As filed with the Securities and Exchange Commission on January 2, 2001
Registration No. 333-44268
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
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 (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)
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 FAU 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
Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practicable after the effective date of this Registration Statement.
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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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum Amount of
Title of Shares to be Amount to be Offering Price Aggregate Registration
Registered Registered Per Unit (1) Offering Price Fee
---------------------------- ------------------ ------------------ ------------------- --------------
<S> <C> <C> <C> <C>
Common Stock, $.001
par value................... 3,004,560 shares $ 1.609 $4,834,337 $1,276.26
Common Stock, $.001
par value(2)................ 3,004,560 shares $ 1.500 $4,506,840 $1,189.81
Common Stock, $.001
par value(3)................ 210,000 shares $ 2.000 $ 420,000 $ 110.88
Common Stock, $.001
par value(4)................ 150,000 shares $ 0.250 $ 37,500 $ 9.90
Common Stock, $.001
par value(5)................ 30,000 shares $ 0.750 $ 22,500 $ 5.94
Common Stock, $.001
par value................... 160,000 shares $ 0.656 $ 104,960 $ 27.71
Common Stock, $.001
par value(6)................ 203,686 shares $ 1.500 $ 305,530 $ 80.66
Common Stock, $.001
par value(6)................ 152,765 shares $ 2.000 $ 305,530 $ 80.66
TOTAL FEE: $2,781.82(7)
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(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457.
(2) Includes 3,004,560 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 an indeterminate number of additional
shares pursuant to Rule 416 to prevent dilution resulting from stock splits,
stock dividends or similar transactions.
(3) Includes 210,000 shares issuable upon the exercise of warrants having
an exercise price of $2.00 per share, which was used as the proposed maximum
offering price per share. Also includes an indeterminate number of additional
shares pursuant to Rule 416 to prevent dilution resulting from stock splits,
stock dividends or similar transactions.
(4) Includes 150,000 shares issuable upon the exercise of warrants having
an exercise price of $0.25 per share, which was used as the proposed maximum
offering price per share. Also includes an indeterminate number of additional
shares issuable pursuant to Rule 416 to prevent dilution resulting from stock
splits, stock dividends or similar transactions.
(5) Includes 30,000 shares issuable upon the exercise of warrants having an
exercise price of $0.75 per share, which was used as the proposed maximum
offering price per share. Also includes an indeterminate number of additional
shares pursuant to Rule 416 to prevent dilution resulting from stock splits,
stock dividends or similar transactions.
(6) Additional shares registered that may be issued pursuant to certain
anti-dilution adjustments in the warrants, which adjustments will not be covered
by Rule 416.
(7) Previously paid.
----------------------------
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>
PROSPECTUS
SUBJECT TO COMPLETION DATED JANUARY 2, 2001
6,915,571 SHARES OF COMMON STOCK
INTRACO SYSTEMS, INC.
We are registering the following shares:
o 3,164,560 shares of common stock held by unaffiliated third
parties; and
o a total of 3,751,011 shares of common stock, of which
3,394,560 shares are currently issuable upon exercise of
warrants held by unaffiliated third parties with exercise
prices ranging from $0.25 per share to $2.00 per share and
356,451 shares that may be issued in the future under
provisions of the warrants that result in adjustments to the
exercise prices in certain situations.
We will not receive any proceeds from the sale of the 3,164,560 shares
of common stock listed above. We will receive proceeds of $5,597,900 from the
exercise of the warrants to purchase a total of 3,751,011 shares of common
stock, if all of the warrants are exercised. We will pay the expenses of
registering all of these shares for sale by the shareholders.
The shareholders named in this prospectus may offer and sell these
shares at any time using a variety of different methods. The actual number of
shares sold and the prices at which they are sold will depend upon the market
price at the time of those sales; therefore, we have not included in this
prospectus information about the price to the public of the shares or the
proceeds to the selling shareholders.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"INSY." On December 29, 2000, the last reported price for our common stock on
the OTC Bulletin Board was $0.21875 per share.
YOU SHOULD CAREFULLY CONSIDER THE SECTION TITLED "RISKS OF INVESTING IN
INTRACO SHARES" BEGINNING ON PAGE 2 OF THIS PROSPECTUS.
------------------------------------
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.
------------------------------------
THE DATE OF THIS PROSPECTUS IS ____________, 2001
------------------------------------
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.
<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY.......................................................................1
RISKS OF INVESTING IN INTRACO SHARES..........................................2
We recently shifted our business focus away from network
installations to providing information technology and voice
services, including speech recognition products and
services. Our revised business plan is still under
development.............................................................2
We have experienced significant losses and these losses are
expected to continue in the future......................................2
We will need substantial additional capital in order to continue
our operations..........................................................2
Our services are based on software obtained from third parties.
We may have to discontinue or significantly change our
products or services if these third parties cancel our
licensing agreements or discontinue production of the
software................................................................2
We depend on a small number of customers for a significant
portion of our revenue. If we lose any of these customers,
our operating results and financial condition could be adversely
affected................................................................3
We depend on joint marketing agreements for the advertising and
promotion of our products. Cancellation of any of these
agreements could have a material adverse effect on our
operations and financial results........................................3
Our services include information, data and voice services, such
as e-mail and voice mail, that are often essential to a
business. We could be subject to liability if we do not
provide our services to our clients in accordance with the
terms of our engagements................................................3
Our common stock is listed on the OTC Bulletin Board and is not
actively traded, with the result that the trading price can
be strongly affected by various factors.................................3
FORWARD-LOOKING STATEMENTS....................................................4
USE OF PROCEEDS...............................................................4
DIVIDEND POLICY...............................................................4
PRICE RANGE OF OUR COMMON STOCK...............................................5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...........................................................5
ABOUT INTRACO SYSTEMS, INC...................................................12
MANAGEMENT...................................................................23
PRINCIPAL SHAREHOLDERS.......................................................27
SELLING SHAREHOLDERS.........................................................29
CERTAIN TRANSACTIONS.........................................................31
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TABLE OF CONTENTS
OUR SECURITIES...............................................................31
SHARES ELIGIBLE FOR FUTURE SALE..............................................34
HOW THE SHARES MAY BE DISTRIBUTED............................................35
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES............................................................36
LEGAL MATTERS................................................................36
EXPERTS......................................................................37
WHERE YOU CAN FIND MORE INFORMATION..........................................37
INDEX TO FINANCIAL STATEMENTS.................................................I
SIGNATURES.................................................................II-8
-ii-
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SUMMARY
INTRACO SYSTEMS, INC.
Intraco is an information technology, data and voice service provider.
Intraco currently offers several suites of comprehensive commercial services
that will enable customers to eliminate or replace all on-site telephone, data
systems and server applications. Its primary customers currently are small and
midsized businesses such as website/e-commerce companies, although Intraco is
also targeting larger businesses such as those in the telecommunications
industry. Management believes that Intraco's services can be used to
voice-enable a wide range of applications such as websites, e-commerce,
auctioning, paging and e-mail.
INTRACO'S HISTORY
Intraco was incorporated in Florida in March 1990. In April 1999, it
completed a share exchange 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.
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 Nine Months Ended For the Years
September 30, December 31,
---------------------------- ----------------------------
2000 1999 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $ 4,357,283 $ 2,023,227 $ 2,925,268 $ 2,704,931
Gross profit............... 730,059 575,752 759,687 992,211
(Loss) from operations..... (3,045,534) (805,286) (1,437,805) (45,618)
------------ ------------ ------------ ------------
Net (loss)................. $ (2,967,870) $ (808,733) $ (1,438,895) $ (80,195)
============ ============ ============ ============
SHARE DATA:
Loss per common shares -
basic and diluted.......... $ (0.18) $ (0.07) $ (0.12) $ (0.01)
============ ============ ============ ============
Weighted average number of
common shares outstanding -
basic and diluted.......... 16,124,235 11,830,739 12,067,309 9,075,864
============ ============ ============ ============
</TABLE>
As of As of
September 30, December 31,
2000 1999
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(unaudited)
BALANCE SHEET DATA:
Cash....................... $ 1,316,780 $ 151,725
Total current assets....... $ 2,240,380 $ 790,220
Total assets............... $ 3,391,528 $ 1,124,783
Total current liabilities.. $ 1,083,320 $ 1,330,725
Stockholders' equity $ 2,284,323 $ (237,265)
(deficit)..................
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RISKS OF INVESTING IN INTRACO SHARES
WE RECENTLY SHIFTED OUR BUSINESS FOCUS AWAY FROM NETWORK INSTALLATIONS
TO PROVIDING INFORMATION TECHNOLOGY AND VOICE SERVICES, INCLUDING SPEECH
RECOGNITION PRODUCTS AND SERVICES. OUR REVISED BUSINESS PLAN 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 plan is
still in development. There can be no assurance that our new business plan will
be successful. 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.
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND THESE LOSSES ARE EXPECTED TO
CONTINUE IN THE FUTURE.
For the year ended December 31, 1999 and the nine months ended
September 30, 2000, we reported net losses of $1,438,895 and $2,967,870,
respectively. As of December 31, 1999, we had an accumulated deficit of
$2,084,303, and stockholders' deficit of $237,265, although as a result of
raising capital through private offerings, we have positive stockholders' equity
of $2,284,323 as of September 30, 2000. 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 SUBSTANTIAL ADDITIONAL CAPITAL IN ORDER TO CONTINUE OUR
OPERATIONS.
We require substantial working capital to build our application service
provider systems, for marketing and promotion, and to fund our general business
operations. In addition, 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. 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 January 31, 2001. After that, we will need to raise
additional funds. We are actively seeking additional financing, which may be
either debt or equity financing. 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.
OUR SERVICES ARE BASED ON SOFTWARE OBTAINED FROM THIRD PARTIES. WE MAY
HAVE TO DISCONTINUE OR SIGNIFICANTLY CHANGE OUR PRODUCTS OR SERVICES IF THESE
THIRD PARTIES CANCEL OUR LICENSING AGREEMENTS OR DISCONTINUE PRODUCTION OF THE
SOFTWARE.
We obtain software products pursuant to agreements with Motorola and
Nuance. We intend to enter into additional agreements as may be necessary in the
future. Obtaining this software, as well as any additional software offerings,
is critical to our expansion strategy because we offer services based on the
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integration of these software packages to clients. 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
application service provider services. We cannot be sure that our current
vendors will continue to offer or 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.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF
OUR REVENUE. IF WE LOSE ANY OF THESE CUSTOMERS, OUR OPERATING RESULTS AND
FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED.
For the first nine months of 2000, approximately 25% of our total
revenues were derived from one customer, Insci-Statements.com Corp., and 69%
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 DEPEND ON JOINT MARKETING AGREEMENTS FOR THE ADVERTISING AND
PROMOTION OF OUR PRODUCTS. CANCELLATION OF ANY OF THESE AGREEMENTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND FINANCIAL RESULTS.
We currently have a joint marketing agreement with Motorola and intend
to enter into additional agreements in the future. We will 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 in the availability of
these programs could have a material adverse effect on our operations and
financial results.
OUR SERVICES INCLUDE INFORMATION, DATA AND VOICE SERVICES, SUCH AS
E-MAIL AND VOICE MAIL, THAT ARE OFTEN ESSENTIAL TO A BUSINESS. WE COULD BE
SUBJECT TO LIABILITY IF WE DO NOT PROVIDE OUR SERVICES TO OUR CLIENTS IN
ACCORDANCE WITH THE TERMS OF OUR ENGAGEMENTS.
Many of the engagements we have begun or plan to undertake involve
projects for information, data and voice services that are critical to the
operations of our clients' businesses and provide benefits to our clients that
may be difficult to quantify. If we fail or are unable to meet a client's
expectations in the performance of our services, our client's operations could
be adversely affected. This could give rise to claims against us or damage our
reputation, adversely affecting our business, operating results and financial
condition.
OUR COMMON STOCK IS LISTED ON THE OTC BULLETIN BOARD AND IS NOT
ACTIVELY TRADED, WITH THE RESULT THAT THE TRADING PRICE CAN BE STRONGLY AFFECTED
BY VARIOUS FACTORS.
Few shares of our common stock trade on the OTC Bulletin Board on any
given day. Therefore, the trading price of our common stock has been, and in the
future is expected to be strongly affected by a number of factors, including:
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o current and anticipated results of operations;
o changes in our business, operations or financial results;
o general market and economic conditions;
o the number of shares outstanding and freely tradeable; and
o the number of market makers in our stock.
The trading price of our common stock can be affected if our
stockholders sell substantial amounts of our common stock, including shares
issued upon the exercise of outstanding options and warrants. If that occurs,
the market price of our common stock is likely to fall. In addition to
17,386,250 shares of common stock and 4,061,227 warrants outstanding, our
officers, directors and employees own options to purchase up to 9,602,400
additional shares of common stock.
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" 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.
USE OF PROCEEDS
We will receive no proceeds from the shares being offered by the
selling shareholders under this prospectus. If all of the warrants are
exercised, we will receive an aggregate of $5,597,900 upon the exercise of the
warrants, which have exercise prices ranging from $0.25 per share to $2.00 per
share. As of December 29, 2000, the current market price of our shares is
$0.21875. If any proceeds are received, the proceeds will be used for general
working capital purposes.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. 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
other factors that our Board of Directors may consider to be relevant.
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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. The quotations listed
below are the high and low closing prices and were obtained from the OTC
Bulletin Board.
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
September 30, 2000.................. $3.000 $1.031
HOLDERS
As of December 29, 2000, there were approximately 465 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 an information technology service provider. Our products and
services include computer hardware, computer networks, speech recognition
products and services, and voice-activated products and services. We are in the
process of attempting to shift our business focus from direct sales of computer
hardware and computer networks to be installed on customer premises to providing
speech recognition and voice command products delivered from Intraco data
centers for recurring monthly fees. This manner of providing products and
services from a remote location for a recurring service charge is referred to as
being an "application service provider."
At present, we have established two data centers, one in New York City
and another in Boca Raton, Florida. Both of these data centers are equipped to
deliver our new services. Our current speech and voice services include a speech
recognition telephone "operator" that answers incoming telephone calls and
directs them to the appropriate extension by responding to the caller's voice
request and a voice-activated telephone dialing system that places outgoing
calls. We have begun signing contracts with customers for the sale of some of
these new services and for the testing of others.
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We believe our competitive advantage lies in our ability to combine our
in-house expertise with leading speech recognition technologies available from
third parties, including voice browsers and natural language engines, to create
comprehensive packages of technology and voice services for a variety of
businesses. We believe the major market for these services is small- to
medium-sized businesses and branch offices of larger companies. Our primary
sales channel for these new products will be through telecommunications
companies with only a relatively small portion of our sales coming from direct
sales from our own sales force. At present, we are testing the "operator" and
the voice-activated dialer with a client that is assessing our services. We
expect test results to be available during the first quarter of 2001.
By January 31, 2001, we will require additional funding to pay our
current operating expenses as well as to continue selling, marketing, testing
and installation of our new products. Our operating expenses total approximately
$350,000 per month. The total funds we will need will depend on both the length
of time it takes to raise the funds as well as the rate at which our new
products gain acceptance in the marketplace. We believe that the faster we can
generate revenues from our new products, the more operating profit will become
available to offset some of our cash requirements for our operations. We have
only recently started to generate limited revenues from these new products,
however, and there can be no assurance we will be able to generate sufficient
revenues from these new products in order to fund all or a part of our operating
expenses. We are also unable to estimate when sufficient revenues may be
generated by sales of our new products. Therefore, we are actively seeking a
capital infusion of approximately $5 million, which we believe will provide
substantially all of the funding needed to meet our operating expenses and our
product development and testing cash needs, while we develop additional sales
channels so as to increase our sales to profitable levels. There can be no
assurances that we will be able to increase our sales to profitable levels.
Management is in the process of identifying potential private investors
for a private equity investment and a private debt offering. The specific terms
of any investment have not yet been negotiated with the potential investors. We
may also obtain funds through the exercise of certain outstanding warrants.
There can be no assurances, however, that we will be able to complete any
offerings or that any warrant holders will exercise their warrants. As of the
date of this prospectus, the trading price of our common stock is below the
exercise prices of our outstanding warrants. If we are not able to raise the
required capital, then we will reduce operations, seek a potential acquirer
and/or discontinue operations.
We were incorporated in Florida in March 1990. In April 1999, we
completed a share exchange with Custom Touch Electronics, Inc., a Nevada
corporation with no material operations whose common stock traded on the OTC
Bulletin Board. Pursuant to the share exchange, all of the 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% to $2,925,268 for the year ended
December 31, 1999 from $2,704,931 for the year ended December 31, 1998. This
increase was primarily due to a $1,296,716 increase in systems/networks
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revenues. Of the increase, $719,323 represented an unusually large sale in the
fourth quarter of 1999 to a single customer (Internet Financial Network). The
increases in systems/networks revenues were offset by a $1,076,379 decrease in
service contract revenues. Approximately 90% of the decrease in service contract
revenues was due to the cancellation of a service contract with Kender Thijssen
BV that Intraco had since 1990. Although Intraco is attempting to shift its
business focus away from its systems/networks products and service contracts,
management anticipates that its systems/networks revenues will continue to be a
significant portion of Intraco's revenues in the future.
Our quarterly operating results fluctuate because of 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 engagements,
and the timing of personnel cost increases. Our information, data and voice
services are complex and often require a significant amount of time to design
for and sell to a new client. 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 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.
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 the corresponding
period in 1998. Cost of systems/networks revenues were $1,852,443, or 72.8%, of
systems/networks revenues for the year ended December 31, 1999, compared to
$638,885, or 51.2%, of systems/networks revenues for the corresponding period in
1998. This increase reflects Intraco's increased sales and also reflects the
effect of increased competition, which limits Intraco's ability to mark-up the
hardware and software sold. Cost of service contracts totaled $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. The
increase in the cost of service contracts is primarily due to the increase in
labor costs, which Intraco contracts out.
Intraco's overall gross profit margins for the years ended 1999 and
1998 were 26% and 37%, respectively. The profit margins on Intraco's
systems/networks products and service contracts continue to erode due to
increased competition, which limits Intraco's mark-ups on the hardware and
software it sells, and due to increased labor costs. The profit margins have,
therefore, been below management's targets of 35% on systems/networks products
and service contracts and 50% on new products. As a result, management is
directing more resources toward developing products and services with higher
profit margins. Management currently believes its voice-activated products can
be sold at higher margins. As a greater portion of Intraco's total revenues
begins to be derived from newer product offerings such as the voice-activated
auto attendant and telephone dialer, management expects the overall margins to
improve. As of December 31, 1999, however, the Company had not sold any such new
products or services. Although there can be no assurances that this strategy
will prove successful, management currently believes it is necessary for
Intraco's long-term viability.
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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. Of the dollar increase, $561,106 represented payroll costs in connection
with the hiring of two additional sales and marketing staff, and four additional
senior management personnel to begin developing new products and services and
entering new markets; $81,830 represented an increase in facilities and leased
equipment; $47,953 represented increased professional fees; and $216,073
represented increased financial advisory fees in connection with the decision to
complete the exchange offer with Custom Touch Electronics and possible
additional acquisitions. The remaining increases were attributable to other
additional selling, general and administrative expenses.
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,
reflecting the repayment of long-term debt.
NET LOSS. As a result of the foregoing, 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.
ACCOUNTS RECEIVABLE. Accounts receivable increased $485,522, or 973%,
to $535,422 for the year ended December 31, 1999 from $49,900 for the year ended
December 31, 1998. This increase primarily reflects that a greater portion of
Intraco's revenues in 1999 was derived from systems/networks as compared to
1998, in which a greater portion of revenues were derived from service
contracts. In 1999, 87% of Intraco's revenues were derived from
systems/networks, as compared to 46% of revenues from systems/networks in 1998.
In 1999, 13% of Intraco's revenues were from service contracts, whereas in 1998
54% of revenues were from service contracts. Intraco's practice has been to bill
its systems/networks clients when the product is delivered; by comparison
service contracts are billed and paid for by clients in advance of the services
being provided. As a result of Intraco's billing practices and the shift from
service contracts to systems/networks, the average number of days outstanding of
Intraco's receivables in 1999 was 36 days as compared to 19 days for 1998. The
average days outstanding was also skewed as of the end of 1999 because of a
large systems/networks sale to one customer in the fourth quarter of 1999 for
which payment was delayed. Excluding the effect of that sale, the average number
of days outstanding for Intraco's accounts receivable in 1999 declined to 12
days. Management continues to monitor Intraco's accounts receivable.
ACCOUNTS PAYABLE. Accounts payable increased $693,476, or 209%, to
$1,025,952 for the year ended December 31, 1999 from $332,476 for the year ended
December 31, 1998. The increase was primarily due to an increase in the
purchasing of hardware to support the increase in revenues for the fourth
quarter of 1999. For the years ended December 31, 1999 and 1998, accounts
payable turned three times a year or an average of every four months.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999.
REVENUES. Revenues increased $2,334,056, or 115%, to $4,357,283 for the
nine months ended September 30, 2000 from $2,023,227 for the nine months ended
September 30, 1999. This increase was due to two major factors. One factor was
an unusually large systems/networks sale of $1,079,045 to a single customer
(Insci-Statements.com Corp), and the second factor was an increase in the sales
and marketing staff to 16 people for the nine months ended September 30, 2000
from six people for the corresponding period in 1998. Although Intraco is
attempting to shift its business focus away from its systems/networks products
and service contracts, management anticipates that its systems/networks revenues
will continue to constitute a significant portion of Intraco's revenues in the
future.
COST OF REVENUES. Cost of revenues increased 149.2% to $3,627,224 for
the nine months ended September 30, 2000 from $1,447,475 for the nine months
ended September 30, 1999. This increase reflects Intraco's increased sales and
also increased competition, which limits Intraco's ability to mark-up the
hardware and software sold. Cost of systems/networks revenues totaled
$3,327,462, or 86.2%, of systems/networks revenues for the nine months ended
September 30, 2000, compared to $1,201,129, or 75.2%, of systems/networks
revenues for the corresponding period in 1999. Cost of service contracts were
$299,762, or 60.3%, of service contract revenues for the nine months ended
September 30, 2000, compared to $246,346, or 57.8%, for the corresponding period
in 1999. The cost of service contracts has increased as a result of higher labor
charges for services Intraco contracts out.
The overall gross profit margins for the nine months ended September
S30, 2000 and 1999 were 17% and 29%, respectively. The profit margins on
Intraco's systems/networks products and service contracts continue to erode due
to increased competition, which limits Intraco's ability to mark-up the hardware
and software it sells, and increased labor costs. The profit margins have,
therefore, been below management's targets of 35% on systems/networks products
and service contracts and 50% on new products. As a result, management is
directing more resources toward developing products and services with higher
profit margins. Management currently believes its voice-activated products can
be sold at higher margins. As a greater portion of total revenues begins to be
derived from newer product offerings such as the voice-activated auto attendant
and telephone dialer, management expects the overall margins to improve. As of
September 30, 2000, the Company was testing its new products but had not made
any sales of these products; therefore, Intraco's operating results do not yet
reflect any changes in operating strategy. There can be no assurances that this
strategy will prove successful.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended September 30, 2000 were
$3,775,593, compared to $1,381,038 for the nine months ended September 30, 1999,
an increase of $2,394,555 or 173.4%. Of the dollar increase, $1,506,429
represented increased payroll and commission costs in connection with the hiring
of nine additional engineers, ten additional sales and marketing staff, and two
additional administrative personnel to begin developing new products and
services, entering new markets and continuing to sell existing products; $74,700
represented recruiting fees in connection with the hiring of sales and
engineering personnel; $79,820 represented increased professional fees; $114,126
represented increased public relations costs in connection with engaging a
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public relations firm; $56,197 represented increased advertising expenses;
$95,868 represented increased directors and officers, health and workmen's
compensation insurance costs; $117,457 reflects increased levels of depreciation
and amortization due to capital investments; $63,327 represented increased
network service charges for the new data centers; and $98,400 represented a
one-time charge for the settlement of an employment contract. The remaining
increase was attributable to other additional selling, general and
administrative expenses.
INTEREST INCOME. Interest income, net of interest expense, increased by
$71,703 to $68,256 for the nine months ended September 30, 2000 as compared to
net interest expense of $3,447 for the nine months ended September 30, 1999,
reflecting the interest earned on deposits and the repayment of long-term debt.
NET LOSS. As a result of the foregoing, Intraco reported a net loss of
$2,967,870 for the nine months ended September 30, 2000 compared to a net loss
of $808,733 for the nine months ended September 30, 1999, an increase of
$2,159,137.
ACCOUNTS RECEIVABLE. Accounts receivable increased $724,127 to
$791,681, or 1072%, for the period ended September 30, 2000 from $67,554 for the
period ended September 30,1999. This increase primarily reflected Intraco's
greater revenues from systems/networks sales in the first three quarters of 2000
as compared to the corresponding period in 1999, but also reflects an increase
in the average days outstanding of Intraco's accounts receivable. The average
number of days outstanding for the 2000 period was 41 and for the 1999 period
was eight. This increase represents a slowing of payments that management
believes was in response to general economic conditions. Management does not at
this time believe this represents a significant impairment in the collectibility
of these receivables, although management is monitoring this closely.
ACCOUNTS PAYABLE. Accounts payable decreased $ 360,189, or 46.3%, to
$416,363 for the period ended September 30, 2000 from $776,552 for the period
ended September 30, 1999. The decrease was due to the use of a portion of the
net proceeds from Intraco's private offering in March 2000 to pay down
outstanding trade payables. Intraco was able to reduce accounts payable to a
current status. As a result of prior credit issues, we are required to maintain
current payment terms with our vendors.
PROPERTY AND EQUIPMENT. Property and equipment increased $983,047, or
342%, to $1,270,404 for the period ended September 30, 2000 from $287,357 for
the period ended September 30, 1999. The increase was due to the investment in
additional equipment to support our new speech and telecommunication services.
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LIQUIDITY AND CAPITAL RESOURCES
Intraco has historically incurred significant losses and has
substantial negative cash flow from operations. Intraco has included a footnote
in its annual financial statements 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 2001.
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 after January 31,
2001. Intraco is actively seeking additional financing, which may be either debt
or equity financing. There can be no assurance that any additional financing
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 September 30, 2000, Intraco's current assets were $2,240,380 and
current liabilities were $1,083,320. Intraco had long-term liabilities of
$31,323 and $23,885 at December 31, 1999 and September 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 $1,316,780 in cash on hand at September 30, 2000, compared
to $151,725 at December 31, 1999. Operating activities for the nine months ended
September 30, 2000 used cash of $3,103,596 primarily due to an increase in
accounts receivable of $250,202 in support of increased revenues, the payment of
trade payables of $609,589 and the net loss of $2,967,870. Net cash used in
investing activities was $944,123, reflecting the purchase of fixed assets and
a licensing agreement. Financing activities provided cash in the amount of
$5,212,774 primarily due to issuance of capital stock of $5,369,869, which was
partially offset by repayment of $130,188 of long-term debt.
Because of delays Intraco has experienced in obtaining the additional
financing required, Intraco has suspended any plans for expansion through
acquisitions or otherwise. Accordingly, Intraco has no material commitments for
capital expenditures at the present time. Because Intraco is operating at a
loss, however, it must secure additional funding to continue its current
operations. No assurance can be made that such funding will be available and, if
available, that such funding will be available on terms acceptable to Intraco.
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ABOUT INTRACO SYSTEMS, INC.
OVERVIEW
Intraco is an information technology, data and voice service provider.
We are using our in-house expertise with leading speech recognition
technologies, such as voice browsers and natural language engines, to create
comprehensive services for small and midsized businesses such as
websites/e-commerce companies and larger businesses such as telecommunications
companies. Ultimately, Intraco intends that its services will voice-power a wide
range of applications such as websites, e-commerce, auctioning, paging, e-mail
and unified messaging.
We believe that a significant market opportunity exists with the
emergence of the Internet, especially for business use, and the subsequent
expansion of "application service providers" who lease software and
telecommunications services over the Internet or private data networks.
According to Forrester Research, the business-to-business 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 business-to-business market is estimated to be more than 12 times the size
of the business-to-consumer market in 2003. According to International Data
Corporation and Dataquest, Inc., a unit of the Gartner Group, the application
service provider market has been estimated to range from $7.8 billion and $25.3
billion by 2004. We believe that we are well-positioned to capture market share
as companies become increasingly familiar with and recognize the need for
advanced speech recognition technologies deployed on an application service
provider basis.
Intraco currently offers several packages of speech recognition based
products and services designed for businesses to use the Internet and
telecommunications applications. It has one fully operational prototype of its
voice-enabled product, which is in the process of being evaluated by one client.
These products include:
o The voice-enablement of websites, which will be offered on an
application service provider basis; and
o "Virtual office" systems including basic telephone services,
unified messaging and voice-driven e-mail facilitation, which
will also be offered on an application service provider basis.
Intraco delivers it services over leased data lines from two rented
data centers currently located in Boca Raton, Florida and New York, New York.
Intraco believes that it has been able to create these systems 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.
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Intraco also believes that its 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 and Nuance, have
allowed it to establish long-term working agreements in the form of licensing
agreements. As a result, Intraco is able to benefit from the significant
investments already made by these outside firms. Finally, Intraco operates as a
systems integrator; in other words, it combines software packages developed by
others into a system that integrates several separate technologies into one
cohesive system.
Intraco intends to sell its products and services on an application
service provider basis primarily through major national network service
providers such as UUNET, Intermedia Communications, Cable and Wireless, Leve13
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.
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 100 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.
PRINCIPAL CUSTOMERS
At the present time, Intraco is dependent on a limited number of
customers. Internet Financial Network represented 38% of Intraco's revenues for
the year ended December 31, 1999. Insci-Statements.com Corp. represented 25% of
Intraco's revenues as of September 30, 2000. Our sales and marketing efforts, as
described above, are intended to increase our exposure to potential clients and
to increase our client base. We cannot guarantee that our efforts will be
successful in this regard, however. As a result, we are vulnerable to the loss
of a major client.
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 speech
recognition products, such as Microsoft, Motorola and Nuance,
Intraco has had access to and in some cases has helped develop
the software that Intraco currently uses in its speech
recognition systems. These relationships, combined with
Intraco's ability to integrate the software using its
proprietary technology, has enabled Intraco to produce what it
believes are superior, first-to-market, commercially viable
solutions.
o LICENSING AGREEMENTS AND JOINT MARKETING RELATIONSHIPS.
Intraco has developed relationships with companies such as
Motorola, Microsoft and Nuance, which have provided Intraco
with access to newly developed speech recognition and other
technologies. Each of
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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 services that
can be delivered to the end-user. Intraco believes that it has
obtained access to these products because of its expertise in
the speech recognition sector and because it is currently one
of the few firms 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 application service provider capabilities.
The agreement is for a term of one year and is
renewable for successive one-year terms upon 90 days'
notice. The agreement may be terminated by either
party in certain circumstances. Intraco paid certain
royalty and set-up fees. In addition, Intraco pays
fees depending on the number of terminals at which
the software is used.
o Nuance: Definitive agreement pursuant to which
Intraco has a non-exclusive license to use Nuance's
software for an indefinite period of time. Intraco
may terminate the agreement at any time. Nuance has
the right to terminate the agreement if Intraco
breaches the terms of the agreement and does not cure
the breach within 30 days of having received written
notice of the breach. Royalty fees were determined
separately by the parties.
o Microsoft: Definitive agreement pursuant to which
Intraco is authorized to provide services and
products developed by Microsoft. The agreement is for
a term of one year and is renewable for successive
one-year terms provided Intraco meets certain
criteria. The agreement may be terminated by either
party with 30 days' notice. Microsoft can terminate
the agreement immediately if Intraco: (i) breaches
its obligations; (ii) pirates its products; or (iii)
transfers or assigns a significant portion of its
stock to a third party. Royalty fees were determined
separately by the parties.
o TECHNOLOGICAL EXPERTISE. Intraco has extensive experience in
speech recognition technology, as well as in programming and
software integration. This experience allows Intraco to 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 that enables Intraco to integrate the most advanced
and effective technological components into one cohesive
system. 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
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technology. Walt Nawrocki, our chief executive officer, 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. In that role, he managed
a number of business areas, including speech recognition
products, and was responsible for acquisitions, joint
development and original equipment manufacturing licensing
programs.
o PRODUCTS WORK TODAY. Intraco currently has one fully
operational prototype of its speech recognition product, which
is being evaluated by one client. Intraco believes it is the
first to offer commercially viable speech recognition
solutions for use in Internet applications. As such, we
believe we are positioned to capture substantial market share
as companies become increasingly familiar with, and realize
the need for, advanced speech recognition technologies.
INDUSTRY OVERVIEW
Intraco currently provides several service packages, on an application
service provider 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 worked poorly and have been 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 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 development of
speech recognition engine technologies requires the use of 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 allowed others
to develop commercial speech applications.
As new technologies are developed, their accessibility and simplicity
of operation directly effects how often and how widely they are used. 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 availability of improved
technologies, the ability to turn websites into speech-driven call centers can
be achieved with the right speech recognition and Internet development skills.
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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 use of human speech to access the Internet via
a telephone is now feasible.
GROWTH OF THE INTERNET. Internet usage and online commerce continue to
grow worldwide. Forrester Research estimates that revenue generated worldwide
from online commerce will grow to exceed $6.8 trillion in 2004.
APPLICATION SERVICE PROVIDER MARKET. Application service providers 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 application service provider provides services
remotely, either on line over the Internet or over dedicated telecommunications
lines. The application service provider hosts the software, builds and maintains
the network servers necessary to store and run the software application,
provides the systems necessary to deliver the software application directly to
the user's desktop, and provides the necessary information technology staff to
implement upgrades and provide support and maintenance functions. The
application service provider takes all administrative and technical
responsibilities from the client company, thereby cutting costs. Clients can use
leading business software applications without the cost and burden of owning
them.
The definition of an application service provider includes the
following characteristics:
1. APPLICATIONS COMMERCIALLY AVAILABLE. Application service
providers provide access to and management of a software application that is
commercially available. This service is different from "business process
outsourcing," where the outsourcing contract encompasses the management of
entire business processes such as human resources or finance.
2. "SELLING" APPLICATION ACCESS. Application service providers
offer customers access to new applications without requiring the customer to
make up-front investments in the application licenses, servers, people and other
resources. The application service provider either owns the software or has a
contractual agreement with the software vendor to license access to the
software.
3. CENTRALLY MANAGED. The 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. The services are designed to be offered
to many users. The application service provider partners with other vendors of
standardized offerings that require little or no customization, that many
companies will subscribe for over specific contract periods.
5. DELIVERING ON THE CONTRACT. The application service provider
is the firm that is responsible, in the customer's eyes, for delivering the
agreed-upon service, ensuring that the application service is provided as
promised.
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The application service provider industry is ideally suited for small
to midsized businesses. Unable to afford the huge fixed costs of network servers
and information technology staff to support them, small and midsized businesses
can turn to an application service provider 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 too expensive. The application service provider can easily
expand the services it provides to meet the growth of the businesses it
supports. With the help of application service providers, small to midsized
businesses should be able to better compete with their larger competitors.
According to International Data Corporation, the number of customers of high-end
application service providers is expected to double or triple in the next few
years as they become more familiar with the benefits of the application service
provider model and more confident in its reliability.
The application service provider 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
information technology are making outsourcing a popular alternative. Third, the
privacy of networks is much more secure using an application service provider
server than individual in-house servers. Finally, large vendors such as Oracle
have shown great confidence in fledgling application service providers. The
application service provider industry offers products and services that provide
recurring revenue streams to resellers.
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, 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 hardware for these systems has multiple voice telephone lines
coming in from the local exchange carrier's central office. This receives the
incoming calls and can originate outgoing calls. 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 Text-to-Speech -- to playback text-based information retrieved
from the network in response to your commands.
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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 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 make use of its strategic
relationships and apply its technological expertise to integrate each separate
capability into a single system.
SERVICE OFFERINGS
In a very competitive global marketplace, businesses must focus on what
they do best and outsource other functions. Operating as an application service
provider enables small to mid-sized businesses to outsource their information
technology needs by allowing Intraco to provide these services. Initially,
Intraco will focus on the basic technology requirements of a business: Web
services, phone services, messaging and networks.
VOICE-BASED SERVICES. The explosion of the Internet, especially the
business-to-business market, along with the expansion of the application service
providers, has led to the rapid expansion of the number of commercial websites
and the hosting of data centers that serve the websites. Through its voice-based
packages of services, Intraco believes that it can provide speech and voice
recognition services to these websites on an application service provider basis
through network service providers such as Verio and Exodus Communications, which
host the websites. These network service providers can incorporate Intraco's
voice-based capabilities with their own 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-based services to business-to-business portal websites, which will
subsequently offer the voice-based service as part of the websites' standard
service offerings. Additionally, Intraco will provide this new service directly
by hosting sites for customers as well as support services either on the
customer's premise or at an Intraco site.
Within the voice-based 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 cellular telephone 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 customer 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
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reducing personnel costs. The last product that stems from the voice browser is
voice alerts. This product will be used to provide information alerts for a
variety of users. One potential area that Intraco intends to target is
construction and machinery auction sites. As these users are typically onsite,
without computer access, they must be able to quickly react to pending contracts
or competitors' bids. This automated process would allow users, via cellular
telephones, to not only receive alerts and critical information instantly, but
to respond as well.
"VIRTUAL OFFICE." With the "Virtual Office" system, 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 availability; and basic telephony
services such as call waiting and forwarding. This 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. Intraco intends to expand its services
through partnerships with providers of other applications typically needed by a
business.
SALES AND MARKETING
Intraco markets its services through direct sales to customers by
Intraco's sales force and by indirect sales through channels such as
telecommunications companies and distributors of telecommunications equipment.
Intraco's strategy is to focus its sales efforts on the large and
growing business-to-business market. 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 such as telecommunications companies and distributors of
telecommunications equipment, which ultimately offer Intraco's 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 and Nuance. Intraco believes that its 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, improve its technical
sales expertise, and offer significant name recognition for marketing events and
programs.
Intraco's current sales management team of 16 sales personnel, who are
experienced in the technology industry, provide a strong ability to understand
existing and new 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.
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SECURITY
Our services rely on encryption and authentication technology licensed
from third parties to provide the security required to safely transmit
confidential information. Breaches of this security could have severe
consequences for our clients. While we have implemented a variety of
state-of-the-art network security systems to protect against unauthorized
access, computer viruses, other intentional acts and accidents, and disruptions
may 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. In addition, the costs we must incur to prevent or
eliminate computer viruses or to alleviate other security threats are likely to
be significant.
COMPETITION
The application service provider market is new and rapidly changing.
The speech recognition for Internet applications sector is even further in its
infancy, which management believes is an advantage for Intraco. By combining
third-party software and 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, current and new competitors may
not have the ability to offer comparable products and/or services without
significant speech recognition and systems integration expertise. 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.
Intraco could potentially compete with a variety of competitors,
including:
o Voice-enabling companies - Tellme Networks, @Motion and Online
Anywhere, a company recently acquired by Yahoo! Inc.;
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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.
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 Intraco will complete successfully with its
existing competitors or with any new competitors.
INTELLECTUAL PROPERTY
Intraco relies on a combination of nondisclosure and other contractual
arrangements and trade secret, copyright, and trademark laws to its protected
proprietary rights and the proprietary rights of third parties. Intraco enters
into confidentiality agreements with key employees, and limits the distribution
of 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.
GOVERNMENT REGULATION
At the present time, Intraco believes that its services are not subject
to regulation as telecommunications services. To the extent that local or long
distance telephone services are provided as part of a package of Intraco's
services, these telephone services are provided directly by a licensed carrier.
Intraco may in the future determine to resell telephone services as
part of its packaged services. If so, Intraco will be required to obtain
certificates of authority or licenses from the telecommunications regulatory
agencies in each state in which it will provide such services. Intraco will also
be required to comply with various state law requirements, such as providing
"911" emergency services. The process to apply for these certificates or
licenses can be lengthy and expensive, and Intraco cannot guarantee that it will
be able to obtain them. If Intraco cannot obtain all necessary state
certificates or licenses, the services it will be able to resell directly will
be affected.
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As a reseller of telephone services, Intraco may also be subject to
federal regulation by the Federal Communications Commission with respect to the
resale of international long-distance services. The FCC requires resellers of
international telecommunications services to obtain authorization, the process
for which can also be lengthy and expensive. Without such authorization, Intraco
would be precluded from offering such services.
EMPLOYEES
As of September 30, 2000, Intraco had a total staff of 43 employees,
composed of 15 technical professionals, 16 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.
Our success depends, in larger part, on our ability to attract,
develop, motivate and retain technical professionals. As of September 30, 2000,
approximately 35% 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. Our location in South Florida can also make
the recruiting process more difficult, as there are a limited number of research
universities in the area and regions of the U.S. other than South Florida are
often seen as being more attractive to technical professionals.
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.
Intraco believes that its current headquarters location is suitable for
the next year.
LEGAL PROCEEDINGS
On October 29, 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.
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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
Director 2000
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
Directors 1999
William D. Hager 53 Director (Audit Committee Member) 2000
Benjamin W. Krieger 62 Director (Audit Committee Member) 2000
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. from June 1996 through July 1999. 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 1992. He served in this position
until May 1996. 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 has
served as its president since that time. He 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.
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ROBERT MARCUS joined Intraco in January 1999 as chief financial
officer, secretary and treasurer. Prior to that, Mr. Marcus was employed at
Robert Marcus Associates providing financial consulting services to various
entities, from July 1998 to January 1999. From June 1997 to July 1998, Mr.
Marcus was a founder and partner in American Imprints, LLC, an advertising
specialty company. From July 1996 to June 1997, Mr. Marcus operated Professional
Processing Services, a sole proprietorship providing computer services to small
businesses. Prior to that, he served as chief executive officer of In-Store
Opportunities, Inc., a marketing and display company serving major food
manufacturers, from March 1991 to March 1996. 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
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 has served in that capacity since
1994. He 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. Risk Metrics gathers and sells public
data to businesses. From 1990 to 1997, 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. Since 1990, he has
been a partner in Corporate Development International, which specializes in
identifying potential merger and acquisition opportunities for its business
clients. He specializes in the pulp and paper, packaging, graphic arts and
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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.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes all compensation awarded to, earned by,
or paid to our president, who served as our principal executive officer during
those years, for services rendered in each of the last three fiscal years. No
other executive officer earned total salary and bonus in excess of $100,000
during the last three fiscal years.
ANNUAL COMPENSATION
-----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS
--------------------------- ---- ---------- -----
Jack S. Berger, President 1999 137,800 0
1998 137,000 0
1997 99,000 0
The annual compensation also includes an allowance for automobile
expenses incurred by Mr. Berger.
KEY PERSONNEL AND 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
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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.
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.
Our success is dependent on the services of Walt Nawrocki, our chief
executive officer, and Jack Berger, our president, both of whom have significant
experience in information, data and voice services and who developed the change
in our business plan to begin offering these services. 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, however,
currently maintain key man life insurance policies for any of our officers or
other personnel.
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 September 30, 2000, options to purchase an aggregate of 9,602,400
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.
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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 tables show information, as of the date of this
prospectus, regarding our common stock, Series A preferred stock and Series B
preferred 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, Series A preferred stock, or Series B preferred stock; (ii) each
director and executive officer; and (iii) all directors and executive officers
as a group. Each shareholder listed below has sole voting and investment power.
Unless otherwise indicated, the address of each of the persons named below is
3998 FAU Boulevard, Suite 210, Boca Raton, Florida 33431. As of the date of this
prospectus, a total of 17,386,250 shares of our common stock, 396,500 shares of
our Series A preferred stock and 972,400 shares of Series B preferred stock are
issued and outstanding. The shares of Series A preferred stock and Series B
preferred stock are convertible into a like number of shares of common stock.
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. The number of shares reflected as owned by each of Messrs.
Nawrocki, Marcus, Hildreth, Hager and Krieger include 4,000,000, 2,000,000,
195,000, 70,000 and 70,000 shares of common stock issuable upon exercise of
options, respectively. In addition, Mr. Hildreth's holdings also include 20,400
shares issuable upon conversion of preferred stock.
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COMMON STOCK
AMOUNT AND NATURE OF PERCENT OF COMMON
BENEFICIAL OWNERSHIP OF STOCK
NAME AND ADDRESS COMMON STOCK BENEFICIALLY OWNED
------------------------------ ------------------------- ------------------
Jack Berger 8,109,000 46.6%
Walt Nawrocki 4,000,000 18.7
Robert Marcus 2,000,000 10.3
Robert Hildreth, Jr. 235,400 1.3
William D. Hager 170,000 *
Benjamin W. Krieger 90,000 *
All executive officers and
directors as a group (six 14,604,400 61.5
persons)
------------------------
*Less than 1%
Messrs. Berger and Nawrocki have entered into a voting agreement with
respect to the shares they each beneficially own. The agreement provides that
each of Messrs. Berger and Nawrocki will grant the other an irrevocable proxy
for the voting of 50% of the shares of common stock owned by both of them. In
addition, they each agreed to vote their shares for their respective election to
the Board of Directors. The agreement will terminate at any time upon the
earlier of (i) the sale or merger of the company; (ii) the resignation of either
party as an officer or director; or (iii) January 31, 2003.
SERIES A PREFERRED STOCK
AMOUNT AND NATURE OF PERCENT OF SERIES A
BENEFICIAL OWNERSHIP OF PREFERRED STOCK
NAME AND ADDRESS SERIES A PREFERRED STOCK BENEFICIALLY OWNED
------------------------------- ------------------------ ------------------
Peter Georg Studer, Sole Director 100,000 25.2%
Alpenstein Holding AG
Berkenstrasse 49
Rotkreuz, SZ
Mario Franchi 50,000 12.6
Sitel Corporation
No. 15 Andar No. 3, Floor
1050
Lisbon, Portugal
Rolf Frommel 50,000 12.6
P.O. Box 53
Taby, SW 18321
Osakeyhtio & Jukka Hallman 20,000 5.0
Haapaniemenkatu 28 KRS
Kuspio, FI 70111
All executive officers and 0 0
directors as a group (six
persons)
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SERIES B PREFERRED STOCK
AMOUNT AND NATURE OF PERCENT OF SERIES B
BENEFICIAL OWNERSHIP OF PREFERRED STOCK
NAME AND ADDRESS SERIES B PREFERRED STOCK BENEFICIALLY OWNED
------------------------------- ------------------------ ------------------
Peter Georg Studer, Sole Director 401,200 41.3%
Alpenstein Holding AG
Berkenstrasse 49
Rotkreuz, SZ
Robert Hildreth, Jr. 20,400 2.1
Song Lin 100,300 10.3
4251 Coral Hills Drive
Coral Springs, FL 33065
Richard A. Persson TTEE 401,200 41.3
Richard A. Persson Declaration
625 Prestwick Drive
Frankfort, IL 60423
All executive officers and 20,400 2.1
directors as a group (six
persons)
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. This table assumes that all shares
offered for sale in this prospectus are sold.
BENEFICIAL NUMBER BENEFICIAL
OWNERSHIP OF COMMON OFFERED BY OWNERSHIP OF COMMON
SELLING STOCK BEFORE SELLING STOCK AFTER
SHAREHOLDER OFFERING SHAREHOLDER OFFERING
----------- -------- ----------- --------
NUMBER PERCENT NUMBER PERCENT
------ ------- ------ -------
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
custodian for Robert B.
Dalglish IRA SEP 136,000 1.0 136,000 0 *
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BENEFICIAL NUMBER BENEFICIAL
OWNERSHIP OF COMMON OFFERED BY OWNERSHIP OF COMMON
SELLING STOCK BEFORE SELLING STOCK AFTER
SHAREHOLDER OFFERING SHAREHOLDER OFFERING
----------- -------- ----------- --------
NUMBER PERCENT NUMBER PERCENT
------ ------- ------ -------
Intercoastal Financial
Services Corp. 393,120 2.2 393,120 0 *
Loeb Holding Corp. Agent 190,000 1.0 190,000 0 *
Magellan International Ltd. 668,000 3.8 668,000 0 *
Peter C. Morse 668,000 3.8 668,000 0 *
Pleiades Investment
Partners, L.P. 468,000 2.7 468,000 0 *
Tonga Partners, L.P. 1,200,000 6.7 1,200,000 0 *
Vestar Capital Corporation 150,000 1.0 150,000 0 *
-------------------------------
* Less than 1%.
In addition to the shares beneficially owned by the selling
shareholders, Intraco has registered an additional 356,451 shares which may be
issued in the future to the selling shareholders under provisions of the
warrants that result in adjustments to the exercise prices in certain
situations.
The selling shareholders listed above, who are not individuals, have
provided us with additional information regarding the individuals who exercise
control over the selling shareholder. The proceeds of any sale of shares
pursuant to this prospectus will be for the benefit of each of individuals that
control the selling entity. The following is a list of the selling shareholders
and the individual who exercises control of the entity:
o Amro International, S.A. - controlled by Mr. Mark Perkins.
o Anegada Fund, Ltd. and Tonga Partners, L.P. - controlled by
Mr. J. Carlo Cannell.
o Aspen International, Inc. - controlled by Mr. Wencesla
Aefageme Quiros.
o BiCoastal Consulting Corp. - controlled by Mr. Peter Benz.
o Intercoastal Financial Services Corp. - controlled by Mr. Roy
Zintz.
o Loeb Holding Corp. Agent - controlled by the Carl M. Loeb
Trust for the benefit of Thomas Kemper and Alan Kemper, Jr.
o Pleiades Investment Partners, L.P. - the general partner is
PNC GPI, Ltd., which is controlled by PNC-GPI Incorporated.
o Magellan International Ltd. - controlled by Mr. Eusebio A.
Morales.
o Vestar Capital Corporation - controlled by George Ecker.
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CERTAIN TRANSACTIONS
From time to time, Intraco has loaned funds and sold products to
Intraco Systems Pty., Ltd., an Australian corporation that is indirectly
controlled by Jack S. Berger, Intraco's president. Mr. Berger is a majority
stockholder in Intraco International, Inc., the corporation that owns a majority
interest in Intraco Systems Pty. In 1998, Intraco sold products to Intraco
Systems Pty. 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.
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 received
891,000 restricted shares of Intraco common stock from the principal shareholder
of Intraco on behalf of Intraco, which represented 9.9% of the then outstanding
shares, and had the right to be issued warrants to maintain its 9.9% interest in
Intraco despite any further issuances of capital stock until May 2000 pursuant
to an anti-dilution provision in its consulting agreement. During November 1998,
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 consulting agreement. The consulting agreement with Vestar was terminated on
February 1, 2000.
In April 1999, Intraco completed a share exchange with Custom Touch, a
Nevada corporation with no material operations whose common stock traded on the
OTC Bulletin Board. Under the share exchange agreement, all outstanding shares
of Intraco capital stock were exchanged for 10,531,500 Custom Touch shares,
which represented 81% of the total Custom Touch shares outstanding at the time
of the exchange. 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 share exchange.
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 summarizes the important provisions of our capital stock.
For more information about our capital stock, please see the copy of our amended
and restated certificate of incorporation that has been filed as an exhibit to
the registration statement of which this prospectus forms a part.
31
<PAGE>
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 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, 17,386,250 shares of
common stock and 1,368,900 shares of preferred stock are outstanding.
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. The Board can determine the
number of shares in each series, as well as the voting and other rights of the
series, including the dividend rights and dividend rate, terms of redemption,
conversion rights and liquidation preferences. The Board has the authority to
determine these rights without any further vote or action by the shareholders.
We have designated 2,500,000 shares of preferred stock as Series A
Convertible Redeemable Preferred Stock, of which 396,500 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 at our option. Each share of Series A preferred
stock is non-voting, except otherwise required by applicable law.
32
<PAGE>
We have designated 1,700,000 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. The Series B preferred stock
does not have a specified dividend; instead, each share will be entitled to
receive dividends only if declared by the Board of Directors, in its sole
discretion. Each share has a liquidation value of $1.00, except that the
liquidation value per share for subscriptions exceeding $100,000 is $.997. We
may redeem the shares at any time for the liquidation value at our option. Each
share of Series B preferred stock is non-voting, except as otherwise required by
applicable law.
WARRANTS
We currently have outstanding an aggregate of 3,364,560 warrants. The
warrants have exercise prices ranging from $0.25 to $2.00 per share. The
warrants are exercisable for five years from the date of issuance. We may not
redeem our Non-Callable A warrants. We may redeem our Callable B warrants upon
30 days' prior written notice, if our common stock's trading price is $3.00 or
more for 20 consecutive days of trading. We may redeem our Callable C warrants
upon 30 days' prior written notice, if our common stock's trading price is $4.00
or more for 20 consecutive days of trading. If we redeem the warrants, warrant
holders have the right to exercise the warrants until the close of the business
day preceding the date fixed for redemption.
The various exercise or conversion prices and the number of shares of
common stock purchasable upon the exercise of the warrants is subject to
adjustment upon the occurrence of certain events, including stock dividends,
stock splits, combinations or reclassification of our common stock. The warrants
do not confer upon holders any voting or any other rights as shareholders.
"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 stock may have an adverse effect on the holders of our
common stock. 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.
33
<PAGE>
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 17,386,250 shares of our common stock outstanding as of the date
of this prospectus, 15,019,639 shares of common stock are restricted securities,
as that term is defined in Rule 144 promulgated under the Securities Act.
Of the 17,386,250 shares currently outstanding, 8,249,400 shares are
owned by our affiliates, as that term is defined under the Securities Act.
Pursuant to an SEC interpretive letter, the resale of the shares owned by
affiliates of a blank check company may be carried out only pursuant to a
registered offering, such as under this prospectus. A "blank check company" is a
development stage company that has no specific business plan or purpose or has
indicated its business plan is to engage in a merger or acquisition with an
unidentified entity or person. The SEC also follows this position with respect
to shares of a blank check company sold directly to non-affiliates in an
unregistered offering.
When a company is no longer considered a blank check company, Rule 144
may be available for resales of the company's shares acquired after that time.
Under Rule 144, if certain other conditions are satisfied, a person who has
beneficially owned restricted shares 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 under Rule 144, if the rule is available, to sell the shares 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.
34
<PAGE>
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.
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, if available, 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, in the event 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.
35
<PAGE>
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 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.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Our amended and restated certificate of incorporation generally
provides for indemnification of each director, employee or agent as long as
these individuals acted in good faith and in a manner he or she believed to be
in or not opposed to our best interest and had no reasonable cause to believe
that such conduct was unlawful.
The SEC is of the opinion that indemnification of directors, officers
and controlling persons for liabilities arising under the Securities Act is
against public policy and is, therefore, unenforceable.
LEGAL MATTERS
The legality of the securities offered by this prospectus will be
passed upon by Broad and Cassel, a partnership including professional
associations, Miami, Florida.
36
<PAGE>
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.
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
this document.
37
<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 September 30, 2000 (unaudited)...................... F-15
Statements of Operations for the Three and Nine Months ended
September 30, 2000 and 1999 (unaudited).............................. F-17
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999 and 1998 and the Nine Months Ended September 30,
2000................................................................. F-18
Statements of Cash Flows for the Three and Nine Months ended
September 30, 2000 and 1999 (unaudited) ................................ F-19
Notes to Financial Statements (unaudited)............................... F-20
I
<PAGE>
DASZKAL BOLTON MANELA DEVLIN & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
2401 N.W. BOCA sRATON 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/ Daskal Bolton Manela Devlin & Co.
Boca Raton, Florida
February 18, 2000, except for
Note 13, as to which the date
is March 16, 2000
F-1
<PAGE>
INTRACO SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
================================================================================
ASSETS
1999 1998
---------- ----------
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
========== ==========
See accompanying notes to financial statements.
F-2
<PAGE>
INTRACO SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
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 dividend, 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
989,400 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>
INTRACO SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
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 -- -- 989,400 989 -- --
Stock options -- -- -- -- -- --
Costs associated with
issuance of stock -- -- -- -- -- --
Issuance of common stock -- -- -- -- 866,300 866
Acquisition of CTE assets -- -- -- -- 2,429,489 2,430
Costs associated with recapitalization -- -- -- -- -- --
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 $ 767 989,400 $ 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 -- (244,846) -- -- (244,846)
Issuance of common stock -- 865,434 -- -- 866,300
Acquisition of CTE assets -- (1,425) -- -- 1,005
Costs associated with recapitalization -- (283,153) -- -- (283,153)
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>
INTRACO SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
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
WARRANTS 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 421,005 166,300
Proceeds from issuance of preferred stock 1,704,000 52,500
Costs associated with issuance of stock (244,846) (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)
Costs associated with recapitalization (283,153) --
----------- -----------
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 mid-size
companies in a wide range of industries including communications, healthcare,
financial services, manufacturing, professional services and technology.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated using the
straight-line method over their estimated useful lives.
ADVERTISING COSTS
Advertising costs, which are principally included in general and administrative
expenses, are expensed as incurred. Advertising expense was $16,231 and $10,742
for the years ended December 31, 1999 and 1998, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales of products are recognized when products are
shipped unless the Company has obligations remaining under a sales or licensing
agreement, in which case revenue is either deferred until all obligations are
satisfied or recognized ratably over the term of the contract. Revenues from
maintenance contracts are recognized ratably over the life of the contract,
usually one year. Deferred income on maintenance contracts at 1999 and 1998 was
$165,494 and $152,174, respectively. 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.
The Company assesses whether its goodwill and other intangible assets are
impaired as required by SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" based on an
evaluation of undiscounted projected cash flows through the remaining
amortization period. If an impairment exists, the amount of such impairment is
calculated based on the estimated fair value of the asset.
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 its Articles of
Incorporation to increase the aggregate number of authorized 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.
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 an offering of its Series A preferred stock 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.
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 is one-to-one, and is subject to
adjustments in certain circumstances including proportional stock splits, stock
dividends and reverse stock splits. The shares of Series A 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 October of 1999, the Company began a Series B preferred stock offering, and,
as a result of the offering, the Company issued 989,400 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 is one-to-one, and is subject to adjustment in certain
circumstances including 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 in exchange for an interest-bearing
note. At December 31, 1999, $446,300 of this note remained outstanding.
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.
F-10
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 10 - STOCKHOLDERS' DEFICIT AND STOCK OPTION PLAN, CONTINUED
----------------------------------------------------------------
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 and 1998 net loss would have increased
by $1,539,000 and $6,500, respectively. 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 PRICE PER SHARE PER OPTION
--------- --------------- ----------------
Outstanding at December 31, 1998 815,000 $ 0.25 $ 0.25
GRANTED (1/1/99 - 3/31/99) 260,000 0.25 0.25
GRANTED (4/1/99 - 4/30/99) 10,000 0.25 0.25
GRANTED (5/1/99 - 9/30/99) 270,000 1.50 TO 2.00 1.97
GRANTED (10/1/99 - 12/31/99) 6,249,800 .88 TO 2.18 0.89
Exercised -- -- --
Forfeited -- -- --
--------- -------------- -----------
Outstanding at December 31, 1999 7,604,800 .25 to 2.18 $ 0.84
========= ============== ===========
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The effect of
Statement No. 123 resulted in a pro forma net loss of $2,977,895 and $86,695 for
the years ended December 31, 1999 and 1998 respectively. In addition, the pro
forma net loss per share was $0.25 and $0.01 per share for the years ended
December 31, 1999 and 1998, respectively.
WARRANTS
In November 1998 the Company granted 150,000 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,
which is equal to the estimated fair market value of the warrants, was recorded
in 1999. Fair market value of $0.25 was used for the Company's common stock at
the date of issuance based on the offering price in the Regulation D 504 common
stock offering in November of 1998 of $0.25 per share. The fair value of each
warrant is estimated on the date of grant using fair market option pricing model
with the assumptions as stated above.
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
WARRANTS PRICE PER SHARE PER WARRANT
--------- --------------- ----------------
Outstanding at December 31, 1998 -- $ -- $ --
Granted 150,000 0.25 0.25
--------- ------------- --------
Outstanding at December 31, 1999 150,000 $ 0.25 $ 0.25
========= ============= ========
The Company paid approximately $70,000 and $90,000 for the years ended December
31, 1999 and 1998, respectively, to Vestar Capital Corporation as part of a
consulting agreement.
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
----------------------
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. The excess of the cost over the purchase price resulted in goodwill
of $83,910, which is being amortized over 15 years using the straight-line
method. The Company believes that the products and the intangible purchased will
be generating revenue for at least 15 years. The estimated fair market value of
the net assets acquired was $6,090.
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.
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. Management believes
that through this additional capital raised the going concern has been
alleviated through December 31, 2000.
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.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 15 - SHARE EXCHANGE
------------------------
In April 1999, CTE, an inactive public company, 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. The exchange ratio of common shares was one-for-one. The estimated fair
market value of the net assets acquired was $1,005. Costs associated with this
recapitalization totaled $283,153. As a result of the re-capitalization, the
Company is now authorized to issue 100,000,000 shares of common stock. Following
the share exchange, the former stockholders of CTE owned 2,429,489 shares of
common stock of the Company.
F-14
<PAGE>
INTRACO SYSTEMS, INC.
CONDENSED BALANCE SHEET
SEPTEMBER 30, 2000
(UNAUDITED)
================================================================================
ASSETS
Current assets:
Cash $ 1,316,780
Accounts receivable, net 785,624
Inventory 56,197
Prepaid expenses 81,779
-----------
Total current assets 2,240,380
-----------
Property and equipment, net 1,026,794
Other assets:
Due from related party 6,907
Goodwill, net 80,596
Deposits 18,184
License agreement, net 18,667
-----------
Total other assets 124,354
-----------
Total assets $ 3,391,528
===========
See accompanying notes to condensed financial statements.
F-15
<PAGE>
INTRACO SYSTEMS, INC.
CONDENSED BALANCE SHEET
SEPTEMBER 30, 2000
(UNAUDITED)
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 416,363
Deferred revenue 143,030
Accrued expenses 227,799
Customer deposits 31,458
Capital lease payable 9,830
Stock issuance cost payable 254,840
-----------
Total current liabilities 1,083,320
-----------
Capital lease payable 23,885
-----------
Stockholders' equity:
Series A convertible redeemable preferred stock,
$0.001 par value, 2,500,000 shares authorized and
396,500 shares issued and outstanding, 7%
cumulative, with a $1.00 per share preference value 397
Series B convertible redeemable preferred stock,
$0.001 par value, 1,700,000 shares authorized and
972,400 shares issued and outstanding, with a $1.00
per share preference value and $1.00 for subscriptions
over $100,000 972
Common stock, $0.001 par value, 100,000,000 shares
authorized, 17,386,250 shares issued and outstanding 17,386
Additional paid-in capital 7,290,741
Accumulated deficit (5,052,173)
Outstanding stock options 27,000
-----------
Total stockholders' equity 2,284,323
-----------
Total liabilities and stockholders' equity $ 3,391,528
===========
See accompanying notes to condensed financial statements.
F-16
<PAGE>
INTRACO SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Systems/networks $ 1,156,616 $ 209,726 $ 3,860,396 $ 1,597,149
Service contracts 108,318 114,030 496,887 426,078
------------ ------------ ------------ ------------
Total revenues 1,264,934 323,756 4,357,283 2,023,227
------------ ------------ ------------ ------------
Cost of Revenues:
Systems/networks 1,155,623 178,864 3,327,462 1,201,129
Service contracts 87,191 38,855 299,762 246,346
------------ ------------ ------------ ------------
Total cost of revenues 1,242,814 217,719 3,627,224 1,447,475
------------ ------------ ------------ ------------
Gross profit 22,120 106,037 730,059 575,752
General and administrative 1,612,139 619,841 3,775,593 1,381,038
------------ ------------ ------------ ------------
Loss from operations (1,590,019) (513,804) (3,045,534) (805,286)
------------ ------------ ------------ ------------
Interest income 53,937 8,487 82,568 27,647
Interest expense (636) (12,753) (14,312) (31,094)
Other income 5,074 -- 9,408 --
------------ ------------ ------------ ------------
Loss before income taxes (1,531,644) (518,070) (2,967,870) (808,733)
Provision (benefit) for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (1,531,644) $ (518,070) $ (2,967,870) $ (808,733)
============ ============ ============ ============
Net loss per share (basic and diluted) (0.09) (0.04) (0.18) (0.07)
============ ============ ============ ============
Weighted average number of shares
outstanding and to be issued 17,191,684 11,830,739 16,124,235 11,830,739
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F-17
<PAGE>
INTRACO SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND NINE MONTHS ENDED SEPTEMBER 30, 2000
====================================================================================================================================
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
Cost 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 - - - - - -
Cost associated with issuance of stock - - - - - -
Issuance of common stock - - - - 866,300 866
Acquisition of CTE assets - - - - 2,429,489 2,430
Cost associated with recapitalization - - - - - -
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
Conversion of preferred stock
to commom stock (370,900) (371) (16,600) (17) 388,000 388
Issuance of common stock - - - - 3,633,586 3,633
Issuance of common stock
for services - - - - 248,560 249
Exercise of options - - - - 95,115 95
Cost associated with issuance of stock - - - - - -
Dividends paid - - - - - -
Receipt of stock subscription - - - - - -
Net loss for the year - - - - - -
--------- --------- ----------- --------- ------------ ----------
Balance at Setember 30, 2000 396,500 $ 397 972,400 $ 972 17,386,250 $ 17,386
========= ========= =========== ========= ============ ==========
</TABLE>
<TABLE>
<CAPTION>
INTRACO SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND NINE MONTHS ENDED SEPTEMBER 30, 2000
====================================================================================================================================
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
Cost 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
Cost associated with issuance of stock - (244,846) - - (244,846)
Issuance of common stock - 865,434 - - 866,300
Acquisition of CTE assets (1,425) 1,005
Cost associated with recapitalization (283,153) (283,153)
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)
Conversion of preferred stock
to commom stock - - - 0
Issuance of common stock - 5,113,618 - - 5,117,252
Issuance of common stock
for services 401,087 - - 401,336
Exercise of options - (95) - - -
Cost associated with issuance of stock - (448,523) - - (448,523)
Dividends paid - (26,907) - - (26,907)
Receipt of stock subscription 446,300 - - - 446,300
Net loss for the year - - - (2,967,870) (2,967,870)
----------- ------------ --------- ----------- -----------
Balance at Setember 30, 2000 $ - $ 7,290,741 $ 27,000 $(5,052,173) $ 2,284,323
=========== ============ ========= =========== ===========
</TABLE>
F-18
<PAGE>
INTRACO SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,967,870) $ (808,733)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 134,766 17,308
Issuance of common stock for services 401,336 --
Changes in assets and liabilities
(Increase) decrease in:
Inventory (39,519) 35,899
Accounts receivable (250,202) (136,075)
Interest receivable -- (25,208)
Note receivable - related party 74,963
Prepaid expenses 4,616 81,024
Due from related party (6,907) 46,480
Due from shareholder --
Security deposits (3,120) (4,245)
Increase (decrease) in:
Accounts payable (609,589) 444,076
Deferred revenue (22,464) (24,917)
Customer deposits 27,558 (152,173)
Accrued expenses 227,799 43,656
----------- -----------
Net cash used by operating activities $(3,103,596) $ (407,945)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (894,123) (97,118)
Purchase of license agreement (50,000) --
----------- -----------
Net cash used by investing activities (944,123) (97,118)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock, net 5,369,869 957,517
Dividends paid (26,907) (1,092)
Repayment of long-term debt (130,188) (196,351)
Costs associated with recapitalization -- (283,153)
----------- -----------
Net cash provided by financing activities 5,212,774 476,921
----------- -----------
Net increase in cash 1,165,055 (28,142)
Cash at beginning of period 151,725 32,245
----------- -----------
Cash at end of period $ 1,316,780 $ 4,103
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-19
<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 310 of Regulation S-B. 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. Such
adjustments consist of normal recurring accruals and other adjustments.
These results have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the preparation
of the Company's Annual Financial Statements for the year ended December 31,
1999. Operating results for the nine months ended September 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:
SEPTEMBER 30,
2000
-----------
Leasehold improvements $ 57,908
Equipment 1,190,236
Furniture and fixtures 22,260
-----------
Total property and equipment 1,270,404
Less: accumulated depreciation (243,610)
-----------
Property and equipment, net $ 1,026,794
===========
Depreciation expense for the nine months ended September 30, 2000 was $101,243.
NOTE 3 - STOCKHOLDERS' EQUITY
-----------------------------
In April of 1999, CTE, an inactive public company, 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. The exchange ratio of common shares was
one-for-one. The estimated fair market value of the net assets acquired was
$1,005. As a result of the recapitalization, the Company is now authorized to
issue 100,000,000 shares of common stock.
In March of 2000, the Company sold approximately 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 approximately
3,475,000 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. The warrants were
issued to the outside investors and considered a cost of raising capital, and
the discount of $.50 per warrant or $15,000, for the 30,000 warrants has been
included in additional paid-in capital.
F-20
<PAGE>
INTRACO SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
NOTE 3 - STOCKHOLDERS' EQUITY, CONTINUED
----------------------------------------
During the nine months ended September 30, 2000, Intraco issued 50,000 shares of
restricted common stock as settlement of an employment contract. The 50,000
shares issued for services were valued at the fair market value of Intraco's
common stock at the date of issuance or $1.97 per share, the quoted market price
on the close of the prior day. The $98,400 has been included in current year
general and administrative expense
During the nine months ended September 30, 2000, Intraco issued 198,560 shares
of restricted common stock as payment of fees and issued 95,115 of restricted
common stock to one employee and five former employees in connection with the
exercise of stock options. The 198,560 shares issued for services were valued at
the fair market value of Intraco's common stock at the date of issuance or $1.53
per share, the quoted market price on the close of the prior day. The $302,936
has been included in current year general and administrative expense.
During the nine months ended September 30, 2000, preferred stock holders
converted 388,000 shares of preferred stock to common stock.
NOTE 4 - LICENSE AGREEMENT
--------------------------
The Company obtained a software license agreement in March of 2000 and it is
being amortized over 1 year, using the straight-line method. The Company
assesses whether its intangible assets are impaired as required by SFAS No 21,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" based on an evaluation of undiscounted projected cash flows
through the remaining amortization period. If impairment exists, the amount of
such impairment is calculated on the estimated fair value of the assets.
F-21
<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................... 45,000
Accounting fees and expenses.............. 10,000
Miscellaneous............................. 5,000
--------
Total..................................... $ 62,738
========
The Company will bear the foregoing expenses on behalf of the selling
shareholders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In November 1998, Intraco issued to Vestar warrants to purchase 150,000
II-1
<PAGE>
restricted shares of common stock at $0.25 per share in exchange for the
cancellation of an anti-dilution clause in the consulting agreement with Vestar.
The warrants were issued pursuant to an exemption from registration under
Section 4(2) of the Securities Act. To Intraco's knowledge, management of Vestar
was sophisticated in financial investments and was familiar with Intraco's
business and operations. No offering document was prepared, and no public
solicitation or general advertising was done in connection with this issuance.
Intraco did not pay any fees or commissions in connection with this issuance.
From December 1998 to July 1999, Intraco sold 714,900 restricted shares
of Series A preferred stock, par value $.001, for gross proceeds of $715,000.
Each share of Series A preferred stock is convertible into one share of common
stock. The shares are redeemable by Intraco at any time. The Series A preferred
stock was sold pursuant to the exemptions from registration under the Securities
Act pursuant to Section 4(2) thereof and Regulation S promulgated thereunder.
The Series A preferred stock was offered to accredited investors only pursuant
to an offering memorandum setting forth the terms of the offering and the Series
A preferred stock; Intraco's business operations, proposed use of proceeds of
the offering and management; Intraco's business plan; and financial statements
prepared by management. No public solicitation or general advertising was done
in connection with the offering. Intraco paid fees totaling $212,000 in
connection with this sale.
From October 1999 to December 1999, Intraco sold 989,400 restricted
shares of Series B preferred stock for gross proceeds 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 Series B preferred stock was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof and Regulation S promulgated thereunder. The Series B preferred stock
was offered to accredited investors only pursuant to an offering memorandum
setting forth the terms of the offering and the Series B preferred stock;
Intraco's business operations, proposed use of proceeds of the offering and
management; Intraco's business plan; and financial statements prepared by
management. No public solicitation or general advertising was done in connection
with the offering. Intraco paid fees totaling $40,000 in connection with this
sale.
In March 1999, Intraco entered into an agreement with H&J Investments
pursuant to which H&J Investments purchased 866,300 restricted 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 pursuant to Section 4(2) thereof. To
Intraco's knowledge, management of the investor was sophisticated in financial
investments and received a variety of financial and other information about
Intraco in connection with its due diligence. No public solicitation or general
advertising was done in connection with this sale. Intraco did not pay any fees
or commissions in connection with this sale.
In April 1999, Intraco issued 10,531,500 restricted shares of common
stock to a total of 40 shareholders of Intraco Systems, Inc., a Florida
corporation, as part of the share exchange with the Florida corporation's
shareholders. The transaction was completed pursuant to an agreement and plan of
exchange in accordance with the exemption from registration under Section 4(2)
of the Securities Act. To Intraco's knowledge, the shareholders of the acquired
II-2
<PAGE>
entity were sophisticated in financial investments and received a variety of
financial and other information about Intraco in connection with its due
diligence. No public solicitation or general advertising was done in connection
with the share exchange.
In June 1999, Intraco acquired the assets of Page Telecomputing and
issued 60,000 restricted shares of its common stock as consideration to the sole
shareholder. The aggregate value of the consideration received for the issuance
was $90,000. An additional 50,000 restricted shares of common stock were issued
in June 2000 to the sole shareholder in settlement of his employment contract.
The aggregate value of the shares issued as settlement is $98,400. The shares
were issued pursuant to an exemption from registration under Section 4(2) of the
Securities Act. To Intraco's knowledge, the shareholder was sophisticated in
financial investments and received a variety of financial and other information
about Intraco in connection with the shareholder's due diligence. No public
solicitation or general advertising was done in connection with this sale.
Intraco did not pay any fees or commissions in connection with this transaction.
In February 2000, the Company sold 160,000 restricted shares of common
stock and warrants to purchase 30,000 restricted 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 pursuant to Section 4(2) thereof. To
Intraco's knowledge, the investor was sophisticated in financial investments and
received a variety of financial and other information about Intraco in
connection with the investor's due diligence. No public solicitation or general
advertising was done in connection with this offering. Intraco did not pay any
fees or commissions in connection with this sale.
In March 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 restricted share of common stock and one warrant to purchase one restricted
share of common stock at $1.50 per share. The sale of the units was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof and were
made pursuant to a term sheet and unit purchase agreement. In addition to
Intraco's representations in the purchase agreement, the investors were provided
with a variety of financial and other information about Intraco in connection
with their due diligence. No public solicitation or general advertising was done
in connection with this offering. Intraco issued a warrant to purchase 210,000
restricted shares of common stock at $2.00 per share, 196,560 restricted shares
of common stock and a warrant to purchase 196,560 restricted shares of common
stock at $1.50 per share and paid a cash fee of $381,200 as a commission for
this sale and paid legal, accounting and other miscellaneous expenses of
$67,323.
In April 2000, Intraco issued 6,199 restricted shares of common stock
to one former employee upon the employee's exercise of stock options granted to
the employee under Intraco's stock option plan in connection with the person's
employment with Intraco. Intraco did not receive any proceeds from the exercise
of options because the optionholders used the cashless exercise method. The
shares were valued at $22,068. The shares were issued pursuant to an exemption
from registration under Section 3(a)(9) and 4(2) of the Securities Act. The
employee had access to the Company's reports filed pursuant to the Exchange Act
and a copy of the stock option plan and was familiar with Intraco's operations
and financial condition. Intraco did not pay any fees or commissions in
connection with this issuance.
II-3
<PAGE>
From April 2000 to June 2000, Intraco issued 2,000 shares of restricted
common stock to Mark Wachs Associates, a public relations firm, in connection
with services provided to Intraco. The shares issued were valued at $8,187.50.
The shares were issued pursuant to an exemption from registration under Section
4(2) of the Securities Act. To Intraco's knowledge, management of the firm was
sophisticated in financial investments and was familiar with Intraco's business
and operations. No offering document was prepared, and no public solicitation or
general advertising was done in connection with this issuance. Intraco did not
pay any fees or commissions in connection with this issuance.
In June 2000, Intraco issued 52,549 shares of restricted common stock
to one employee and three former employees upon the employees' exercise of stock
options granted to the employees under Intraco's stock option plan in connection
with their employment with Intraco. Intraco did not receive any proceeds from
the exercise of the options because the optionholders used the cashless exercise
method. The stock options were valued at an aggregate of $150,625. The shares
were issued pursuant to an exemption from registration under Sections 3(a)(9)
and 4(2) of the Securities Act. The individuals had access to the Company's
reports filed pursuant to the Exchange Act and a copy of the stock option plan
and were familiar with Intraco's operations and financial condition. Intraco did
not pay any fees or commissions in connection with these issuances.
In August 2000, Intraco issued 36,487 shares of restricted common stock
to two former employees upon the employees' exercise of stock options granted to
the employees under Intraco's stock option plan in connection with their
employment with Intraco. Intraco did not receive any proceeds from the exercise
of the options because the optionholders used the cashless exercise method. The
stock options were valued at an aggregate of $125,625. The shares were issued
pursuant to an exemption from registration under Sections 3(a)(9) and 4(2) of
the Securities Act. The individuals had access to the Company's reports filed
pursuant to the Exchange Act and a copy of the stock option plan and were
familiar with Intraco's operations and financial condition. Intraco did not pay
any fees or commissions in connection with these issuances.
From February 2000 to September 2000, Intraco issued 388,000 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 3(a)(9) of the Securities Act.
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.(l)
3.1 Amended and Restated Certificate of Incorporation(l)
3.2 By-laws(l)
II-4
<PAGE>
3.3 Certificate of Correction(2)
3.4 Certificate of Designation of Preferences, Rights and
Limitations of Series A Convertible Redeemable Preferred
Stock(2)
3.5 Certificate of Designation of Preferences, Rights and
Limitations of Series A Convertible Redeemable Preferred
Stock(2)
4.1 Form of Non-Callable A Warrant*
4.2 Form of Callable B Warrant*
4.3 Form of Callable C Warrant*
5.1 Opinion of Broad and Cassel*
9.1 Voting Trust Agreement dated February 1, 2000 between Jack
Berger and Walt Nawrocki(4)
10.1 1998 Stock Option Plan(l)
10.2 Employment Agreement dated January 1, 1998 between Intraco
Systems, Inc. and Jack Berger(l)
10.3 Amendment to Employment Agreement effective January 1, 2000
between Intraco Systems, Inc. and Jack Berger(4)
10.4 Employment Agreement dated January 18, 1999 between Intraco
Systems, Inc. and Robert Marcus(l)
10.5 Amendment to Employment Agreement effective January 1, 2000
between Intraco Systems, Inc. and Robert Marcus(4)
10.6 Employment Agreement dated September 24, 1999 between
Intraco Systems, Inc. and Walt Nawrocki(4)
10.7 Motorola Software License Agreement dated January 18, 2000
by and between Intraco Systems, Inc. and Motorola, Inc.(3)
10.8 Software License and Support Agreement between Intraco
Systems, Inc. and Nuance Communications(3)
10.9 Microsoft Certified Solution Provider Agreement by and
between Intraco Systems, Inc. and Microsoft Corporation(3)
23.1 Consent of Broad and Cassel (filed as part of Exhibit 5.1)
II-5
<PAGE>
23.2 Consent of Daszkal, Bolton & Manela Devlin & Co.*
24 Power of Attorney (see page II-5 of this registration
statement as originally filed)
--------------
* Filed herewith.
(1) Incorporated by reference from the registrant's Registration Statement on
Form 10-SB filed on August 18, 1999.
(2) Filed with Amendment No. 2 to this Registration Statement, File No.
333-44268.
(3) Filed with Amendment No. 1 to this Registration Statement, File No.
333-44268.
(4) Incorporated by reference from the registrant's Annual Report on Form
10-KSB for the year ended December 31, 1999.
ITEM 28. UNDERTAKINGS.
(a) 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.
(b) 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.
II-6
<PAGE>
(c) 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-7
<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 Amendment No. 3
to the registration statement to be signed on its behalf by the undersigned, in
the City of Boca Raton in the State of Florida on the 2nd day of January,
2001.
INTRACO SYSTEMS, INC.
By: /s/ WALT NAWROCKI
--------------------------------------
Walt Nawrocki, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Amendment No. 2 to the registration statement has been signed by
the following persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE
---------------------------- ---------------------------- --------------------
* Chairman of the Board January 2, 2001
----------------------------
Robert Hildreth, Jr.
* President and Director January 2, 2001
----------------------------
Jack S. Berger
Chief Executive Officer January 2, 2001
and Director (Principal
* executive officer)
----------------------------
Walt Nawrocki
Chief Financial Officer January 2, 2001
/s/ ROBERT MARCUS (Principal accounting
---------------------------- officer)
Robert Marcus
* Director January 2, 2001
----------------------------
William D. Hager
* Director January 2, 2001
----------------------------
Benjamin W. Krieger
*By: /s/ ROBERT MARCUS
-------------------------------
Robert Marcus, Attorney-in-fact
II-8
<PAGE>
