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 MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-12139
INTELLIQUIS INTERNATIONAL, 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 May 15, 2000 the number of shares outstanding of the Registrant's Common
Stock was 34,320,475.
Transitional Small Business Disclosure Format - (check one): [ ] YES
[ X ] NO
Intelliquis International Inc. and Subsidiary
Form 10QSB
For the Quarterly Period Ended March 31, 2000
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements
a) Condensed Balance Sheets
as of March 31, 2000 and December 31, 1999 3
b) Condensed Statements of Operations
for the three and nine months ended March 31,
2000 and 1999 4
c) Condensed Statements of Cash Flows
for the nine months ended March 31, 2000 and 1999 5
d) Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 14
Part II. Other Information 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
ASSETS
March 31, December 31
2000 1999
(Unaudited) (Audited)
Current assets
Cash (Note 2 and 11) $225,491 $264,395
Accounts receivable-trade (Note 2) 3,658,887 4,123,507
Accounts receivable-employee (Note 2) 68,498 56,632
Note Receivable (Note 3) 111,461 598,220
Inventory (Note 2) 633,423 551,845
Prepaid expenses 371,594 31,660
Deposits 10,200 7,700
5,079,554 5,633,959
Property, Plant & Equipment (Note 2) 144,326 147,350
Other assets
Certificate of deposit (Note 2) 42,826 42,256
Intangibles (Note 2) 23,259 6,213
Inventory - Long Term (Note 2) 400,000 400,000
Total Assets $5,689,965 $6,229,778
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $2,781,840 $ 3,115,869
Short term notes (Note 3) 302,142 275,853
Short term notes - related party (Note 4) - -
Accrued dividends payable 51,946 22,028
3,135,928 3,413,750
Commitments and Contingencies (Note 9)
Stockholders' Equity
Preferred Stock, 5,000,000 shares authorized,
par value $.001, 1,500 shares outstanding 2 2
Common Stock, 50,000,000 shares authorized,
$.001 par, 33,970,475 shares issued and outstanding 33,970 33,462
Additional paid in capital 2,821,402 2,835,672
Retained earnings (deficit) (301,337) (53,108 )
2,554,037 2,816,028
Total Liabilities and Stockholders' Equity $5,689,965 $ 6,229,778
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Preferred Common Paid in Members' Retained
Shares Amount Shares Amount Capital Equity Deficit
Balance, January 1, 1997 $ - $ - $ - $ - $ - $ - $ -
Members' Equity - - - - - 170,000 -
Net loss - - - - - - (54,523)
Balance, December 31, 1997 - - - - - 170,000
(54,523)
Issuance of common
stock for purchase of
Intelliquis, Inc. - - 37,759,233 37,759 132,241
(170,000) -
Net Income - - - - - - 75,921
Balance, December 31, 1998 - - 37,759,233 37,759 132,241
21,398
Common stock repurchase
(Note 4 &7) - - (6,202,944) (6,203) (153,797)
- -
Issuance of common stock
in a private placement
(Note 7) - - 1,815,000 1,815 1,060,185 -
-
Issuance of preferred
stock (Note 6) 2,000 2 - - 1,730,453 - -
Issuance of common stock
to employees (Note 7) - - 91,344 91 66,590
- -
Fractional common shares
canceled in 3 for 1 forward
stock split - - (213) - -
- -
Net Income (loss) - - - - -
- (74,506)
Balance, December 31, 1999 2,000 $ 2 $33,462,420 $ 33,462
$2,835,672 $ - $ (53,108)
Preferred shares converted to
Common shares, Feb 2000 (200) - 508055 508
(508) -
-
Net Income (loss) - - - - - - $ (248,229)
Balance, March 31, 2000 1800 $ 2 33,970,475 $ 33,970 $
2,835,164 $ (301,337)
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Statements of Operations
For the three months ended
March 31, 2000 and 1999
(Unaudited)
2000 1999
Sales
$ 404,796 $ 1,220,274
Cost of Sales 138,063 503,690
Gross Margin 266,733 716,584
Expenses:
Sales & Marketing 240,327 118,316
General & Administrative 214,916 266,544
Total Expenses 455,243 384,860
Operating Income (Loss) (188,510) 331,724
Other Income (Expense)
Interest Expense (44,774) (6,578)
Interest Income 15,372 2,108
Bad Debt (399) -
(29,801) (4,470)
Net Income (Loss) before Taxes (218,311) 327,254
Income Tax Expense (Note 2) - 127,679
Net Income (Loss) ($218,311 ) $199,575
Preferred Dividends 29,918 -
Net Income (Loss) Attributable to Common Stock
($248,229 ) $199,575
Net Income (Loss) Per Share ($ .006) $ .006
Total average shares outstanding 33,784,188
35,177,754
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2000 1999
Cash Flows from Operating
Activities:
Net income ($248,229 ) $199,575
Non Cash Flow Items:
Depreciation & Amortization 12,348 4,911
Increase (decrease) in
Accounts receivable 452,754 (766,585 )
Inventory (81,578) (6,584 )
Prepaid expenses & deposits
(342,434 ) (10,372)
Accounts payable & accrued expenses
(304,111 ) 234,371
Net Cash Flows used in
Operating Activities (511,250) (344,684 )
Cash Flows from Investing Activities:
Cash from private placement of stock
- 902,000
Cost of stock registration (13,762) -
Net Cash Flows from
Investing Activities (13,762) 902,000
Cash Flows from Financing Activities:
Note receivable 486,759 -
Purchase of fixed assets (26,370) (36,749 )
Purchase of intangibles & other assets
(570 ) (353 )
Proceeds from short-term debt 26,289 -
Cash used to pay-off short-term debt
- (105,000)
Net Cash Flows used in Financing Activities
486,108 (142,102)
Net increase (decrease) in cash (38,904) 415,214
Cash, beginning of year 264,395 23,074
Cash, end of period $225,491 $438,288
Supplemental Cash Flow Information
Cash Paid for:
Taxes $- $ -
Interest $44,574 $ 6,578
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
March 31, 2000
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 to its current name.
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 ownership
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 $2,115 for 1999. The Company's
amortization expense for the first quarter of 2000 and 1999 was $1,454 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 $0 and $111,316 for the first quarter
of 2000 and 1999, respectively. The state tax provision is $0 and $16,363 for
the first quarter of 2000 and 1999, respectively.
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;
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
March 31, 2000
NOTE 2 - Significant Accounting Policies (continued)
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) valued at lower of cost (FIFO) or market. During 1999, the Company
purchased a large number ofISA cards into inventory that were programmed with
Y2K compliance software for use in its Intellifix 2000 Software Package, a
rapidly moving software package prior to the beginning of the year 2000. The
purchase resulted in an oversupply of the ISAcards at year-end that cannot be
returned to the supplier. The Company negotiated a reduction in the royalty due
on each card sold from $5.50 to $1.00 for each card sold in the future.
This reduction in royalty payment makes it economically feasible to reprogram
the ISA cards with new software at a cost estimated at $35,367. Management
believes the newly programmed cards will be a slower moving inventory
item and that it may take up to two years to sell the oversupply of cards. As
a result, management has elected to write down the value of the cards
carried in its inventory at year-end by $820,507, or, approximately 50%
of the original value. The cards have a $2.50-3.00 per card salvage value, or
a total salvage value of $530,500-$636,600. Failure of the Company to sell
the re-programmed ISA cards could result in an additional inventory
write-down of $250,000-$300,000.
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) and
therefore is not currently available for use in operations The 6-60 month
certificate has interim rollover maturity dates. The certificate matures
on September 10, 2000. Interest is stated at 4.86%.
Fixed Assets The Company capitalizes purchases of long lived assets that
are expected to give benefit to the Company over the life of the asset. The
Company also capitalizes improvements and costs that increases the value of
or extend the life of the asset.
Fixed assets consist of the following:
March 31, December 31,
2000 1999
Computer Equipment & Software $137,231 $130,215
Office Equipment & Furniture 57,334 57,018
Leasehold Improvements 4,109 3,571
198,674 190,804
Less: Accumulated Depreciation (54,348) (43,454)
$ 144,326 $ 147,350
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
March 31, 2000
NOTE 2 - Significant Accounting Policies (continued)
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
$30,316 for 1999. For the first quarter the depreciation expense is $10,895
and $4,911 for 2000 and 1999, respectively.
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 $405,919 and $236,000 and allowance for bad debt of $122,669 and
$150,000 for the first three months ended March 31, 2000 and for fiscal year
1999, respectively. Certain of the Company's distributors including the
largest distributor have the right to return for credit, products purchased
from the Company. The Company has a major concentration in accounts receivable
with one major distributor accounting for 72% of all receivables at
December 31, 1999. That distributor had paid 34% of the balance at March 31,
2000. The distributor has taken credits against the account totaling
approximately $1,087,117 that management believes are improper and is in the
process of resolving with the distributor. Accounts receivable balance
includes $68,498 of employee receivables (see Note 4).
NOTE 3 - Short Term Notes
The Company has acquired short term borrowing for working capital as
follows:
March 31, December 31,
2000 1999
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 10.75%,
due May 10, 2000 $ 79,500 $ 79,500
Note payable to a lender; unsecured;
personal guarantees by two directors;
interest stated at 8% per 30 days;
due August, 1999 211,388 167,929
Note payable to a law firm; unsecured;
No stated interest 11,254 28,423
$ 302,142 $ 275,853
Interest expense for fiscal 1999 was $107,330. The interest expense for
the first quarter of 2000 is $44,774 and $6,578 for the same quarter in 1999.
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
March 31, 2000
NOTE 4 - Related Party Transactions
The Company had accounts receivable owing from three officers/directors
at March 31, 2000, as follows:
Bernard Yaw, President and Chief Executive Officer/Director- $16,000
Mark Tippetts, Vice President of Sales and Marketing/Director- $30,259
Dave Jones, Chief Financial Officer- $11,575
On May 25, 1999, Bernard Yaw and Mark Tippetts, two officers and
directors of the Company, issued on behalf of the Company, their personal
guarantees to allow the Company to secure a $200,861 loan advance from A-Vision
Financial. The loan advance had stated interest of 7% per 30-day period
when not in default with the stated rate accelerating to 8% per 30-day period
from inception if in default. The Company paid $150,000 on the loan advance
in 1999 and satisfied the remaining balance plus accrued interest
($212,009) in April 2000, through the issuance of 250,000 shares of restricted
common stock (see Note 5-"Subsequent Events").
Messrs. Yaw and Tippets have also issued their personal guarantees
relating to a loan from First Utah Bank in the amount of $79,500.
In June 1999, Intelliquis International, Inc. began negotiations to
acquire Direct Media Communications, Inc. through the issuance of common stock
and funding of the company. The Company funded $90,000 between June 1999 and
November 1999, when a $500,000 wire transfer was made to substantially
fund Direct Media Communications, Inc. In December 1999, the transaction was
negated. Subsequent to the cancellation of the transaction, and with Direct
Media Communications, Inc. owing $590,000 to Intelliquis International,
Inc., a director of Intelliquis International, Inc., through an affiliate in
Malaysia concluded a similar transaction with Direct Media Communications, Inc.
Subsequent to the Company's year-end, Direct Media Communications has
repaid $500,000 of the advances made to it by Intelliquis International, Inc.
leaving a principal balance of $90,000 plus accrued interest of $11,461 as of
the Company's year-end (see Note 5-"Subsequent Events").
In February 1999, the Company reacquired 6,202,944 shares of restricted
common stock at a cost of $160,000 from Say Thean Lim, a director of the
Company. Also, in February 1999, Mr. Lim purchased 450,000 shares of the
Company's common stock at a price of $0.67 per share.
In May 1998 and again in August 1998, Mr. Lim loaned $40,000 to the
Company for a total of $80,000. The loan did not bear interest and was fully
repaid in February 1999.
In April 1998, Mr. Yaw loaned $5,000 to the Company in an interest free
loan and repayable on demand. The Company repaid $4,000 of this loan in June
1999.
NOTE 5 - Subsequent Events
In April 2000, the Company satisfied the remaining principal and accrued
interest ($212,009) relating to a loanadvance received from A-Vision Financial
in May 1999, by agreeing to the issuance of 250,000 shares of
restricted common stock (see Note 4-"Related Party Transactions").
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
March 31, 2000
NOTE 6 On October 25, 1999, the Company issued to ROBI Investors, LLC 2,000
shares of the Company's 6% Convertible Series A Preferred Stock with a stated
value of $1,000 per share and a $.001 par value per share. The Company
realized $1,730,455 after legal expense of $83,200, filing fees of
$10,000, travel expense of $1,880 and commissions and fees of $174,565. The
Preferred Stock carries preferences in liquidation and dissolution and
prohibits the payment of dividends to common shareholders until all accrued
dividends in the Preferred Stock are paid. The Securities Purchase Agreement
also contained a warrant allowing ROBI to purchase up to 100,000 common shares
and a conditional warrant allowing ROBI to purchase another 3,000
shares of the Company's 6% Convertible Series A Preferred Stock and another
warrant to purchase another 150,000 shares of common stock. Dividends accruing
on the Preferred Stock are payable in cash or registered common shares at the
Company's option. The conversion price for the Series A Preferred Stock is
linked to the future market price of the common stock. As a result, the
conversion price will change as the price for the common shares
changes in the marketplace. Therefore, the number of common shares to which
the Preferred Shares will convert cannot be determined until the date of
conversion. The Securities Purchase Agreement required the Company to file a
Registration Statement within 30 days of the agreement with the Securities and
Exchange Commission to register the underlying shares with the Registration
Statement to be declared effective within 180 days of the agreement.
An application for a stock listing on the NASDAQ Small-cap Market was to be
filed within 45 days of the date of the agreement. Failure of the Company
to perform some of these conditions could result in significant penalties to
the Company. Under certain conditions, the Company can require the exercise of
the Conditional Warrant that would result in an additional $3,000,000 of
equity into the Company. Management does not expect this to occur.
NOTE 7 The Company issued 91,344 shares of restricted common stock valued
at $66,681 to employees during 1999. An additional 1,815,000 restricted
common shares were issued for $1,062,000 in a private placement during the first
quarter of the year. Of the shares issued 360,000 restricted common
shares were issued to Bill Chipman for assistance in the financing
arrangements for the Company.
In April 1999, the Company effected a 3-for-1 forward stock split. All
information presented in the financial statements gives retroactive effects to
this stock split.
In February 1999, the Company reacquired 6,202,944 restricted common
shares of its stock from a director at a cost of $160,000.
The Company currently has outstanding warrants that allow for the
purchase of up to 160,000 shares of common stock as follows:
ROBI Investors, LLC 100,000 Warrants @ variable price
(Note 6)
Patrick Lucci 10,000 Warrants*
Doug Cole 25,000 Warrants*
Say Lim 25,000 Warrants*
* Pricing of warrant will be determined when option plan is completed.
NOTE 8 The Company has entered into Executive Employment Agreements with
Bernard Yaw, President, CEO and Director and Mark Tippets, Vice President of
Sales and Marketing and Director. The agreements, which became effective on
February 3, 1999, are for a period of two years. The agreements provide for
compensation to the two parties to be set by the board of directors,
reimbursement for expenses, termination for cause, fiduciary responsibility to
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
March 31, 2000
NOTE 8
protect confidential information, indemnification to the fullest extent
permitted by the Nevada Corporation Statutes, a non-compete agreement for one
year following the party's departure from the Company and the Company's right
of first refusal to purchase equity owned by the parties.
NOTE 9 On The Planet v. Intelliquis International, Inc.
On May 6, 1999, a legal action was commenced against the Company by On
the Planet, Inc. in the United States District Court for the District of Utah,
Central Division. The claims purportedly arise out of a software rights
agreement under which the Company 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 year 2000 fix
software identified therein. On the Planet asserts that the Company violated
this agreement by engaging in direct sales or giving third parties a license
to engage in direct sales of the year 2000 fix software and other related
products and also 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 Company's
alleged direct sales of the year 2000 fix software, as well as attorneys' fees
and punitive damages. The Company 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. The Company has also filed
additional claims against On the Planet and its principal, Ernest Hemple,
arising from conduct that the Company believes constitutes defamation and
interference with contract.
The Company intends to vigorously defend the action and pursue its
counterclaims. The outcome of the litigation is uncertain and cannot be
predicted at this time. Any adverse result could have a material adverse
affect on the business of the Company.
William L. Rosonbeck v. Staples and Intelliquis International, Inc.
This Case No. 00CVI00202 was filed as a small claims complaint in the
Xenia, Ohio Xenia Municipal Court on February 17, 2000, seeking damages of
$1,290.31 arising out of personal computer problems which purportedly
resulted from use of Y2K software distributed by the Company. Due to the
costs to defend the case in Xenia, Ohio, the Company does not plan to appear.
If the claim is reduced to judgment in Ohio and enforcement action is taken
in Utah, the Company plans to contest the matter on jurisdiction ground.
No opinion has been expressed on the outcome of the matter.
Doren Rosenthal DBA RRosenthal Engineering v. Intelliquis International,
Inc. and Intelliquis LLC
By this action, pending as Civil No. 991124 in the Superior Court in the
State of California, County of San Luis Obispo, plaintiff alleges that he
developed and produced a computer program which operated as a Y2K fix for
hardware with year 2000 complications, that he licensed his repair
software to the Company for the purpose of distribution at the retail level,
and that he has not been paid the royalties to which he was entitled under the
license and parties' agreement. He asserts claims for breach of contract,
misappropriation of trade secrets, breach of the covenant of good faith and
fair dealing, unjust enrichment, and unfair competition. The action seeks
general damages in the amount of $5 million, punitive damages in an unstated
amount and injunctive relief. No opinion has been expressed as to the
ultimate outcome of the action.
In addition to filed litigation actions by or against the Company, the
following claims have also been made against the Company:
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
March 31, 2000
NOTE 9
Blair Barrett Claims
Blair Barrett, a former officer of the Company, has made two categories
of demands upon the Company; 1) a demand for delivery of stock certificates
representing 5,336,496 shares in the Company, and 2) a demand for payment of
back wages and benefits purportedly owing as a result of the allegedly
wrongful termination of his employment in June 1999. The Company has
delivered certificates representing the demanded shares but denies that the
termination was improper and that he is owed any back wages and benefits. No
lawsuit or arbitration has been filed by Mr. Barrett. No opinion has been
expressed concerning the likelihood that any action will be taken nor to the
ultimate outcome of any action if action is taken.
Envirocon Strategic Management Consulting Group, Inc.
In December 1999, this alleged consulting group made a $100,000 demand
against the Company for consulting services allegedly rendered. The Company
denied the claim by letter on December 29, 1999. No action has been taken
by this consulting group for the fee allegedly owed. No opinion has been
expressed as to the ultimate outcome of the matter.
The Company engaged a payroll processing company for handling its payroll
and payroll tax deposits during the first three quarters of the year.
The payroll processing company accurately accounted for all payroll tax deposits
for the first quarter. Payroll tax depositories indicate no payroll taxes
were deposited for the account of the Company during the second and third
quarters although accounting records indicate the Company deposited the
liabilities with the payroll processor. Failure to resolve this matter
could result in the Company being liable for an additional $88,318.01 in
payroll tax deposits.
NOTE 10
The Company leases approximately 3,900 square feet of office space under
a lease that expires on March 31, 2002 and approximately 5,638 square feet of
warehouse space under a lease that expires on March 31, 2002.
NOTE 11 Cash at December 31, 1999; the Company had deposited funds that
exceeded the FDIC insured limits of $100,000. The amount of cash subject to
this potential loss at December 31, 1999 was $27,136.
The Company currently uses one major distributor for most of its sales.
That distributor accounted for approximately 64% of all sales in 1999. This
distributor accounts for over 70% of the Company's accounts receivable. The
Company could recognize significant declines in sales if the distributor
or the Company chooses to alter its current sales relationship.
The Company's Intellifix 2000 and Fix 2000 Pro Y2K software products
accounted for 81.87% of sales for 1999. With the beginning of 2000 and the
lapse of the potential problems associated therewith, the Company could
experience significant declines in sales if the Company fails to diversify
its product line through the introduction of new software products. The
Company is in the process of transcending from licensing software products for
distribution to developing their own software products.
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 seeks to build a leadership position in this market by
first licensing fully tested software applications from independent software
developers and then developing or acquiring a family of software
applications. The Company's main emphasis lies in PC Utilities titles, but
will 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. Since the release of the Company's first software title in
November 1997, the Company has grossed approximately $9 million in sales to
date.
The Company has licensed and released a total of eight software
titles through the end of the first four months of 2000 namely, INTELLIFIX
2000 (formerly FIX2000), TOTALFAX, WEB SITE TRAFFIC BUILDER, CREDIT BUILDER,
SPEED 98, CYBER SURVEILLANCE, WEB SITE TRAFFIC METER, AND MASS MAILER. In the
last quarter of 1997, the Company republished and released its first three
titles (NetFax, Speed98 and Credit Builder). During 1998, Intelliquis
released another three titles (TotalFax, Fix2000, and Web Site Traffic
Builder). In 1999, the Company revamped Credit Builder and launched it as
Credit Builder Deluxe. Intelliquis also released Cyber Surveillance during
fourth quarter 1999. With the availability of new and quality titles to license,
the Company intends to release new titles on a regular basis in 2000 and beyond.
Intelliquis announced the launch of two new titles at the beginning
of 2000, Mass Mailer and Web Site Traffic Meter. Mass Mailer is a bulk e-mail
message program that allows users to broadcast e-mails to multiple contact
lists. Web Site Traffic Meter allows Webmasters to track and monitor traffic
patterns to and within their Internet sites. The Company plans to offer
Web Site Traffic Meter as a stand-alone product and include the product with
Web Site Traffic Builder in a suite of Internet products.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $511,250 and $344,684 for
the three months ended March 31, 2000 and 1999, respectively. The increase in
cash used in operating activities is primarily attributable to the prepayment
of marketing expenses for fiscal year 2000 and the decrease in accounts
payable.
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. With the additional
infusion of capital and the existing receivables, the Company is planning to
meet its budgeted marketing efforts and acquire other products or businesses.
There are no assurances, however, that the Company will be successful in its
efforts to obtain additional equity financing.
Accounts receivable is still rather high; however, the Company anticipates
resolving a discrepancy with its major distributor that will result in
decreasing accounts receivable by over $1 million. Although the Company does
not anticipate any problems related to accounts receivable collections, it is
currently taking measures to assure collection on all amounts outstanding. In
addition, the Company continues to record an allowance for possible returns.
In addition, the Company is currently in the process of obtaining
additional credit facilities for working capital purposes. No assurance can
be given, however that such credit facilities will be available to the Company
when or on the terms useful to the Company.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
The Company derives revenue from the sale of software products,
which it licenses from developers and resells. The Company sells its products
in North America and internationally primarily through retailers and
distributors. The Company's international sales represented less than 4% and
1% of sales during the first quarter of 2000 and 1999, respectively.
The Company's sales decreased $815,287 from $1,220,274 for the first
quarter of 1999 to $404,796 for the same period in 2000. The Company's
decrease in sales is primarily due to the decrease in sales of the IntelliFix
2000 products and the late release of the Company's new products. During the
first quarter of 1999 over 78% of sales were from Y2K related products
while the first quarter of 2000 had negative sales due to returns of the
product. The Company expects sales to increase for the rest of the fiscal
year due to the release of new products and new versions of existing products.
The Company had over $400,000 in revenues during April 2000 due to the demand
for its new products, Web-site Traffic Meter and Mass Mailer.
The Company released both of these 2 new software programs (Web-site
Traffic Meter and Mass Mailer) during the first four months of 2000. The
Company believes that sales for its current programs will continue to increase
throughout the year. In addition, the Company is planning to release at least
one new software program each quarter. The Company is partnering with another
entity to develop a program that will be installed on the ISA cards currently
in inventory. The Company believes that sales of the ISA card product will
completely deplete the current inventory of the cards.
Cost of sales includes cost of goods sold, royalties paid to
developers and the costs for maintaining technical support. The cost of sales
totaled $138,063 for the three months ended March 31, 2000 and constituted 34%
of total sales as compared to $503,690 and 41% of total sales for the same
period in 1999. The change in the percent of sales is due to decreases in
royalty fees and per unit cost of production for the current products being
sold. During the first quarter of 1999 cost of goods sold were higher than
normal due to the cost of sales for the ISA cards. The Company anticipates
that cost of sales will approach 40% of sales for the fiscal year 2000.
The total sales and marketing for the first quarter of 2000 amounted
to $240,327 while the same period in 1999 amounted to $118,316. Sales and
marketing expense as a percentage of sales were 59% and 10% for the three
months ended March 31, 2000 and 1999, respectively. The increase in percent
of sales is due to the decrease in sales. Also, the Company was involved in
numerous marketing programs that will be of benefit for the entire year. While
sales continue to increase sales and marketing as a percentage of sales will
decrease. The Company expects sales and marketing expense to be between 15%
to 20% for the fiscal year 2000.
General and administrative expenses totaled $214,916 and $266,544
for the three months ended March 31, 2000 and 1999, respectively. The
decrease in costs can be attributed to cutbacks in payroll associated with the
Y2K products. General and administrative costs have increased as a percentage
of sales to 53% from 22% for the three months ended March 31, 2000
and 1999, respectively. However, the increase is more attributabe to a
decrease in sales than an increase in general and administrative expenses.
The Company anticipates general and administrative expenses as a percentage of
sales to approximate 15% the next quarter and for the fiscal year 2000.
For the fiscal year 2000, the Company expects to continue to grow
by realizing overseas growth in its current product lines and the demand for
the new products released in April. In relation, the Company anticipates to
have income from operations for each of the remaining quarters and for the
fiscal year. The income will be a result of increased sales throughout the
year due to new products and revisions. In addition, the Company is exploring
other products that could be release by third or fourth quarter which could
dramatically increase sales.
For the three months ended March 31, 2000, the Company reported an
operating loss of $218,311, compared to operating income of $199,575 in the
corresponding period in 1999.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR PROVISION" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
When used in this report, the words "believe," "plan," "
anticipates," "expects" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of
1934, as amended. Such statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual
results to differ materially from those stated. All of these forward-looking
statements are based on estimates and assumptions made by management of the
Company, which although believed to be reasonable, are inherently uncertain
and difficult to predict. There can be no assurance that the benefits or
results anticipated in these forward-looking statements will be achieved.
The following important factors, among others, could cause the Company's to no
experience the results contemplated in this report, or otherwise cause the
Company's results of operations to be adversely affected in the future: (i)
the Company's reliance on the sale of few products; (ii) the Company's
dependence on the ability of its distribution channels to market the Company's
products; (iii) the Company's dependence on one major distributor for retail
sales; (iv) the Company's reliance on its Y2K software for a majority of
revenues; (v) the uncertainty of the potential impact of the Year 2000 on
computer systems; (vi) continued or increased competitive pressures from
existing competitors and new entrants; (vii) unanticipated costs related to the
Company's growth and operating strategies; (viii) loss of key members of
management; (ix) deterioration of general economic conditions; (x) loss of
customers or customer acceptance of Company products; (xi) unanticipated
problems or "bugs" in the Company's software products; and (xii) the outcome
of any litigation the Company may be involved in. Stockholders, potential
investors and other readers are urged to consider these factors carefully in
evaluating the forward-looking statements and are cautioned not to place undo
reliance on such forward-looking statements. Many such factors are beyond the
control of the Company. The forward-looking statements made herein are only
made as of the date of the Form 10-QSB and the Company undertakes no obligation
to publicly update such forward-looking statements to reflect subsequent
events or circumstances.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. ON THE PLANET, INC. V. INTELLIQUIS INTERNATIONAL, INC., ET AL. On
May 6, 1999, On The Planet, Inc. ("OTP"), filed an action against the Company
in the United States District Court for the District of Utah, entitled On The
Planet v. Intelliquis International, Inc., Civil No. 2:99CV324K. The claims
purportedly arise out of a Software Rights Agreement under which the Company
granted OTP "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. OTP asserts that the Company
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. OTP asserts claims of copyright infringement, breach of contract
and fraud. In addition to injunctive relief, OTP 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 OTP, the Company 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. The Company has also filed
additional claims against OTP and its principal, Ernest Hemple, arising from
conduct that the Company believes to constitute defamation and interference
with contract. OTP has filed a motion to enforce a purported settlement
agreement by which, among other things, the Company would pay certain sums to
OTP and would cause certain shares of stock in the Company to be delivered to
OTP. That motion is pending. In addition, OTP has filed a second amended
complaint by which (a) claims for copyright infringement are alleged against
Bernard Yaw and Mark Tippets (officers of the company) and against six
entities which had contracted with the Company in aspects of the distribution
and/or sale of certain Y2K fix software, and (b) a claim has been alleged
for damages for breach of the purported settlement agreement. The Company
has filed a motion to dismiss the second amended complaint. The company
intends to defend against the settlement enforcement motion and the action and
to prosecute its counterclaims. There can be no assurance that Intelliquis
will be successful in its defense of the case, and in the event that Intelliquis
is unsuccessful, the amount of potential damages that may be awarded is also
uncertain.
2. BLAIR BARRETT CLAIMS. Blair Barrett, a former officer of the Company,
has made two categories ofdemands upon the Company: (1) a demand for delivery
of stock certificates representing 5,336,496 shares in the Company, and (2) a
demand for payment of back wages and benefits purportedly owing as a result of
the allegedly wrongful termination of his employment in June 1999. In
response to the first demand, the Company has delivered certificates
representing the demanded shares to Mr. Barrett. With respect to the second
demand, the Company denies that termination was improper and denies that he
is owed any sum. No lawsuit or arbitration demand has been filed respecting Mr.
Barrett's wrongful termination claims. There can be no assurance that no
lawsuit will be filed or that no arbitration demand will be made, and in the
event that a lawsuit is filed or an arbitration proceeding is instituted,
there can be no assurance of the outcome of the litigation or arbitration
proceeding.
3. WILLIAM L. ROSENBECK V. INTELLIQUIS INTERNATIONAL. On February 17,
2000 William L. Rosenbeck filed a small claims complaint in the Xenia
Municipal Court, Xenia, Ohio, styled William L. Rosenbeck v. Staples and
Intelliquis International, Case No. 00CV100202. By this action, Rosenbeck
seeks damages of $1,290.31 arising out of personal computer problems which
purportedly resulted from use of Y2K software. Because the cost to defend the
action in Xenia, Ohio, substantially exceeds the potential exposure, the
Company has elected not to appear; however, if the claim is reduced to
judgment in Ohio and results in enforcement action in Utah, the company
intends to contest the matter on jurisdictional grounds. There can be no
assurance of the ultimate outcome of this matter.
4. ROSENTHAL ENGINEERING V. INTELLIQUIS. This case was brought by Doren
Rosenthal d/b/a Rosenthal Engineering ("Rosenthal") against the Company, based
on claims made by Rosenthal that stem from an alleged breach of a licensing
agreement. The case includes claims for breach of contract, misappropriation
of trade secrets, and others, and is currently pending as Civil No. 991124.
Rosenthal is a software programmer that developed computer programs
designed to fix Year 2000 bugs in software programs. Rosenthal alleges that he
entered into a licensing agreement with Intelliquis, whereby Intelliquis
licensed Rosenthal's software program and included it in the Company's own
Year 2000 fix, and whereby Intelliquis did not pay certain royalties owed to
Rosenthal, and also that Intelliquis made unauthorized use of Rosenthal's
program. Rosenthal has filed a lawsuit in the Superior Court for the State of
California based on the contract and related claims, and is seeking damages in
an unspecified amount. Rosenthal has also threatened to file a lawsuit in
Federal Court based on claims related to intellectual property. Outside of
the litigation, Rosenthal has stated that he is seeking in excess of $1,000,000.
Intelliquis denies all of the allegations made by Rosenthal in the case.
Intelliquis has taken the position that any royalties owed, if any, are of a
nominal amount, and were properly withheld as a reserve due to potential
returns of the Rosenthal product as a result of product defects. Intelliquis
also denies that it engaged in any misappropriation of trade secrets, or any
of the other acts alleged. Intelliquis intends to defend the present and
threatened actions of Rosenthal. This matter is in its early stages, and the
outcome is uncertain. There can be no assurance that Intelliquis will be
successful in its defense of the case, and in the event that Intelliquis is
unsuccessful, the amount of potential damages that may be awarded is also
uncertain.
5. CLAIM OF ENVIROCON STRATEGIC MANAGEMENT CONSULTING GROUP, INC. In
December 1999, this alleged consulting group made demand against the Company
for $100,000 for consulting services allegedly rendered. On December 29, 1999,
the Company denied the claim by letter. The Company is not aware of any
further action taken by the consulting group for the fee allegedly owed, but the
Company cannot guarantee that no further action will be taken.
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
27 Financial Data Schedule
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 2000.
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 and Duly
Authorized Officer of the Registrant
Dated: May 22, 2000
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