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, 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 August 9, 2000 the number of shares outstanding of the Registrant's
Common Stock was 34,845,475.
Transitional Small Business Disclosure Format - (check one)
[ ] YES [ X ] NO
Intelliquis International Inc. and Subsidiary
Form 10QSB
For the Quarterly Period Ended June 30, 2000
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements
a) Condensed Balance Sheets
as of June 30, 2000 and December 31, 1999 3
b) Condensed Statements of Operations
for the three and six months ended June 30, 2000 and 1999 4
c) Condensed Statements of Cash Flows
for the six months ended June 30, 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
June 30, December 31,
2000 1999
(Unaudited) (Audited)
Current assets
Cash (Note 2 and 11) $143,792 $264,395
Accounts receivable-trade (Note 2) 3,117,017 4,123,507
Accounts receivable-employee (Note 2) 64,217 56,632
Note Receivable (Note 3) 114,829 598,220
Inventory (Note 2) 590,854 551,845
Prepaid expenses 534,679 31,660
Deposits 10,200 7,700
4,575,588 5,633,959
Property, Plant & Equipment (Note 2) 138,372 147,350
Other assets
Certificate of deposit (Note 2) 43,347 42,256
Intangibles (Note 2) 241,550 6,213
Inventory - Long Term (Note 2) 400,000 400,000
Total Assets $5,398,857 $6,229,778
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 789,379 $3,115,869
Short term notes (Note 3) 1,974,518 275,853
Short term notes - related party (Note 4) - -
Litigation settlement payable (Note 9) 139,070 -
Accrued dividends payable 81,864 22,028
2,984,831 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 34,845 33,462
Additional paid in capital 3,300,020 2,835,672
Retained earnings (deficit) (920,841) (53,108 )
2,414,026 2,816,028
Total Liabilities and Stockholders' Equity $5,398,857 $ 6,229,778
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
Sales $ 564,862 $ 2,199,137 $ 969,658 $3,419,410
Cost of Sales 61,507 1,151,990 199,548 1,655,680
Gross Margin 503,355 1,047,147 770,110 1,763,730
Expenses:
Sales & Marketing 189,960 276,831 430,287 395,447
General & Administrative 256,181 472,399 471,098 738,655
Total Expenses 446,141 749,230 901,385 1,134,102
Operating Income (Loss) 57,214 297,917 (131,275) 629,628
Other Income (Expense)
Interest Expense (7,673) (3,017) (52,447) (9,595)
Interest Income 5,104 2,800 20,476 4,908
Bad Debt (136,331) - 136,730) -
(138,900) (217 ) (168,701) (4,687)
Net Income (Loss)
before Taxes (81,686) 297,700 (299,976) 624,941
Income Tax Expense
(Note 2) - 116,148 - 243,827
Net Income (Loss) $ (81,686) $ 181,552 $ (299,976) $ 381,114
Loss on Litigation 507,921 - 507,92 -
Preferred Dividends 29,918 - 59,836 -
537,839 - 567,757 -
Net Income (Loss)
Attributable to
Common Stock $ (619,525) $ 181,552 $ (867,733) $ 381,114
Net Income (Loss)
Per Share $ (.018) $ .006 $ (.025) $ .011
Total average
shares outstanding 34,492,013 33,178,790 34,140,056 34,167,578
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2000 1999
Cash Flows from Operating
Activities:
Net income ($867,733) $381,114
Non Cash Flow Items:
Depreciation & Amortization 24,900 12,193
Increase (decrease) in
Accounts receivable 998,905 (2,102,222 )
Inventory (39,009) (9,923 )
Prepaid expenses & deposits (505,519 (17,894)
Accounts payable & accrued expenses (2,266,654 904,398
Net Cash Flows used in
Operating Activities (2,655,110 ) (832,334 )
Cash Flows from Investing Activities:
Stock Purchase - (160,000)
Cash from private placement of stock - 1,212,000
Stock issued for public relations services 199,375 -
Stock issued for services 10,813 -
Stock issued for litigation settlement 209,688 -
Stock issued for payment of debt 213,198 -
Cost of stock registration (167,343 -
Net Cash Flows from
Investing Activities 465,731 1,052,000
Cash Flows from Financing Activities:
Note receivable 483,391 -
Purchase of fixed assets (251,259) (76,443 )
Purchase of intangibles & other assets
(1,091 ) (1,233 )
Proceeds from short-term debt
1,837,735 -
Cash used to pay-off short-term debt
- (109,000)
Net Cash Flows used in
Financing Activities 2,068,776 (186,676 )
Net increase (decrease) in cash (120,603 ) 32,990
Cash, beginning of year 264,395 23,074
Cash, end of period $143,792 $56,064
Supplemental Cash Flow Information
Cash Paid for:
Taxes $- $ -
Interest $52,447 9,594
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
June 30, 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 second quarter of 2000 and 1999 was $1,653 and
$529, respectively.
The Company's amortization expense for the first six months of 2000 and 1999
was $3,107 and $1,028, 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 $101,264 for the second quarter of
2000 and 1999, respectively. The state tax provision is $0 and $14,884 for
the second quarter of 2000 and 1999, respectively. The federal income tax
provision is $0 and $212,580 for the first six months of 2000 and 1999,
respectively. The state tax provision
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
June 30, 2000
NOTE 2 - Significant Accounting Policies (continued)
is $0 and $31,247 for the first six months 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;
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 of ISA 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 ISA cards 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
$530,500 to $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:
June 30, December 31,
2000 1999
Computer Equipment & Software $ 142,105 $ 130,215
Office Equipment & Furniture 57,334 57,018
Leasehold Improvements 4,180 3,571
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
June 30, 2000
NOTE 2 - Significant Accounting Policies (continued)
203,619 190,804
Less: Accumulated Depreciation (65,247) (43,454)
$138,372 $147,350
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 second quarter the depreciation expense is $10,898 and $6,224
for 2000 and 1999, respectively. For the first six months the depreciation
expense is $21,793 and $11,135 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 $213,497 and $328,000 and allowance for bad debt of $260,000 and
$150,000 for the first six months ended June 30, 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 54% of the balance at June 30,
2000. The distributor has taken credits against the account totaling
approximately $487,117 that management believes are improper and is in the
process of resolving with the distributor. Accounts receivable balance
includes $64,217 of employee receivables (see Note 4).
NOTE 3 - Short Term Notes
The Company has acquired short term borrowing for working capital as follows:
June 30, 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 November 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 - 167,929
Note payable to a vendor; secured by
Inventory, interest stated at 8.50%,
due November, 2000 1,883,764 -
Note payable to a law firm; unsecured;
No stated interest 11,254 28,423
$302,142 $275,853
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
June 30, 2000
NOTE 3 - Short Term Notes (continued)
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.
NOTE 4 - Related Party Transactions
The Company had accounts receivable owing from three officers/directors at
June 30, 2000, as follows:
Bernard Yaw, President and Chief Executive Officer/Director- $16,000
Mark Tippetts, Vice President of Sales and Marketing/Director- $36,222
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").
At June 30, 2000, an officer of the corporation held $173,000 in his personal
accounts for the benefit of the Company. As of the review report date, the
$173,000 has been utilized for the Company's benefit.
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 prepaid
$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
As a settlement in the On the Planet litigation, the Court ordered Intelliquis
to pay $202,000 to On the Planet plus issue 260,000 shares to On the Planet or
as directed by OTP's counsel. As of the review report date $47,000 has been
paid and 260,000 shares issued
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
June 30, 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. In addition, Robi Investors, LLC
has issued a letter to the Company requesting redemption by the Company of
the preferred shares purchased by them pursuant to the terms of the original
agreement.
NOTE 7 During the quarter ended June 30, 2000, 305,000 common shares were
issued as partial settlements of pending litigations, 30,000 common shares
were issued to individuals for their services in the procurement of financing
for the Company and 2,136,000 common shares were issued for public/investor
relations services.
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 Tippetts, Vice President of
Sales and Markeing 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
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
June 30, 2000
NOTE 8 responsibility to 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.
During the pendency of the litigation, the parties began negotiating the terms
of a settlement. After settlement negotiations broke down, On the Planet made
a motion to enforce a document as a final settlement agreement, and the
motion was granted, which resulted in a judgment being entered in favor of On
the Planet, which requires Intelliquis to pay the amount of $202,100 cash, and
deliver 260,000 shares of Intelliquis common stock to On the Planet.
Intelliquis has filed Notice of appeal of the judgment, and since that time,
the parties have begun negotiating a final settlement of the case. However,
there can be no guarantee that the matter will settle, nor can there be any
assurance that a settlement will be reached.
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
INTELLIQUIS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to The Financial Statements
June 30, 2000
NOTE 9
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:
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 $2,655,110 and $832,334 for the six
months ended June 30, 2000 and 1999, respectively. The increase in cash used
in operating activities is primarily attributable to the reclassification of a
large account payable to a note payable and prepayment of marketing expenses
for fiscal year 2000.
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. With the
forecasted sales for the next quarter and existing receivables, the Company is
planning to meet its obligations.
Accounts receivable is still rather high; however, the Company is
attempting to resolve a discrepancy with its major distributor that will
result in decreasing accounts receivable by approximately $500 thousand.
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.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999
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 and internationally primarily through retailers and distributors. The
Company's international sales represented less than 4% and 1% of sales
during the second quarter of 2000 and 1999, respectively. The Company's
sales decreased $1,634,275 from $2,199,137 for the second quarter of 1999 to
$564,862 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. 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 released 2 new software programs (Web-site Traffic Analyzer and
Mass Mailer) during the first six months of 2000. The Company believes that
sales for its current programs will continue to increase through-out 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 $61,507
for the three months ended June 30, 2000 and constituted 11% of total sales as
compared to $1,151,990 and 52% 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
second quarter of 1999 cost of goods sold were higher than normal due to the
cost of sales for the ISA cards. During the second quarter of 2000 the
Company had taken additional measures to reduce royalties and production
labor. The Company anticipates that cost of sales will approach 19% of sales
for the fiscal year 2000.
The total sales and marketing for the second quarter of 2000 amounted to
$189,960 while the same period in 1999 amounted to $276,831. Sales and
marketing expense as a percentage of sales were 34% and 13% for the three
months ended June 30, 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 approximately
20% for the fiscal year 2000.
General and administrative expenses totaled $256,181 and $472,399 for the three
months ended June 30, 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
45% from 21% for the three months ended June 30, 2000 and 1999, respectively.
However, the increase is more attributable to 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% for the fiscal year 2000.
The Company settled on two lawsuits during the second quarter of
2000. The settlements resulted in a loss of $507,921. The Company does not
anticipate any further claims or litigation will result with material effect
on the Company's financial position, results of operations or cash flows.
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 June 30, 2000, the
Company reported an operating income of $57,214, compared to operating
income of $297,917 in the corresponding period in 1999.
Six Months Ended June 30, 2000 and 1999
The Company's sales amounted to $969,658 for the first six months of 2000
which is a decrease of $2,449,753 from $3,419,411 for the same period in
1999. 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. 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.
Cost of sales includes cost of goods sold, royalties paid to developers and the
costs for maintaining technical support. The cost of sales totaled $199,548
for the six months ended June 30, 2000 and constituted 21% of total sales as
compared to $1,655,680 and 48% 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
six months of 1999 cost of goods sold were higher than normal due to the cost
of sales for the ISA cards. During the first six months of 2000 the Company
had taken additional measures to reduce royalties and production labor. The
Company anticipates that cost of sales will approach 19% of sales for the
fiscal year 2000.
The total sales and marketing for the first six months of 2000 amounted to
$189,960 while the same period in 1999 amounted to $276,831. Sales and
marketing expense as a percentage of sales were 44% and 12% for the six months
ended June 30, 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 approximately
20% for the fiscal year 2000.
General and administrative expenses totaled $471,098 and $738,658 for the six
months ended June 30, 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
49% from 22% for the six months ended June 30, 2000 and 1999, respectively.
However, the increase is more attributable to 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% for the fiscal year 2000.
The Company settled on two lawsuits during the second quarter of
2000. The settlements resulted in a loss of $507,921. The Company does not
anticipate any further claims or litigation will result with material effect
on the Company's financial position, results of operations or cash flows.
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 and a reduction in production costs and
overhead. In addition, the Company is exploring other products that could be
release by third or fourth quarter which could dramatically increase sales.
For the six months ended June 30, 2000, the Company reported an operating loss
of $131,275, compared to operating income of $629,627 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. 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. 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.
2. 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.
3. 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.
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, and
has filed a Demurrer (the state court equivalent of a motion to dismiss) to
the complaint. 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.
4. 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.
5. 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. During the pendency of the
litigation, the parties began negotiating the terms of a settlement.
After settlement negotiations broke down, On the Planet made a motion to
enforce a document as a final settlement agreement, and the motion was
granted, which resulted in a judgment being entered in favor of On the Planet,
which requires Intelliquis to pay the amount of $202,100 cash, and deliver
260,000 shares of Intelliquis common stock to On the Planet. Intelliquis has
filed Notice of appeal of the judgment, and since that time, the parties have
begun negotiating a final settlement of the case. However, there can be no
guarantee that the matter will settle, nor can there be any assurance that a
settlement will be reached.
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: August 14, 2000
