 to $14,955 for the six months ended June 30, 2000 as compared to net
interest expense of $1,476 for the six months ended June 30, 1999.
NET LOSS. As a result of the foregoing, Intraco reported a net loss of
$1,436,226 for the six months ended June 30, 2000 compared to a net loss of
$303,696 for the six months ended June 30, 1999, an increase of $1,132,530.
LIQUIDITY AND CAPITAL RESOURCES
Intraco has historically 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 received approximately $5.4 million from equity
private placements during the first half of 2000. Intraco will require
additional funding to cover current operations and the implementation of its
business plan. There can be no assurance that any additional funds will be
raised or if raised, on favorable terms.
At December 31, 1999, Intraco's current assets totaled $790,220 and
current liabilities totaled $1,330,725, resulting in a negative working capital
ratio. At June 30, 2000, Intraco's current assets were $3,301,358 and current
liabilities were $904,123. Intraco had long-term liabilities of $31,323 and
$26,409 at December 31, 1999 and June 30, 2000, respectively. Management is
seeking to raise additional investment capital, both for working capital 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 to
$32,245 at the end of 1998. Net cash used in operations for the year ended
December 31, 1999 totaled $1,104,543. This deficit was funded by the sale of
common and preferred stock. Intraco also repaid $294,147 of debt and incurred
costs of $283,153 in recapitalizing and merging with Custom Touch.
Intraco had $2,178,639 of cash on hand at June 30, 2000, compared to
$151,725 at December 31, 1999. Operating activities for the six months ended
June 30, 2000 used cash of $2,286,442, primarily due to an increase in accounts
receivable of $333,942 in support of increased revenues, pay down of trade
payables of $819,639 and net loss of $1,436,226. Net cash used in investing
activities was $598,868, reflecting the purchase of certain fixed assets and
investments in licensing agreements. Financing activities provided cash in the
amount of $4,912,224, primarily due to issuance of capital stock of $5,059,669,
which was partially offset by repayment of $127,838 of long-term debt.
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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. Intraco has no current arrangements with respect
to any possible acquisition. Funding for such plans may be obtained through the
issuance of additional equity, through additional borrowings and through 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.
ABOUT INTRACO SYSTEMS, INC.
OVERVIEW
Intraco is a full-service information technology and telephony products
and services provider. We believe that our competitive advantage lies in our
ability to combine all our in-house expertise with leading speech recognition
technologies (i.e., voice browsers and natural language engines) to create
comprehensive commercial solutions. Intraco is delivering these advanced
technology solutions, on a business-to-business, or B2B, basis, to small and
midsized businesses such as websites/e-commerce companies and larger businesses
such as telecommunications companies. Ultimately, these solutions will
voice-power a wide range of applications such as websites, e-commerce,
auctioning, paging, e-mail and unified messaging.
We believe that with the emergence of the Internet, especially 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 expected 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 business-to-consumer, or 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, we believe that
we are well positioned to capture substantial market share as companies become
increasingly familiar with and recognize the need for advanced speech
recognition technologies deployed on an ASP basis.
Intraco currently offers several suites of comprehensive commercial
solutions for speech recognition based products and services designed to use the
Internet and telecommunications applications. It has fully operational
prototypes of its solutions, some of which are in the client evaluation stage.
These products include:
- Voice ASP: the voice enablement of websites, which will be
offered on an ASP basis; and
- 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.
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Intraco has been able to create these commercial solutions based upon
several advantages. Our senior management has extensive knowledge of the voice
recognition industry. Intraco's chief executive officer, Walt Nawrocki, spent
more than 30 years with IBM pioneering new technologies, where he was ultimately
responsible for the creation and ongoing management of IBM's 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 several separate technologies
into one cohesive solution.
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 through portals that cater to small and midsized 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. Intraco intends to pursue these customers by using a
sales team that has more than 150 years of combined experience in the technology
industry. Additionally, Intraco's strategic relationships provide it with proven
marketing partners, with a history of successful products and services.
THE INTRACO SOLUTION
Intraco's products and services are designed to use 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. Through 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 that Intraco currently 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
critical software using its proprietary technology, has enabled Intraco
to produce superior, first-to-market, commercially viable solutions.
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 newly
developed speech recognition and other
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technologies. Each of these firms has expended significant amounts of
resources developing these components, such as voice browsers and
natural language engines, but lacks the ability to integrate these
disparate pieces of software into a set of products and services that
can be delivered to the end user. Intraco has obtained access to these
products because of its expertise in the speech recognition sector and
because it is currently the only firm that can integrate these
applications into a commercially viable product.
Intraco currently has the following agreements in place:
o 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.
o Unisys: Letter of intent for the joint marketing of Unisys'
Natural Language Engine as it pertains to Intraco's voice
enabling capabilities.
o 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 in 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 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 products and services that use the Internet and standard
telecommunications applications. This effort is spearheaded by Mr.
Nawrocki, our chief executive officer, who has significant experience
in developing and integrating voice automation technologies. Mr.
Nawrocki spent more than 30 years with IBM, where he became manager for
worldwide product development and business management, where he managed
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 its 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
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for the use in Internet applications. As such, we believe we are well
positioned to capture substantial market share as companies become
increasingly familiar with, and realize the need for, advanced speech
recognition technologies.
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
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, however, 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 and
Hauspie, IBM, Dragon Systems, Voice Control Systems, Nuance, Nortel, SpeechWorks
and Lucent, have spent substantial 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.
International Data Corporation estimates that there were 142 million web users
worldwide at the end of 1998. International Data Corporation anticipates that
number will grow to approximately 502 million users by the end of 2003.
International Data Corporation also estimates that revenue generated worldwide
from online commerce will grow from $50 billion in 1998 to exceed $1.3 trillion
by 2003.
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APPLICATION SERVICE PROVIDER MARKET
ASPs are service-oriented firms that provide contractual services,
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, or 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 information technology, or 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 use leading applications without the cost
and burden of owning the leading business software applications.
According to International Data Corporation, 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, or 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
new application environments 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 midsized businesses.
Unable to afford the huge fixed costs of network servers and IT staff to support
them, small and midsized 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 receive access to 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 midsized businesses should be able to better
compete with their larger competitors.
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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 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 International Data Corporation, 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. International Data Corporation and Dataquest estimate that the
ASP market will achieve $4.5 billion in pure ASP revenue and $22 billion in ASP
and integration revenue in 2003.
Today, computer telephony and voice technologies in general are
becoming increasingly important for small and midsize businesses in order to
survive and to successfully compete in their respective industries. At the same
time, these integrated solutions are becoming increasingly complex to design,
implement and support, thereby further helping to justify the outsourcing of the
implementation and support of these solutions.
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 10 times as many telephones as
computers with Internet access, and phones, especially cellular 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.
The infrastructure, typically rack mounted, has multiple voice circuit
trunk lines coming in from the local exchange carriers central office. This
receives the incoming calls and can originate outgoing calls (such as event
alerts). The software functions are:
o Voice Browser - this is the "voice gateway" through which the
computer-based conversation is managed.
o Authentication, billing and accounting - to track all system
usage from which bills are created.
o Voice recognition - to recognize and interpret your responses
to prompts.
o 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 and Nuance, all having been instrumental in
the development of speech
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recognition software. For example, Motorola and Microsoft each offers its own
proprietary voice browser software enabling voice access to the Web. Companies
such as 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 their information technology needs by allowing
Intraco to provide the most advanced fundamental building blocks for small to
midsized 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
websites. Through the Voice ASP suite of services, Intraco offers a solution
that will provide speech and voice recognition services to these websites on an
ASP basis through network service providers, or 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 that they provide to
websites in addition to the standard Web hosting services.
Intraco will provide this service directly and will also offer its
Voice ASP services to B2B portals, which will subsequently offer the Voice ASP
service as part of its standard service offerings. Additionally, Intraco will
provide this new service directly by hosting these mirrored sites for customers
as well as scripting and support services 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 their 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 that Intraco
intends to target
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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
to respond as well.
VIRTUAL OFFICE ASP
With the Virtual Office ASP suite, Intraco is developing the basic
building blocks for a business' telecommunications needs. The basic services
offered will include: voice-enabled e-mail, a service which allows a person to
access his/her e-mail and have it read to him/her 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 midsized company that does not want to expend resources to hire
operators and/or secretaries. Instead, even a start-up can portray a "high-tech"
image by subscribing to these services, which provides such services as
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.
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 midsized 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 using its own sales staff and through 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 significant name recognition for marketing events and
programs.
The current sales management team at Intraco has more than 150 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.
Intraco's marketing staff intends to promote Intraco as a leading
provider of voice enabled services through an ongoing public relations program
including trade shows, professional seminars and other promotional venues.
COMPETITION
The new and rapidly changing ASP market comprises as many as 200
individual ASPs. In the near future, however, analysts do not expect a great
deal of head-to-head competition among ASPs in the small and midsized business
market. The speech recognition for Internet
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<PAGE>
applications sector is even further in its infancy. Management believes this is
an advantage for Intraco, as it is the only speech recognition applications
vendor to have application development expertise for both Microsoft's and
Motorola's products. By combining this technology with its own in-house
expertise, Intraco believes it maintains an 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
infrastructures have 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 expertise to integrate each of the components into a
single source commercial solution.
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 its protected
proprietary
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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 June 30, 2000, Intraco had a total staff of 39 employees,
composed of 12 technical professionals, 15 sales and marketing personnel and 12
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.
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 five-year renewal options.
LEGAL PROCEEDINGS
In November 1999, 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 filed suit
against AIM 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 responded to the claims against it. Discovery
has not yet commenced.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following personnel serve as the directors and executive officers
of Intraco:
DIRECTOR
NAME AGE POSITION SINCE
Walt Nawrocki 55 Chief Executive Officer and 2000
Director
Jack Berger 46 President and Director 1999
Robert Marcus 57 Chief Financial Officer, --
Secretary and Treasurer
Robert Hildreth, Jr 66 Chairman of the Board of 1999
Directors
William D. Hager 53 Director (Audit Committee Member) 2000
Benjamin W. Krieger 62 Director (Audit Committee Member) 2000
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<PAGE>
WALT NAWROCKI joined Intraco in November 1999 as chief executive
officer. In 2000, he was appointed to Intraco's Board of Directors. Prior to
joining Intraco, Mr. Nawrocki served as president, chief executive officer and
director of Registry Magic Inc. Under Mr. Nawrocki's direction, Registry Magic
positioned its Virtual Operator as the industry sales leader for speech-driven
auto-attendant products, and created the largest dealer network and garnered the
most awards in the speech recognition industry. Mr. Nawrocki also forged
agreements with Microsoft and Motorola to speech-enable Internet websites using
technology from both companies. Prior to that, Mr. Nawrocki spent more than 30
years at IBM, where he held positions of increasing responsibility, eventually
becoming manager for worldwide product development and business management in
August of 1992. In this capacity, he oversaw a number of business areas and was
responsible for acquisitions, joint development and OEM licensing programs. Mr.
Nawrocki assembled the speech recognition team at IBM. His working teams have
earned 17 industry awards for technology development and customer satisfaction.
JACK S. BERGER founded the predecessor to Intraco in 1990 and is
currently Intraco's president and director. Mr. Berger has more than 20 years of
experience in the domestic and international computer systems industry. Intraco
initially specialized in exporting computer hardware, and in doing so
established strategic relationships with major international information
technology companies that continue today. Mr. Berger later refocused the product
and marketing strategy into higher margin, higher value-added technology
solutions, and shifted focus to the domestic market. Prior to founding the
predecessor to Intraco, Mr. Berger held several key positions in the Real Time
Products Division of Computer Products, Inc. He supervised production control
activity, and he also established and managed the sales support department,
which was responsible for supporting all sales activity on a global basis. His
leadership resulted in the division meeting its quarterly revenue goals ahead of
schedule for the first time. Mr. Berger was then promoted to international sales
manager, where he established and managed a worldwide organization of
distributors that continuously met its revenue goals. Mr. Berger has a Bachelor
of Science in Electrical Engineering from the University of Miami.
ROBERT MARCUS joined Intraco in January 1999 as chief financial
officer, secretary and treasurer. Before joining Intraco, Mr. Marcus was a
founder and partner in American Imprints, LLC, an advertising specialty company.
Prior to that, he served as chief executive officer of In-Store Opportunities,
Inc., a marketing and display company serving major food manufacturers. While
there he raised $8 million in investment capital, and built a nationwide network
of field representatives. As chief operating officer of Pioneer Communications
Network, a publicly traded publishing company, Mr. Marcus managed the company's
initial public offering. He also worked in various positions for the information
resources group of Xerox Corporation from 1972 to 1985, including manager of
financial planning and analysis, assistant controller, and manager of business
development, where he was responsible for mergers and acquisitions. During this
time, Mr. Marcus was instrumental in completing the acquisition of the microfilm
business of THE NEW
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YORK TIMES. He was also a member of the turnaround team that brought two of
Xerox's information group companies to profitability. Mr. Marcus earned a
Bachelor of Science from C.W. Post College and a Masters of Business
Administration from the University of Connecticut.
ROBERT HILDRETH, JR. is the Chairman of the Board of Directors and was
the first member of Intraco's Board of Advisors formed in May 1998. Mr. Hildreth
brings a broad scope of experience to Intraco, with more than 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 chief
executive officer 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.
Intraco's directors hold their positions until the next annual meeting
of shareholders and until their successors have been duly elected and qualified.
During 2000, the Board of Directors established an audit committee, whose
members currently are William Hager and Benjamin Krieger. Our non-employee
directors receive compensation in the form of stock options upon appointment and
reimbursement of expenses incurred while attending Board of Directors' meetings.
Our officers hold office until the first meeting of the Board of
Directors following the annual meeting of our shareholders and until their
successors have been chosen and qualified, subject to early removal by the Board
of Directors.
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<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table summarizes all compensation earned by, or paid to
our president (who served as our principal executive officer), for services
rendered in each of the last three fiscal years. No other executive officer
earned total salary and bonus in excess of $100,000 during the last three fiscal
years.
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS
--------------------------- ---- ------------- -----
Jack S. Berger, President 1999 137,800 0
1998 137,800 0
1997 99,000 0
------------------------
(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. The agreement now expires
December 31, 2002. The agreement provides for an annual salary of $160,000, with
base salary adjustments 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 at any time prior to December 31, 2002,
provided that Intraco shall pay Mr. Berger an amount equal to payment at his
base salary rate from the date of termination through December 31, 2002, 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 or 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 by him under the
agreement, engages in any conduct that 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 Intraco 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
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, with base salary
adjustments 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.
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<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 in base salary will be at the discretion of the Board of
Directors.
STOCK OPTION PLAN
Intraco has adopted a stock option plan to attract and induce officers,
directors and key employees of Intraco to remain with Intraco. The plan provides
for the grant of options that qualify as incentive stock options under Section
422(a) of the Internal Revenue Code of 1986, as amended, and nonstatutory
options. The stock option plan was approved in 1998 and amended in 1999 to
increase the number of shares available for grant to 10,000,000.
As of June 30, 2000, options to purchase an aggregate of 8,994,800
shares of common stock were outstanding under the plan with exercise prices of
$0.25 to $4.87. These options vest immediately to over a five-year period and
expire from two years to 10 years from the date of grant. In 1999, options to
purchase an aggregate of 6,789,800 shares were granted, including 4,000,000 to
Mr. Nawrocki and 2,000,000 to Mr. Marcus.
The Board may terminate the plan or may amend the plan as it may deem
advisable. The Board may unilaterally amend the plan and incentive awards as it
deems appropriate to ensure compliance with Rule 16b-3 and to cause incentive
awards to meet the requirements of the Internal Revenue Code and the regulations
thereunder.
All present and future employees of Intraco or of any parent or
subsidiary of Intraco and any consultant retained to provide services to
Intraco, and who is selected by the committee to be eligible to receive
incentive awards under the plan are entitled to receive options under the plan.
All present and future non-employee directors are eligible to receive
nonstatutory 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 common 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 be 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 be less than 85% of fair market
value of such shares on the date of grant.
PRINCIPAL SHAREHOLDERS
The following table shows information, as of the date of this
prospectus, regarding our common stock owned of record or beneficially by (i)
each shareholder who we know is the beneficial owner of more than of 5% of the
outstanding shares of our common stock; (ii) each director and executive
officer; and (iii) all directors and executive officers as a group. Each
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<PAGE>
shareholder listed below has sole voting and investment power. As of the date of
this prospectus, a total of 17,334,250 shares of our common stock and 1,420,900
shares of our preferred stock, which are convertible into a like number of
shares of common stock, are issued and outstanding.
In accordance with the SEC rules, shares that are not outstanding but
that are issuable upon the exercise of immediately exercisable options,
warrants, rights or conversion privileges have been included for the purpose of
computing the percentage of outstanding shares owned by the individual owning
the convertible security or right, but not when computing the percentage for any
other person.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP PERCENT OF COMMON
NAME AND ADDRESS (1) OF COMMON STOCK STOCK BENEFICIALLY OWNED
-------------------- --------------- ------------------------
<S> <C> <C>
Jack Berger(2) 8,109,000 46.8%
Walt Nawrocki(2) 4,000,000(3) 18.7
Robert Marcus 2,000,000(4) 10.3
Robert Hildreth, Jr. 235,400(5) 1.3
William D. Hager 170,000(6) *
Benjamin W. Kreiger 90,000(7) *
All executive officers and directors as 14,604,400 61.6
a group (six persons)
</TABLE>
-------------------------------
*Less than 1%
(1) The address of all persons listed above is 3998 Florida Atlantic
University Boulevard, Suite 210, Boca Raton, Florida 33431.
(2) Messrs. Berger and Nawrocki have entered into a voting agreement with
respect to their shares. See "Certain 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 100,000 shares of common stock and options to acquire 70,000
shares.
(7) Includes 20,000 share of common stock and options to acquire 70,000
shares.
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<PAGE>
SELLING SHAREHOLDERS
The following table shows certain information as of the date of this
prospectus regarding the number of shares of our common stock beneficially owned
by each selling shareholder and the number of shares each selling shareholder is
including for sale in this prospectus.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF NUMBER OFFERED
COMMON STOCK BEFORE BY SELLING BENEFICIAL OWNERSHIP
SELLING SHAREHOLDER OFFERING SHAREHOLDER AFTER SALE(1)
-------------------------- ------------------------- ---------------- ---------------------
NUMBER PERCENT NUMBER PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Amro International, S.A 668,000 3.8% 668,000 0 *
Anegada Fund, Ltd. 336,000 1.9 336,000 0 *
Aspen International, Ltd. 668,000 3.8 668,000 0 *
BiCoastal Consulting Corp. 668,000 3.8 668,000 0 *
Robert B. Dalglish 346,000 2.0 346,000 0 *
Dean Witter Reynolds, as 136,000 1.0 136,000 0 *
custodian for Robert B.
Dalglish IRA SEP
Intercoastal Financial 393,120 2.2 393,120 0 *
Services Corp.
Magellan International, 668,000 3.8 668,000 0 *
Ltd
Peter C. Morse 668,000 3.8 668,000 0 *
Pleiades Investment 468,000 2.7 468,000 0 *
Partners, L.P.
Tonga Partners, L.P. 1,200,000 6.7 1,200,000 0 *
</TABLE>
------------------------------
* Less than 1%.
(1) Assumes that all shares offered for sale in this prospectus are sold.
CERTAIN TRANSACTIONS
From time to time, Intraco has loaned funds and sold products to
Intraco Systems Pty., Ltd., an Australian corporation which is indirectly
controlled by Jack S. Berger, Intraco's president. In 1998, Intraco sold
products valued at $235,255 and received cash payments of $199,126. The balance
remaining due to Intraco for those products, together with the balance due from
the prior year's sales, totaled $169,539 and 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 be uncollectible.
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<PAGE>
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 Custom
Touch, 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 Custom Touch shares. Upon
the completion of the exchange, the prior shareholders and promoters of Custom
Touch held 2,429,489 shares and the Intraco shareholders held 10,531,500 shares.
Thereafter, Custom Touch 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 March 2000, Jack S. 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. Each 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.
OUR SECURITIES
The following is a summary of certain terms and provisions of our
capital stock, which is qualified in its entirety by reference to our amended
and restated certificate of incorporation. A copy of the amended and restated
certificate of incorporation has been filed as an exhibit to, or incorporated by
reference into, the registration statement of which this prospectus forms a
part.
Under the amended and restated certificate of incorporation, the
authorized but unissued and unreserved shares of our capital stock will be
available for issuance for general corporate purposes, including, but not
limited to, possible stock dividends, future mergers or acquisitions, or private
or public offerings. Except as may otherwise be required, shareholder approval
will not be required for the issuance of those shares.
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par
value $.001 per share. As of the date of this prospectus, 17,334,250 shares of
common stock and 1,420,900 shares of preferred stock are outstanding.
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<PAGE>
COMMON STOCK
Each share of our common stock entitles the holder to one vote on all
matters submitted to a vote of the shareholders. The holders of common stock are
entitled to receive dividends, when, as and if declared by the Board of
Directors, in its discretion, from funds legally available therefor. We do not
currently intend to declare or pay cash dividends in the foreseeable future, but
rather intend to retain any future earnings to finance the expansion of our
businesses. If we liquidate or dissolve, the holders of our common stock are
entitled to share ratably in our assets, if any, legally available for
distribution to shareholders after the payment of all of our debts and
liabilities and payment of the liquidation preference of any outstanding shares
of preferred stock.
Our common stock has no preemptive rights and no subscription,
redemption or conversion privileges. Our common stock does not have cumulative
voting rights, which means that the holders of a majority of the outstanding
shares of our common stock voting for the election of directors can elect all
members of the Board of Directors. A majority vote is also sufficient for other
actions that require the vote or concurrence of shareholders.
PREFERRED STOCK
Our Board of Directors has the authority to issue up to 10,000,000
shares of preferred stock in one or more series and to fix the number of shares
constituting any such series, the voting powers, designation, preferences and
relative participation, option or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights and dividend
rate, terms of redemption (including sinking fund provisions), redemption price
or prices, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by the shareholders.
We have designated 2,550,000 shares of preferred stock as Series
A Convertible Redeemable Preferred Stock, of which 448,500 shares are currently
outstanding. Each share is convertible into one share of our common stock,
subject to adjustment in certain circumstances. Each share of Series A preferred
stock is entitled to receive a cumulative dividend of 7% per annum, payable
quarterly. Each share has a liquidation value of $1.00. We may redeem the shares
at any time for $1.00 per share. Each share of Series A preferred stock is
entitled to one vote per share and votes together with our common stock, unless
otherwise required by law.
We have designated 2,550,000 shares of preferred stock as Series B
Convertible Redeemable Preferred Stock, of which 972,400 shares are currently
outstanding. Each share is convertible into one share of our common stock,
subject to adjustment in certain circumstances. We may redeem the shares at any
time for $1.50 per share at our option.
"ANTI-TAKEOVER" PROVISIONS
Although the Board of Directors is not currently aware of any takeover
attempts, our certificate of incorporation and by-laws contain certain
provisions that may be deemed to be "anti-takeover" because they may deter,
discourage or make more difficult the assumption of control of the company by
another corporation or person through a tender offer, merger, proxy contest or
similar transaction or series of transactions. These provisions were adopted
unanimously by our Board of Directors and approved by our shareholders.
AUTHORIZED BUT UNISSUED SHARES. We authorized 100,000,000 shares of
common stock and 10,000,000 shares of preferred stock. These shares were
authorized for the purpose of providing our Board of Directors with as much
flexibility as possible to issue additional shares for proper corporate
purposes, including equity financing, acquisitions, stock dividends, stock
splits, other grants of stock options, and other purposes. The issuance of
shares of preferred
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<PAGE>
stock may have an adverse effect on the holders of our common stock. See
"Preferred Stock," above. Our shareholders do not have preemptive rights with
respect to the purchase of any shares. Therefore, such issuances could result in
a dilution of voting rights and book value per share as to our common stock.
NO CUMULATIVE VOTING. Our by-laws do not contain any provisions for
cumulative voting. Cumulative voting entitles shareholders to as many votes as
equal the number of shares owned by such holder multiplied by the number of
directors to be elected. A shareholder may cast all these votes for one
candidate or distribute them among any two or more candidates. Thus, cumulative
voting for the election of directors allows a shareholder or group of
shareholders that hold less than 50% of the outstanding shares voting to elect
one or more members of a board of directors. Without cumulative voting for the
election of directors, the vote of holders of a plurality of the shares voting
is required to elect any member of a board of directors and would be sufficient
to elect all the members of the board being elected.
GENERAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The overall effect of these
provisions may be to deter a future tender offer or other takeover attempt that
some shareholders might view to be in their best interest, as the offer might
include a premium over the market price of our common stock at that time. In
addition, these provisions may have the effect of assisting our current
management in retaining its positions and better enable it to resist changes
that some shareholders may want to make if dissatisfied with the conduct of our
business.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 17,334,250 shares of our common stock outstanding as of the date
of this prospectus, 14,988,139 shares of common stock are restricted securities,
as that term is defined in Rule 144 promulgated under the Securities Act.
Of the 17,334,250 shares currently outstanding, 8,249,400 shares are
owned by our affiliates, as that term is defined under the Securities Act.
Absent registration under the Securities Act, such as under this prospectus, the
sale of these shares is subject to Rule 144. Under Rule 144, if certain other
conditions are satisfied, a person (including an affiliate of the company) who
has beneficially owned restricted shares of common stock for at least one year
is entitled to sell within any three-month period a number of shares up to the
greater of 1% of the total number of outstanding shares of common stock, or if
the common stock is quoted on Nasdaq or an exchange, the average weekly trading
volume during the four calendar weeks preceding the sale. A person who has not
been our affiliate for at least three months immediately preceding the sale, and
who has beneficially owned the shares of common stock for at least two years, is
entitled to sell the shares under Rule 144 without regard to any of the volume
limitations described above.
No prediction can be made as to the effect, if any, that sales of
shares or the availability of shares for sale as described above will have on
the market prices of the common stock prevailing from time to time.
Nevertheless, the possibility that substantial amounts of common stock may be
sold in the public market may adversely affect prevailing prices for the common
stock and could impair our ability to raise capital in the future through the
sale of equity securities.
32
<PAGE>
HOW THE SHARES MAY BE DISTRIBUTED
The selling shareholders may sell their shares of common stock in
various ways and at various prices. Some of the methods by which the selling
shareholders may sell their shares include:
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers or makes arrangements for other
brokers to participate in soliciting purchasers;
o privately negotiated transactions;
o block trades in which the broker or dealer will attempt to
sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by
that broker or dealer for the selling shareholder's account
under this prospectus in the over-the-counter market at prices
and on terms then prevailing in the market;
o sales under Rule 144 rather than using this prospectus;
o a combination of any of these methods of sale; and
o any other legally permitted method.
The applicable sales price may be affected by the type of transaction.
The selling shareholders may also pledge their shares as collateral for
margin loans under their customer agreements with their brokers. If there is a
default by the selling shareholders, the brokers may offer and sell the pledged
shares. When selling their shares of common stock, the selling shareholders
intend to comply with the prospectus delivery requirements under the Securities
Act, by delivering a prospectus to each purchaser. We intend to file any
amendments or other necessary documents in compliance with the Securities Act
that may be required in the event a selling shareholder defaults under any
customer agreement with brokers.
Brokers and dealers may receive commissions or discounts from the
selling shareholders (or, if the broker-dealer acts as agent for the purchaser
of the shares, from that purchaser) in amounts to be negotiated. These
commissions are not expected to exceed those customary in the types of
transactions involved.
We cannot estimate at the present time the amount of commissions or
discounts, if any, that will be paid by the selling shareholders in connection
with the sales of the shares.
The selling shareholders and any broker-dealers or agents that
participate with the selling shareholders in sales of the shares may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. In that event, any commissions received by the
33
<PAGE>
broker-dealers or agents and any profit on the resale of the shares purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
Under the securities laws of certain states, the shares may be sold in
those states only through registered or licensed broker-dealers. In addition,
the shares may not be sold unless the shares have been registered or qualified
for sale in the relevant state or unless the shares qualify for an exemption
from registration or qualification.
We have agreed to pay all fees and expenses incident to the
registration of the shares, including certain fees and disbursements of counsel
to the selling shareholders. We have agreed to indemnify the selling
shareholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
Certain of the selling shareholders have also agreed to indemnify us
and our directors, officers, agents and representatives against certain
liabilities, including certain liabilities under the Securities Act.
The selling shareholders and other persons participating in the
distribution of the shares offered under this prospectus are subject to the
applicable requirements of Regulation M promulgated under the Exchange Act in
connection with sales of the shares.
LEGAL MATTERS
Certain legal matters with respect to the securities offered by this
prospectus will be passed upon by Broad and Cassel, a partnership including
professional associations, Miami, Florida.
EXPERTS
Our Consolidated Financial Statements as of December 31, 1999 and for
each of the years ended December 31, 1999 and 1998 included in this prospectus
have been included herein in reliance upon the reports of Daszkal Bolton Manela
Devlin & Co., independent certified public accountants, which appear elsewhere
in this prospectus, and are included upon the authority of this firm as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 with
respect to the securities being offered hereby. This prospectus does not contain
all of the information set forth in the registration statement, as permitted by
the rules and regulations of the SEC. For further information, you should refer
to the registration statement and to the exhibits filed with the registration
statement. Each statement made in this prospectus referring to a document filed
as an exhibit to the registration statement is qualified by reference to the
exhibit for a complete statement of its terms and conditions.
34
<PAGE>
We also file annual, quarterly and special reports and other
information with the SEC. You may read and copy any report or document we file,
and the registration statement, including the exhibits, may be inspected at the
SEC's public reference rooms located at 450 Fifth Street, N.W., Washington, D.C.
20549; at 7 World Trade Center, Suite 1300, New York, New York 10048; and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our
SEC filings are also available to the public from the SEC's web site at:
HTTP://WWW.SEC.GOV.
We will provide without charge to each person, including any beneficial
owner, to whom a prospectus is delivered, upon written or oral request of that
person, a copy of any and all of the information that has been incorporated by
reference in this prospectus (excluding exhibits unless those exhibits are
specifically incorporated by reference into the documents requested). Please
direct such requests to the chief financial officer, Intraco Systems, Inc., 3998
FAU Boulevard, Suite 210, Boca Raton, Florida 33431, telephone number (561)
367-0600.
You should only rely on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information. Our common stock is not being offered in any state
where the offer is not permitted. You should not assume that the information in
this prospectus is accurate as of any date other than the date on the front of
those documents.
35
<PAGE>
INTRACO SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report.............................................F-1
Balance Sheets as of December 31, 1999 and 1998..........................F-2
Statements of Operations for the Years Ended December 31, 1999
and 1998 ..............................................................F-4
Statements of Changes in Stockholders' Deficit for the Years
Ended December 31, 1999 and 1998 ......................................F-5
Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.............................................F-6
Notes to Financial Statements............................................F-7
Balance Sheet as of June 30, 2000 (unaudited)...........................F-14
Statements of Operations for the Three and Six Months ended
June 30, 2000 and 1999 (unaudited) ...................................F-15
Statements of Cash Flows for the Three and Six Months
ended June 30, 2000 and 1999 (unaudited) .............................F-16
Notes to Financial Statements...........................................F-17
i
<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
F-1
<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.
F-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.
F-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.
F-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.
F-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.
F-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 midsize 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.
F-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
=========
F-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.
F-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.
F-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.
F-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 $ -- $ --
========= =========
F-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.
F-13
<PAGE>
INTRACO SYSTEMS, INC.
CONDENSED BALANCE SHEET
JUNE 30, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $2,178,639
Accounts receivable, net 869,364
Inventory 120,495
Prepaid expenses 132,860
----------
Total current assets $3,301,358
----------
Property and equipment, net 737,961
Other assets:
Due from related party 29,227
Goodwill, net 180,136
Deposits 18,184
License agreement, net 33,333
----------
Total other assets 260,880
----------
Total assets $4,300,199
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 206,313
Deferred revenue 213,932
Accrued expenses 208,028
Customer deposits 11,355
Capital lease payable 9,655
Note payable --
Stock issuance cost payable 254,840
----------
Total current liabilities 904,123
----------
Capital lease payable 26,409
----------
Stockholders' equity:
Series A convertible redeemable preferred
stock, $0.001 par value, 2,500,000 shares
authorized and 427,000 shares issued and
outstanding, 7% cumulative, with a $1.00
per share preference value. 427
Series B convertible redeemable preferred stock,
$0.001 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 par value, 100,000,000 shares
authorized, 17,296,764 shares issued and
outstanding. 17,296
Additional paid-in capital 7,290,783
Subscription receivable (446,300)
Accumulated deficit (3,520,528)
Outstanding stock options 27,000
----------
Total stockholders' equity 3,369,667
----------
Total liabilities and stockholders' equity $4,300,199
==========
See accompanying notes to condensed financial statements.
F-14
<PAGE>
INTRACO SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Systems/networks $ 2,703,780 $ 1,383,474 $ 1,434,285 $ 862,566
Service contracts 388,569 318,139 170,200 74,075
------------ ------------ ------------ ------------
Total revenues 3,092,349 1,701,613 1,604,485 936,641
------------ ------------ ------------ ------------
Cost of revenues:
Systems/networks 2,171,839 1,033,293 1,094,420 583,249
Service contracts 212,571 206,687 114,832 89,626
------------ ------------ ------------ ------------
Total cost of revenues 2,384,410 1,239,980 1,209,252 672,875
------------ ------------ ------------ ------------
Gross profit 707,939 461,633 395,233 263,766
General and administrative 2,163,454 764,007 1,365,204 396,324
------------ ------------ ------------ ------------
Loss from operations (1,455,515) (302,374) (969,971) (132,558)
------------ ------------ ------------ ------------
Interest income 28,631 16,865 20,055 16,752
Interest expense (13,676) (18,341) (5,439) (10,393)
Other income 4,334 154 1,546 154
------------ ------------ ------------ ------------
Loss before income taxes (1,436,226) (303,696) (953,809) (126,045)
Provision (benefit) for income taxes $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
Net loss $ (1,436,226) $ (303,696) $ (953,809) $ (126,045)
============ ============ ============ ============
Net loss per share (basic and diluted) $ (0.08) $ (0.03) $ (0.06) $ (0.01)
============ ============ ============ ============
Weighted average number of shares
outstanding and to be issued 17,162,855 12,067,309 17,162,855 12,067,309
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F-15
<PAGE>
INTRACO SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
--------------------------------------------------------------------------------
For the six months
ended June 30,
---------------------------
2000 1999
------------ ------------
Cash flows from operating activities
Net loss $(1,436,226) $ (303,697)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization 62,537 9,602
Issuance of common stock for services 159,535 --
Changes in assets and liabilities
(Increase) decrease in:
Inventory (103,817) (20,411)
Accounts receivable (333,942) (271,100)
Interest receivable -- (16,722)
Note receivable - related party -- 74,963
Prepaid expenses (46,464) 72,079
Due from related party (29,227) 46,480
Due from shareholder -- 2,800
Security deposits (3,120) (7,245)
Increase (decrease) in:
Accounts payable (819,639) 308,526
Deferred revenue 48,438 (88,277)
Customer deposits 7,455 (140,822)
Accrued expenses 208,028 33,973
----------- -----------
Net cash used by operating activities $(2,286,442) $ (299,851)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (548,868) (5,391)
Investment in intangibles (50,000) --
----------- -----------
Net cash used by investing activities (598,868) (5,391)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock, net 5,060,794 727,828
Common stock issued in connection with
excercise of employee stock options 14,658 --
Dividends paid (35,390) (1,092)
Repayment of long-term debt (127,838) (121,322)
Costs associated with recapitalization -- (283,153)
----------- -----------
Net cash provided by financing activities 4,912,224 322,261
----------- -----------
Net increase in cash 2,026,914 17,019
Cash at beginning of period 151,725 32,245
----------- -----------
Cash at end of period $ 2,178,639 $ 49,264
=========== ===========
See accompanying notes to condensed financial statements.
F-16
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required for complete financial statements.
In the opinion of management, all adjustments necessary for a fair presentation
of the results for the interim periods presented have been included.
These results have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the preparation
of the Annual Financial Statements for the year ended December 31, 1999 for
Intraco Systems, Inc. (the "Company"). Operating results for the six months
ended June 30, 2000, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
It is recommended that the accompanying condensed financial statements be read
in conjunction with the financial statements and notes thereto included
elsewhere in this filing.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
June 30,
2000
---------
Leasehold improvements $ 57,908
Equipment 844,981
Furniture and fixtures 22,260
---------
Total property and equipment 925,149
Less: accumulated depreciation (187,188)
---------
Property and equipment, net $ 737,961
=========
Depreciation expense for the six months ended June 30, 2000 was $44,821.
NOTE 3 - STOCKHOLDERS' EQUITY
In March of 1999, the Company sold 866,300 shares of $0.001 par value common
stock to an investment company at $1.00 per share. At June 30, 2000, the Company
holds an interest-bearing note of $446,300 from the investment company.
Subsequent to June 30, 2000 the investment company has paid the note in full.
In April of 1999, CTE, a public shell, acquired all of the outstanding common
stock of the Company. For accounting purposes, the acquisition has been treated
as an acquisition of CTE by the Company and as a recapitalization of the
Company. As a result of the recapitalization, the Company is now authorized to
issue 100,000,000 shares of common stock.
F-17
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - STOCKHOLDERS' EQUITY (CONTINUED)
In March of 2000, the Company sold 160,000 shares of $0.001 par value common
stock to an investor at a cost of $1.25 per share with 30,000 warrants
exercisable at $0.75 per warrant. The Company sold 3,474,667 units for $1.50 per
unit; each unit consists of one share of common stock and one warrant
exercisable at $1.50 per warrant. Fees associated with the offerings consisted
of cash, warrants, and common stock.
In June 2000, Intraco issued an additional 50,000 shares of restricted common
stock as consideration in acquiring the assets of Page Telecomputing.
During the six months ended June 30, 2000 Intraco issued 198,560 shares of
restricted common stock as payment of fees and issued 58,628 of restricted
common stock to one employee and 3 former employees in connection with the
exercise of stock options.
During the six months ended June 30, 2000, preferred stockholders converted
333,920 shares of preferred stock into common stock.
F-18
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Intraco may agree to the terms and conditions upon which any director,
officer, employee or agent accepts an office or position and in its by-laws, by
contract or in any other manner may agree to indemnify and protect any director,
officer, employee or agent of Intraco, or any person who serves at the request
of Intraco as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise, to
the fullest extent permitted by the Nevada Revised Statutes (including, without
limitation, the statutes, case law and principles of equity) of the State of
Nevada. If the Nevada Revised Statutes (including without limitation, the
statutes, case law or principles of equity, as the case may be) of the State of
Nevada are amended or changed to permit or authorize broader rights of
indemnification to any of the persons referred to in the immediately preceding
sentence, then Intraco shall be automatically authorized to agree to indemnify
such respective persons to the fullest extent permitted or authorized by such
law, as so amended or changed, without the need for amendment or modification of
the certificate of incorporation of Intraco and without further action by the
directors or shareholders of Intraco.
Without limiting the generality of the foregoing, to the fullest extent
permitted or authorized by the Nevada Revised Statutes as now in effect and as
the same may from time to time hereafter be amended, no director of Intraco
shall be personally liable to Intraco or to its shareholders for monetary
damages for breach of fiduciary duty as a director. Any repeal or modification
of the immediately preceding sentence shall not adversely affect any right or
protection of a director of Intraco existing hereunder with respect to any act
or omission occurring prior to or at the time of such repeal or modification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that its expenses in connection with this
registration statement will be as follows:
SEC registration fee............................ $ 2,738
Legal fees and expenses......................... 15,000
Accounting fees and expenses.................... 2,000
Miscellaneous................................... 5,000
-------
Total........................................... $22,738
=======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In 1998 and 1999, Intraco sold 714,900 shares of convertible Series A
preferred stock, par value $.001, for gross proceeds of $714,900. Each share of
Series A preferred stock is
II-1
<PAGE>
convertible into one share of common stock. The shares are redeemable by Intraco
at any time. 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
and Regulation S promulgated thereunder. Intraco paid fees totaling $212,000 in
connection with this sale.
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 for a total of $989,000. Each share of Series
B preferred stock is convertible into one share of common stock. The shares are
redeemable by Intraco at any time. The sale of Series B preferred stock was
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 4(2) thereof, as a transaction not involving a public offering.
Intraco paid fees totaling $40,000 in connection with this sale.
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
three notes with principal amounts totaling $866,300, of which $446,300 was paid
as of March 31, 2000 and the balance of which was paid on July 24, 2000. The
sale of shares was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) of the Securities Act. Intraco did not pay fees or
commissions in connection with this sale.
In April 1999, the Company issued 2,429,489 shares of common stock as
part of the exchange offer with Custom Touch.
In June 1999, Intraco acquired the assets of Page Telecomputing and
issued 60,000 shares of its common stock as consideration to the sole
shareholder. An additional 50,000 shares of common stock were issued in the
first half of 2000 as consideration for the purchase. The shares were issued
pursuant to an exemption from registration under Section 4(2) of the Securities
Act of 1933. Intraco did not pay any fees or commissions in connection with
these issuances.
In the first quarter of 2000, the Company sold 3,474,667 units for
$4,805,799 net of fees and expenses 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 per share. 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. Intraco issued a
warrant to purchase 210,000 shares of common stock at $2.00 per share, 196,560
shares of common stock and a warrant to purchase 196,560 shares of common stock
at $1.50 per share and paid a cash fee of $381,200 as a commission for this
sale.
In the first quarter of 2000, the Company sold 160,000 shares of common
stock and warrants to purchase 30,000 shares of common stock at $0.75 per share
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. Intraco did not pay any fees
or commissions in connection with this offering.
During the six months ended June 30, 2000, Intraco issued 2,000 shares
of restricted common stock to a public relations firm in connecton with services
provided to the Company. The shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933. Intraco did not
pay any fees or commissions in connection with this issuance.
During the six months ended June 30, 2000 Intraco issued 58,628 shares
of restricted common stock to one employee and three former employees in
connection with the exercise of stock options. The shares were issued pursuant
to an exemption from registration under Section 4(2) of the Securities Act of
1933. Intraco did not pay any fees or commissions in connection with these
issuances.
During the six months ended June 30, 2000, Intraco issued 333,920
shares of common stock to preferred shareholders who converted a like number of
shares of preferred stock. The shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933. Intraco did not
pay any fees or commissions in connection with these issuances.
II-2
<PAGE>
ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
2.1 Exchange Agreement dated April 9, 1999 between Intraco Systems,
Inc. and Custom Touch Electronics, Inc.(1)
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 By-laws(1)
5 Opinion of Broad and Cassel*
9 Voting Trust Agreement dated February 1, 2000 between Jack
Berger and Walt Nawrocki(2)
10.1 1998 Stock Option Plan(1)
10.2 Employment Agreement dated January 1, 1998 between Intraco
Systems, Inc. and Jack Berger(1)
10.3 Amendment to Employment Agreement effective January 1, 2000
between Intraco Systems, Inc. and Jack Berger(2)
10.4 Employment Agreement dated January 18, 1999 between Intraco
Systems, Inc. and Robert Marcus(1)
10.5 Amendment to Employment Agreement effective January 1, 2000
between Intraco Systems, Inc. and Robert Marcus(2)
10.6 Employment Agreement dated September 24, 1999 between Intraco
Systems, Inc. and Walt Nawrocki(2)
23.1 Consent of Broad and Cassel*
23.2 Consent of Daszkal, Bolton & Manela Devlin & Co.
24 Power of Attorney**
----------
* To be filed by amendment.
** Included on signature page.
(1) Incorporated by reference from the registrant's Registration Statement
on Form 10-SB filed on August 18, 1999.
(2) Incorporated by reference from the registrant's Annual Report on Form
10-KSB for the year ended December 31, 1999.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
RULE 415 OFFERING. The undersigned company hereby undertakes:
(1) To file, during any period in which offers or sales of securities
are being made, a post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities Act of
1933 (the "Securities Act"); (ii) reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information set forth in the registration statement; and (iii) include any
additional or changed material information on the plan of distribution.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification for
liabilities arising under the Securities Act, may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
TRANSACTIONS WITH OR BY SELLING SECURITY HOLDERS. The undersigned
registrant hereby undertakes to file a post-effective amendment to this
Registration Statement in the event that there is a change in the plans,
proposals, agreements, arrangements or understandings, if any, with respect to
transactions with or by selling security holders.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the city of Boca
Raton in the State of Florida on the 22nd day of August, 2000.
INTRACO SYSTEMS, INC.
By: /s/ JACK S. BERGER
----------------------------
Jack S. Berger, President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Jack
S. Berger and Robert Marcus or any one of them, as his or her true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for him or her and in his or her name, place and stead in any and all capacities
to execute in the name of each such person who is then an officer or director of
the registrant any and all amendments (including post-effective amendments) to
this registration statement, and any registration statement relating to the
offering hereunder pursuant to Rule 462 under the Securities Act of 1933, as
amended, and to file the same with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents and each of them full power and authority to
do and perform each and every act and thing required or necessary to be done in
and about the premises as fully as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue thereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons in
the capacities and on the dates stated.
SIGNATURE TITLE DATE
/s/ ROBERT HILDRETH, JR. Chairman of the Board August 22, 2000
------------------------
Robert Hildreth, Jr.
/s/ JACK S. BERGER President and Director August 22, 2000
-------------------------
Jack S. Berger
II-5
<PAGE>
/s/ WALT NAWROCKI Chief Executive Officer and August 22, 2000
-------------------------
Walt Nawrocki Director (Principal executive
officer)
/s/ ROBERT MARCUS Chief Financial Officer August 22, 2000
-------------------------
Robert Marcus (Principal financial and
accounting officer)
/s/ WILLIAM D. HAGER Director August 22, 2000
-------------------------
William D. Hager
/s/ BENJAMIN W. KREIGER Director August 22, 2000
-------------------------
Benjamin W. Kreiger
