UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 2-94704-NY
INTELLIQUIS INTERNATIONAL, INC.
(Formerly Leesburg Land and Mining, Inc.)
(Exact name of Registrant as specified in its charter)
NEVADA 87-0630562
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
352 WEST 12300 SOUTH #300 DRAPER, UTAH 84020
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (801) 990-2600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports, and (2) has been
subject to such filing requirements for the past 90 days.
[ X ] YES [ ] NO
As of August 4, 1999 the number of shares outstanding of the Registrant's
Common Stock was 33,462,420.
Transitional Small Business Disclosure Format - (check one):
[ ] YES [ X ] NO
Intelliquis International Inc. and Subsidiary
(formerly Leesburg Land and Mining, Inc.)
Form 10QSB
For the Quarterly Period Ended June 30, 1999
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements
a) Condensed Balance Sheets as of June 30, 1999 and
December 31, 1998 3
b) Condensed Statements of Operations for the three and
six months ended June 30, 1999 and 1998 4
c) Condensed Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 5
d) Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 10
Part II. Other Information 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
(formerly Leesburg Land and Mining, Inc.)
Condensed Balance Sheets
ASSETS
June 30, December 31,
1999 1998
(Unaudited) (Audited)
Current assets
Cash $ 56,064 $23,074
Accounts receivable (Note 2) 2,722,188 619,966
Inventory (Note 2) 140,440 130,517
Prepaid expenses 16,479 6,838
Deposits 8,753 500
2,943,924 780,895
Property, Plant & Equipment (Note 2) 119,604 54,297
Other assets
Certificate of deposit (Note 2) 41,584 40,351
Intangibles (Note 2) 7,271 8,328
Total Assets $3,112,383 $883,871
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $1,407,371 $502,973
Short term notes (Note 3) 79,500 104,500
Short term notes - related party (Note 4) 1,000 85,000
1,487,871 692,473
Commitments and Contingencies (Note 8)
Stockholders' Equity
Preferred Stock, 5,000,000 shares authorized,
par value $.001, no shares outstanding - -
Common Stock, 50,000,000 shares authorized,
$.001 par, 39,665,364 and 37,759,233
shares issued and outstanding, respectively (Note 6) 39,665 37,759
Additional paid in capital 1,342,335 132,241
Retained earnings 402,512 21,398
Treasury Stock (Note 6) (160,000) -
1,624,512 191,398
Total Liabilities and Stockholders' Equity $3,112,383 $883,871
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
(formerly Leesburg Land and Mining, Inc.)
Condensed Statements of Operations
For the three and six months ended
June 30, 1999 and 1998
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
Sales $ 2,199,137 $ 643.607 3,419,410 834,645
Cost of Sales 1,151,990 189,624 1,655,680 238,773
Gross Margin 1,047,147 453,983 1,763,730 595,872
Expenses:
Sales & Marketing 276,831 258,827 395,447 289,437
General & Administrative 472,399 69,013 738,655 120,909
Total Expenses 749,230 327,840 1,134,102 410,346
Operating Income (Loss) 297,917 126,143 629,628 185,526
Other Income (Expense) (217) (643) (4,687) (643)
Net Income (Loss) before Taxes 297,700 125,500 624,941 184,883
Taxes (Note 1) 116,148 - 243,827 -
Net Income (Note 6) 181,552 125,500 $381,114 184,883
Net Income Per Share
(Note 6) .006 - .011 -
Total average shares
outstanding 33,178,790 - 34,167,578 -
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
(formerly Leesburg Land and Mining, Inc.)
Statements of Cash Flows
For the six months ended
June 30, 1999 and 1998
(Unaudited)
Six Months Ended
June 30,
1999 1998
Cash Flows from Operating
Activities:
Net income $381,114 $184,883
Non Cash Flow Items:
Depreciation & Amortization 12,193 3,651
Increase (decrease) in
Accounts receivable (2,102,222) (676,313)
Inventory (9,923) (10,617)
Prepaid expenses & deposits (17,894 (3,995
Accounts payable & accrued expenses 904,398 419,350
Net Cash Flows used in
Operating Activities (832,334) (83,041)
Cash Flows from Financing Activities:
Cash from private placement of stock 1,062,000 -
Stock issued for public relations services 150,000 -
Purchase of treasury stock (160,000) -
Net Cash Flows from
Financing Activities 1,052,000 -
Cash Flows from Investing
Activities:
Purchase of fixed assets (76,443) (8,828)
Purchase of intangibles & other assets (1,233 -
Proceeds from short-term debt - 5,000
Cash used to pay-off short-term debt (109,000 40,000
Net Cash Flows used in Investing Activities (186,676 36,172
Net increase (decrease) in cash 32,990 (46,869)
Cash, beginning of year 23,074 52,455
Cash, end of period $ 56,064 $5,586
Supplemental Cash Flow Information
Cash Paid for:
Taxes $ - $ -
Interest $ 9,594 $ 643
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
(formerly Leesburg Land and Mining, Inc.)
Notes to The Financial Statements
June 30, 1999
NOTE 1 - Background and History
Intelliquis International, Inc. (the Company) (formerly Leesburg Land and
Mining, Inc.) was created on June 21, 1983 in the State of Colorado. The
Company was involved in mining activities until approximately 1987, when it
ceased all activities and began disposing of its assets. It has not had
any business activity since that time. The Company changed its name in
December 1998.
Also in December 1998, the Company created and later merged with a Nevada
subsidiary.
Intelliquis, LLC was created in 1997 as a corporation and later
reorganized as a limited liability company in the State of Utah. Intelliquis
was organized for the purpose of licensing and marketing computer software to
wholesale and private label customers.
Intelliquis International, Inc. acquired all of the outstanding units of
Intelliquis LLC effective December 31, 1998.
The acquisition is accounted for as a "reverse acquisition" where the
parent corporation is taken over by the owners of the subsidiary. All
activity of the financial reports is that of the subsidiary operation.
NOTE 2 - Significant Accounting Policies
Cash and Cash Equivalents The Company considers all short term, highly
liquid investments that are readily convertible to known amounts as cash
equivalents.
Intangible Assets Intangible assets consist of contract design work and
goodwill. Both intangibles are being amortized over 60 months on the straight
line method. Amortization expense was $2115 for 1998. The Company's
amortization expense for the second quarter of 1999 and 1998 was $529 and
$529, respectively. Amortization expense for the first six months of 1999
and 1998 was $1,028 and $529, respectively.
Use of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. In these financial statements, assets, liabilities and earnings
involve extensive reliance on management's estimates. Actual results could
differ from those estimates.
Income Taxes The Company adopted Statement of Financial Standards No. 109
"Accounting for Income Taxes" in the fiscal year ended December 31, 1998 and
applied it retroactively.
Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes" requires an asset and liability approach for financial
accounting and reporting for income tax purposes. This statement recognizes
(a) the amount of taxes payable or refundable for the current year and (b)
deferred tax liabilities and assets for future tax consequences of events that
have been recognized in the financial statements or tax returns.
The federal income tax provision is $101,264 and $0 for the second
quarter of 1999 and 1998, respectively. The state tax provision is $14,884
and $0 for the second quarter of 1999 and 1998, respectively. The federal
income tax provision is $212,580 and $0 for the first six months of 1999 and
1998, respectively. The state tax provision is $31,247 and $0 for the first
six months of 1999 and 1998, respectively.
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
(formerly Leesburg Land and Mining, Inc.)
Notes to The Financial Statements
June 30, 1999
NOTE 2 - Significant Accounting Policies (continued)
Deferred income taxes result from temporary differences in the
recognition of accounting transactions for tax and financial reporting
purposes. There were no temporary differences at December 31, 1998 and
earlier years; accordingly, no deferred tax liabilities have been recognized
for all periods.
The Company has cumulative net operating loss carry forwards of more than
$4,000,000 at December 31, 1998. No effect has been shown in the financial
statements for the net operating loss carry forwards as the likelihood of
future tax benefit from such net operating loss carry forwards is highly
improbable. Accordingly, the potential tax benefits of the net operating
loss carry forwards, estimated based upon current tax rates at December 31,
1998, have been offset by valuation reserves of the same amount.
The subsidiary operation was a limited liability company (LLC) in 1997
and 1998. LLC's report their earnings on a partnership tax return and no tax
liability accrued at the company level. Taxable income is allocated to its
individual members and tax paid by each member.
Inventory consists of finished goods (assembled and unassembled computer
software) that is valued at lower of cost (FIFO) or market.
Certificate of Deposit The Company holds a Certificate of Deposit as
partial security for a short term loan at the Company's bank (see Note 3).
The certificate matures on September 10, 1999. Interest is stated at 4.91%.
Fixed Assets
Fixed assets consist of the following:
June 30, December 31,
1999 1998
Computer Equipment & Software $106,135 $32,886
Office Equipment & Furniture 37,742 34,549
143,877 67,435
Less: Accumulated Depreciation (24,273) (13,138)
$ 119,604 $ 54,297
Computer equipment and software is being depreciated on the straight line
method over three to five years. Office equipment is being depreciated on
the straight line method over five years. Depreciation expense was $8,641 for
1998. For the second quarter the depreciation expense is $6,224 and $1,912
for 1999 and 1998, respectively. For the first six months the depreciation
expense is $11,135 for 1999 and $3,122 for 1998.
Principles of Consolidation The Company consists of the parent
corporation, Intelliquis International, Inc., and its subsidiary, Intelliquis
LLC. The two companies together report as a consolidated group referred to
here as the "Company". All inter-company accounts and transactions have been
eliminated.
Accounts Receivable Accounts Receivable are shown net of allowance for
returns of $328,000 and $186,660 and allowance for bad debt of $150,000 and
$150,000 for the first six months ended June 30, 1999 and for fiscal year
1998, respectively.
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
(formerly Leesburg Land and Mining, Inc.)
Notes to The Financial Statements
June 30, 1999
NOTE 3 - Short Term Notes
The Company has acquired short term borrowing for working capital as
follows:
June 30, December 31,
1999 1998
Note payable to a bank, secured by
$40,000 certificate of deposit, all
assets of the Company and personal
guarantees from certain officers of
the corporation, interest stated at 10%,
due March 10, 2000 $ 79,500 $ 79,500
Note payable to an individual, no
security, interest stated at 25%
payable in January 1999 - 25,000
$ 79,500 $ 104,500
Interest expense for fiscal 1998 was $3,584. The interest expense for the
second quarter of 1999 is $3,016 and $643 for the same quarter in 1998. The
Company incurred interest expense of $9,594 and $643 for the first six months
of 1999 and 1998, respectively.
NOTE 4 - Short Term Notes - Related Party
The Company has acquired short term financing from two officers of the
corporation. One loan was for $80,000 and was paid during the first quarter
of 1999. The other loan is for $5,000 of which $4,000 was paid during the
second quarter of 1999. This is a demand note with no interest accruing.
NOTE 5 - Economic Dependency
The Company currently uses one major distributor for most of its sales.
That distributor accounted for 55% and 76% of all sales in the second quarter
of 1999 and 1998, respectively. The same distributor accounted for 55% and
75% of sales in the first six months of 1999 and 1998, respectively. The
Company could recognize significant declines in sales if that distributor or
the Company chooses to alter its current sales relationship.
NOTE 6 - Member Contributions/Common Stock Transactions
In 1998, the Company continued to operate as a limited liability company
until December 31, 1998 when Intelliquis International, Inc. acquired 100% of
the membership units in exchange for 32,511,600 shares of
common stock. Before the acquisition, the corporation had 5,247,633
shares outstanding with no assets and no liabilities. In relation, net income
per share or total average shares outstanding are not indicated for the second
quarter or first six months of 1998 because the company was operating as
a limited liability company during that time.
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
(formerly Leesburg Land and Mining, Inc.)
Notes to The Financial Statements
June 30, 1999
On April 12, 1999 the Company announced a 3-for-1 stock split payable to
shareholders of record as of the close of business on April 23, 1999. The
payout date was April 29, 1999 and the execution date was April 30, 1999. All
numbers pertaining to the shares of the company have been reported using the
3-for-1 stock split.
Private Placement During the first quarter of 1999, the Company
concluded a private placement offering of common stock. The amount raised was
$1,062,000 with 1,446,000 shares issued. The Company issued 159,300 shares
for commissions of $106,200 related to the private placement. In addition,
the company issued 75,831 shares for attorney fees of $50,554 incurred as a
part of the private placement. Also, in the first quarter of 1999, the
Company repurchased 6,202,944 of the company shares for $160,000. During the
second quarter the Company issued 225,000 shares to an investor relations firm
for $150,000 in services.
NOTE 7 - Subsequent Events
In January of 1999, the Company leased office space for a term of three
years at $4,000 per month. In addition, the Company has converted
approximately 272 of warehouse space to office space.
The Company entered into an asset acquisition agreement with Direct Media
Communications on July 7, 1999. The asset being acquired is a technology
code-named global communication module (GCM) which allows for an unlimited
number of users to interact over networks and/or the Internet using a
variety of data types, including audio, live and recorded video, text and html,
among others, and combines these various data types into one data stream.
Pursuant to that agreement the Company is obligated to acquire the assets of
Direct Media for 1.5 million shares of common stock and the payment of $1
million in cash which the Company is obligated to pay on or before October
7, 1999. The Company is also obligated to issue up to an additional 12
million shares to Direct Media based on the future sales of the GCM.
NOTE 8 - Commitments and Contingencies
On May 6, 1999, On The Planet, Inc. filed a lawsuit in the United States
District Court for the District of Utah against Intelliquis International,
Inc. ("Intelliquis"). The claims purportedly arise out of a Software Rights
Agreement under which Intelliquis granted On The Planet "an exclusive license
for direct sales along with a nonexclusive license for all other sales
including but not limited to retail sales" for certain Y2K fix software
identified therein. On The Planet asserts that Intelliquis violated that
Agreement by engaging in direct sales or giving third parties a license to
engage in direct sales of the Y2K fix software and other related products. On
The Planet asserts claims of copyright infringement, breach of contract and
fraud. In addition to injunctive relief, On The Planet is seeking unspecified
damages including profits lost through the direct sales of the Y2K fix
software, as well as attorneys' fees and punitive damages. In response to the
lawsuit filed by On The Planet, Intelliquis has denied the claims filed
against it and has filed counterclaims seeking rescission of the Software
Rights Agreement and asserting breach of contract of that Agreement.
Intelliquis has also filed a motion to amend its counterclaims and add
additional claims against On The Planet and its principal, Ernest Hemple,
arising from conduct that Intelliquis believes constitutes defamation and
interference with contract. If an amicable resolution is not reached in
the near future, Intelliquis intends to vigorously defend the action and
prosecute its counterclaims.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
The Company seeks to become a leading republisher, marketer and supporter of
Year 2000, Internet utility, productivity and communication software products
for the computer software retail market. The Company was incorporated as
Leesburg Land and Mining Inc. in Colorado for the purpose of conducting mining
operations. Effective December 31, 1998, the Company acquired all of the
equity of Intelliquis LLC, which then became a wholly owned subsidiary ("the
Subsidiary") of the Company. During this same period the Company changed its
corporate domicile to Nevada and changed its name to Intelliquis
International, Inc. The Subsidiary was founded in August 1997 and organized
in December 1997 as a Utah Limited Liability Company. As a result of the
acquisition of the Subsidiary, the controlling shareholders of the Subsidiary
became controlling shareholders of the Company.
The Company (hereafter "the Company" may be used to include the activities
of its newly acquired Subsidiary) seeks to build a leadership position in the
computer software retail market by licensing fully tested software
applications from independent software developers. In time, the Company
intends to acquire a family of software applications. The Company's main
emphasis lies in PC utilities titles, but the Company intends in the future to
offer a selection of reference, productivity and communication titles both in
the North American and International market. The software products are being
marketed through traditional software distribution channels and the Internet's
World Wide Web. The Company is currently building distribution and financing
capabilities worldwide, with particular emphasis in Southeast Asia.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $832,334 and $83,041 for the six
months ended June 30, 1999 and 1998, respectively. The Company's operating
cash flows have been insufficient to satisfy growing cash needs without the
help of a private placement offering of $1,062,000 (1,446,000 shares) during
the first quarter of 1999. Also, the Company is currently negotiating better
terms for outstanding accounts receivable which will aid to increase cash flow.
However due to the growth of the Company, the Company anticipates that it will
need additional funds other than that provided through operations in order to
meet its obligations.
Liquidity is a significant concern for the Company until it can generate
adequate cash flows from operations, which are primarily dependent on the
development, marketing and distribution of the Company's products. Management
believes that continued financing from private investors through the issuance
of Common Stock must be obtained in order to meet the Company's expected
growth and capital needs for the coming year. The Company is currently
pursuing additional funding through a private placement of $5,000,000 to
$10,000,000 to provide additional cash to meet the Company's growth plans.
With the additionalinfusion of capital and the existing receivables, the
Company is planning to build additional inventory, hire additional staff,
meet its budgeted marketing efforts and acquire other products or businesses.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998
The Company derives revenue from the sale of software products, which it
licences from developers and resells. The Company sells its products in North
America primarily through retailers and distributors. The Company's
international sales represented less than 1% and 0% of sales during the
second quarter of 1999 and 1998, respectively.
The Company's sales increased $1,555,530 from $643,607 for the second quarter
of 1998 to $2,199,137 for the same period in 1999. The Company's increase in
sales and increases in other items from operations are due primarily to the
increasing sales of the IntelliFix 2000, Web-Site Traffic Builder and Total
Fax products. The Company expects sales to continue to increase for the rest
of the fiscal year due to the growing demand for its year 2000 software
products.
Cost of sales includes cost of goods sold, royalties paid to developers and
the costs for maintaining technical support. The cost of sales totaled
$1,151,990 for the three months ended June 30, 1999 and constituted 52% of
total sales as compared to $189,624 and 29% of total sales for the same period
in 1998. The change in the percent of sales is primarily due to an increase
in royalty fees and cost of production for the titles being produced during
the second quarter of 1999. The bulk of this increase is associated with a
special promotion that the company conducted with respect to one of its
products, TotalFax. Cost of the TotalFax sales increased due to a promotion
that includes the sale of a modem with the purchase of each product. In
addition, the Company's increased sales of ISA cards has increased cost of
goods sold as a percentage because the cost of production and royalties are
significantly higher for the cards than other products. The Company
anticipates that cost of sales as a percentage of sales should be
approximately 50% for the next two quarters due to anticipated sales of the
ISA cards.
The total sales and marketing for the second quarter of 1999 amounted to
$276,831 while the same period in 1998 amounted to $258,827. The Company
participated in a variety of marketing promotions during the second quarter of
1999, but none were as expensive as the free TotalFax rebate offered in 1998.
In the second quarter of 1998 the Company participated in a promotion for a
rebate with the purchase of the TotalFax program. Sales and marketing expense
as a percentage of sales were 13% and 40% for the three months ended June 30,
1999 and 1998, respectively. The Company expects sales and marketing expense
to approach 12% for the next two quarters as it continues its aggressive
marketing promotions.
General and administrative expenses totaled $472,399 and $69,013 for the three
months ended June 30, 1999 and 1998, respectively. The increase in costs can
be attributed to the continued growth of the Company and the hiring of an
investor relations firm. The growth of the Company has made it necessary to
hire more employees and to lease additional office and warehouse space.
General and administrative costs have increased as a percentage of sales to
21 %from 11% for the three months ended June 30, 1999 and 1998, respectively.
The Company anticipates general and administrative expenses as a percentage of
sales to decrease to 20% over the next two quarters due economies of scale
that have been achieved.
For the rest of 1999, the Company expects to continue to grow by realizing
overseas growth in its current product lines. During the second quarter of
1999, the Company established a sales/fulfillment center in Ireland to handle
sales in Europe. Also, the Company has a similar arrangement in Malaysia to
handle sales in the Far East. International sales are expected to be
approximately 30% of total volume for 1999. The Company's sales for the
first six months has already exceeded total sales for fiscal year 1998 and is
expected to experience additional growth in its sales of its IntelliFix 2000
product and ISA Cards as the year 2000 approaches and the Y2K problem becomes
more prominent. In addition, the Company plans to market and sale the global
communication module (GCM), acquired with Direct Media, during the fourth
quarter of 1999. The GCM allows for an unlimited number of users to interact
over networks and/or the Internet using a variety of data types, including
audio, live and recorded video, text and html, among others, and combines these
various data types into one data stream.
The Company is currently planning to use the proceeds of the private
placements for expanding its marketing budget, for acquisitions of subsidiaries
and for expansion and diversification of its products and/or other services.
The Company is also expanding its sales potential and presence by selling its
products directly to consumers over the Internet, thus eliminating significant
overhead expenses associated with wholesale and retail marketing through
existing channels.
For the three months ended June 30, 1999, the Company reported operating
income of $297,917, compared to operating income of $126,143 in the
corresponding period in 1998. The increase is primarily attributed to
increased sales of the IntelliFix 2000, Web-Site Traffic Builder and Total
Fax products.
For the three months ended June 30, 1999, the Company reported net income of
$181,552, compared to net income of $125,500 in the corresponding period in
1998. The increase is primarily attributed to increased sales of the
IntelliFix 2000, Web-Site Traffic Builder and Total Fax products.
Six Months Ended June 30, 1999 and 1998
The Company's sales amounted to $3,419,410 and $934,645 for the six months
ended June 30, 1999 and 1998, respectively. The Company's increase in sales
and increases in other items from operations are due primarily to the
increased sales of the IntelliFix 2000, Web-Site Traffic Builder and Total
Fax products. Also, the Company had three more products in its sales
production for the first six months that were not in the sales channels for
all six months of the same period in 1998. In addition, sales of the ISA
Cards have increased dramatically during 1999 over the same period in 1998.
The cost of sales totaled $1,655,680 and $238,773 for the first six months
of 1999 and 1998, respectively. Cost of sales as a percentage of sales
increased to 48% for the first six months of 1999 from 29% for the same
period in 1998. The change in the percent of sales is primarily due to an
increase in royalty fees and cost of production for the titles being produced
during the first six months of 1999. The bulk of this increase is associated
with a special promotion that the Company conducted with respect to one of its
products, TotalFax. Cost of the TotalFax product increased due to a
promotion that includes the sale of a modem with the purchase of each product.
In addition, the Company's increased sales of ISA cards has increased cost of
goods sold as a percentage because the cost of production and royalties are
significantly higher for the cards than other products. The Company
anticipates that cost of sales as a percentage of sales should be
approximately 50% for the next two quarters due to anticipated sales of the
ISA cards.
The total sales and marketing for the first six months of 1999 amounted to
$395,447 while the same period in 1998 amounted to $289,437. The increase of
$106,010 in sales and marketing expenses is primarily due to the Company's
aggressive marketing of its' products through a number of major retailers.
The increase would be larger if not for the TotalFax rebate promotion offered
during the first six months of 1998. The Company expects sales and marketing
expense to approach 12% for the next two quarters as it continues its
aggressive marketing promotions.
General and administrative expenses totaled $738,655 and $120,909 for the
first six months of 1999 and 1998, respectively. General and administrative
expenses amounted to 22% and 14% of sales for the first six months of 1999 and
1998, respectively. The growth of the Company has made it necessary to hire
more employees and to lease additional office and warehouse space. In
addition, the Company has employed an investor relations firm that has
significantly increased general and administrative expenses. The Company
anticipates general and administrative expenses as a percentage of sales to
decrease to 20% over the next two quarters due economies of scale that have
been achieved.
For the six months ended June 30, 1999, the Company reported operating income
of $629,628, compared to operating income of $185,526 in the corresponding
period in 1998. The increase is primarily attributed to increased sales of
the IntelliFix 2000, Web-Site Traffic Builder and Total Fax products.
For the six months ended June 30, 1999, the Company reported net income of
$381,114, compared to net income of $184,883 in the corresponding period in
1998. The increase is primarily attributed to increased sales of the
IntelliFix 2000, Web-Site Traffic Builder and Total Fax products.
CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS AND MARKET
PRICE OF STOCK
Intelliquis operates in a rapidly changing environment that involves a
number of risks and uncertainties, some of which are beyond the Company's
control and any of which may have an adverse effect on the Company's business,
financial condition and results of operations. These uncertainties include,
but are not limited to, the Company's reliance on the sale of few products;
the Company's dependence on the ability of its distribution channels to
market the Company's products; the Company's dependence on one major
distributor for retail sales; the Company's reliance on its Y2K software for
a majority of revenues; the uncertainty of the potential impact of the Year
2000 on computer systems; and the outcome of any litigation the Company may
be involved in.
YEAR 2000 COMPLIANCE
The Company has assessed the impact of the Year 2000 issue* on its information
technology ("IT") and non-IT systems. Five thousand dollars ($5,000.00) has
been incurred to upgrade existing systems so that they are Year 2000
compatible. The Company financed the upgrades with operating income. The
Company anticipates additional expenditures of three hundred and fifty
dollars ($350.00) in connection with Year 2000 compliance.
The Company's two servers have been tested for Year 2000 compliance and each
has been found to meet the National Software Testing Laboratories Standard.
Each of the Company's two operating systems have also been updated for Year 2000
compliance. Management believes that its computer systems are Year 2000
compliant. Nevertheless, significant uncertainty exists concerning the
potential impact of the Year 2000 on computer systems generally. Any year
2000 compliance problems of the Company or any of its customers or such
affiliates could have a material adverse effect upon the Company's business,
results of operations, or financial condition. (See "Risk Factors").
At the present time, the Company believes that a reasonable worst case
scenario involving a Year 2000 event would be an interruption in certain normal
business activities or operations. However, the Company believes that as it
continues its year 2000 assessment the risk of such an event will decrease.
The Company currently is in the process of developing contingency plans for
dealing with Year 2000 issues, including the worst case scenario just
described. Those plans are scheduled to be complete and in place by September
30, 1999.
The costs of the projects and the dates on which the Company believes it will
complete the Year 2000 upgrades are based on management's best estimates at
this time, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantees that these estimates will be achieved,
that personnel trained in this area will be available at a reasonable cost,
or that we will locate and correct all relevant computer codes and similar
uncertainties.
The "Year 2000 Problem" has arisen because many computer programs were
written using only the last two digits to refer to a year (i.e. "98" for
1998). Therefore, these computer programs may not properly recognize the year
2000. If not corrected, many computer applications could fail or create
erroneous results.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 6, 1999, On The Planet, Inc. filed a lawsuit in the United States
District Court for the District of Utah against Intelliquis International,
Inc. ("Intelliquis"). The claims purportedly arise out of a Software Rights
Agreement under which Intelliquis granted On The Planet "an exclusive license
for direct sales along with a nonexclusive license for all other sales including
but not limited to retail sales" for certain Y2K fix software identified
therein. On The Planet asserts that Intelliquis violated that Agreement by
engaging in direct sales or giving third parties a license to engage in
direct sales of the Y2K fix software and other related products. On The
Planet asserts claims of copyright infringement, breach of contract and
fraud. In addition to injunctive relief, On The Planet is seeking unspecified
damages including profits lost through the direct sales of the Y2K fix
software, as well as attorneys' fees and punitive damages. In response to
the lawsuit filed by On The Planet, Intelliquis has denied the claims filed
against it and has filed counterclaims seeking rescission of the Software
Rights Agreement and asserting breach of contract of that Agreement.
Intelliquis has also filed a motion to amend its counterclaims and add
additional claims against On The Planet and its principal, Ernest Hemple,
arising from conduct that Intelliquis believes constitutes defamation and
interference with contract. If an amicable resolution is not reached in the
near future, Intelliquis intends to vigorously defend the action and prosecute
its counterclaims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
2.1 "Asset Acquisition Agreement with Direct
Media, dated July 7, 1999"
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Intelliquis International, Inc.
By: /s/ Dave Jones
Dave Jones, Chief Financial Officer
Dated: August 13, 1999
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