10QSB 1 form10qsb033102.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2002 ------------------------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to --------------- ---------------- Commission file number 0-28831 ----------------------------------- CBQ, Inc. -------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Colorado 84-1047159 ------------------------------------------------------------------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 655 15th Street NW, Ste 460, Washington, D.C. 20005 ------------------------------------------------------------------------------ (Address of principal executive offices) (202) 659-2979 ext 11 -------------------------------------------------- Issuer's telephone number (Former name, former address and former fiscal year, if changed since last report.) APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes No APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date: May 15, 2002 Approximately 79,621,299 shares Transitional Small Business Disclosure Format (check one). Yes ; No X ---- ----- PART I Item 1. Financial Statements INDEPENDENT ACCOUNTANT'S REPORT To the Board of Directors and Shareholders CBQ, Inc. and Subsidiaries We have reviewed the accompanying consolidated balance sheets of CBQ, Inc. and Subsidiaries as of March 31, 2002 and December 31, 2001 and the related consolidated statements of operations and cash flows for the three month periods ended March 31, 2002 and 2001. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statement taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with generally accepted accounting principles. Respectfully submitted /s/ Robison, Hill & Co. ----------------------------- Certified Public Accountants Salt Lake City, Utah May 15, 2002 CBQ, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited) March 31, December 31, 2002 2001 --------------- -------------- Assets: Current assets: $ - $ - Other non-current assets: Investments 274,000 250,000 --------------- -------------- Total assets $ 274,000 $ 250,000 =============== ==============
CBQ, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited) March31, December 31, 2002 2001 --------------- -------------- Liabilities and Stockholders' Deficit: Current liabilities: Line of credit payable $ 577,157 $ 577,157 Current portion of long-term debt 2,860,460 2,860,460 Accounts payable, trade 692,451 692,451 Accrued expenses 626,104 517,356 Due to related party 1,215 1,215 Due to shareholders 139,000 115,000 Net liabilities of discontinued operations 1,311,025 1,311,025 --------------- -------------- Total current liabilities 6,207,412 6,074,664 --------------- -------------- Non-current liabilities: Preferred stock of subsidiaries 525,000 525,000 --------------- -------------- Total non-current liabilities 525,000 525,000 Total Liabilities 6,732,412 6,599,664 --------------- -------------- Stockholders' Deficit: Preferred Stock, par value $.001 per share Authorized 100,000,000 shares, 70,000 shares issued and outstanding at March 31, 2002 and December 31, 2001 70 70 Common Stock, par value $.0001 per share Authorized 500,000,000 shares, Issued 79,516,835 Shares at March 31, 2002 and December 31, 2001 7,952 7,952 Additional paid-in capital 3,518,141 3,518,141 Accumulated deficit (9,984,575) (9,875,827) --------------- -------------- Total Stockholders' Deficit (6,458,412) (6,349,664) --------------- -------------- Total Liabilities and Stockholders' Deficit $ 274,000 $ 250,000 =============== ==============
See accompanying notes and accountants' report. CBQ, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) For the three months ended March 31, -------------------------------- 2002 2001 -------------- -------------- Continuing operations: Revenues $ - $ - Costs and expenses: General and administrative 36,500 56,107 Interest 72,248 - -------------- -------------- Net income (loss) from continuing operations (108,748) (56,107) Discontinued operations: Income (Loss) from operations of discontinued operations - (23,002) Loss on disposal of discontinued operations - - -------------- -------------- Net Income (loss) from discontinued operations - (23,002) -------------- -------------- Net Income (Loss) $ (108,748) $ (79,109) ============== ============== Basic & Diluted loss per share $ - $ - ============== ==============
See accompanying notes and accountants' report. CBQ, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the three months ended March 31, ------------------------------- 2002 2001 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Continuing operations: Net Income (Loss) $ (108,748)$ (56,107) Adjustments necessary to reconcile net loss to net cash used in operating activities: Increase (decrease) in accounts payable - (213,826) Increase (decrease) in accrued expenses 108,748 - --------------- --------------- Net Cash Used in continuing operations - (269,933) --------------- --------------- Cash flows from discontinued operations - 73,772 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in deposits (24,000) - --------------- --------------- Net cash provided by (used) investing activities (24,000) - --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Other decreases in long-term debt - (15,432) Increase in payable to shareholder 24,000 Common stock issued for cash - 215,000 Common stock issued for services - --------------- --------------- Net Cash Provided by Financing Activities 24,000 199,568 --------------- --------------- Net (Decrease) Increase in Cash and Cash Equivalents - 3,407 Cash and Cash Equivalents at Beginning of Period - - --------------- --------------- Cash and Cash Equivalents at End of Period $ - $ 3,407 =============== ===============
CBQ, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Continued
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ - $ 37,418 Franchise and income taxes $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: On March 1, 2001, the Company purchased Easy Soft International, Inc. ("Easy Soft"). The purchase price was 5,625,000 shares of common stock in exchange for assets valued at $580,596 (receivables in the approximate amount of $95,665, equipment and other assets of $5,181 and goodwill of $479,750) less liabilities of $9,305. On March 27, 200l the Company purchased certain assets of Technet Computers Services, Inc. and Networkland, Inc. for 7,800,000 shares of common stock and a 10% note payable of $700,000 in exchange for which the Company received assets valued at $1,794,748 ( receivables $1,553,273, inventory $27,067, equipment $20,417, goodwill $192,671 and other assets $1,320) and assumed liabilities of $688,029. In April 2001, the Company settled approximately $120,000 in disputed charges with a third party for $17,000 in cash and 900,000 shares of the Company's common stock. See accompanying notes and accountants' report. CBQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN The accompanying financial statements have been prepared on the basis of accounting principles applicable to a "going concern", which assume that the Company will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations. Several conditions and events cast doubt about the Company's ability to continue as a "going concern". The Company has incurred net losses of approximately $4,505,000 for the year ended December 31, 2001 and losses of approximately $4,260,000 for the year ended December 31, 2000, has a liquidity problem, and requires additional financing in order to finance its business activities on an ongoing basis. The Company is actively pursuing alternative financing and has had discussions with various third parties, although no firm commitments have been obtained. The Company's future capital requirements will depend on numerous factors including, but not limited to, continued progress in developing its products, and market penetration and profitable operations from its software development outsourcing, web development, custom software development, network systems integration and management. These financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a "going concern". While management believes that the actions already taken or planned, will mitigate the adverse conditions and events which raise doubt about the validity of the "going concern" assumption used in preparing these financial statements, there can be no assurance that these actions will be successful. If the Company were unable to continue as a "going concern", then substantial adjustments would be necessary to the carrying values of assets, the reported amounts of its liabilities, the reported revenues and expenses, and the balance sheet classifications used. Organization and Basis of Presentation CBQ, Inc., (formerly Freedom Funding, Inc.) a Colorado corporation, was incorporated September 18, 1986, under the laws of the State of Delaware, and changed its situs to Colorado in 1989. The Company ceased its development stage with its merger with Quantum Technology Group, Inc. ("Quantum Group") in August 2000. Nature of Business The Company's lines of businesses include software development outsourcing, web development, custom software development, network systems integration and management. CBQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of accounting policies for CBQ, Inc. and Subsidiaries is presented to assist in understanding the Company's consolidated financial statements. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Interim Reporting The unaudited financial statements as of March 31, 2002 and for the three month periods ended March 31, 2002 and 2001 reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and results of operations for the three months. Operating results for interim periods are not necessarily indicative of the results which can be expected for full years. Principles of Consolidation The consolidated financial statements for the three months ended December 31, 2001 and 2000 include the accounts of the parent entity and all of its subsidiaries: Quantum Group and its subsidiary, ProWare, Inc. ("ProWare"); China Partners, Inc. (from the date of its formation in March 2000); CyberQuest, Inc. ("CyberQuest"); Reliance Technologies, Inc. ("Reliance") and its subsidiary, TopherNet, Inc. ("TopherNet"); and Priority One Electronic Commerce Corporation ("Priority One"). Two subsidiaries of Quantum Group, Quantum Technology Distribution, Inc. ("Quantum Distribution") and dpi Net Solutions, Inc. ("DPI"), are included in the consolidated financial statements from November 15, 1999 and April 1, 2000, their respective dates of acquisition by Quantum Group. As more fully described in Note 3, the business combinations between the Company and ChinaSoft, Inc. ("ChinaSoft") in January 2000 and between the Company and Quantum Group in August 2000 were accounted for as poolings of interests. Accordingly, the Company's consolidated financial statements have been restated for all periods to reflect the consolidated financial position, results of operations and cash flows of the Company, ChinaSoft and Quantum Group. All significant intercompany balances and transactions have been eliminated. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. CBQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ---------------------------------------------------------------- Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes The Company has a net operating loss for income taxes. Due to the regulatory limitations in utilizing the loss, it is uncertain whether the Company will be able to realize a benefit from these losses. Therefore, a deferred tax asset has not been recorded. There are no significant tax differences requiring deferral. Loss per Share The reconciliations of the numerators and denominators of the basic loss per share computations are as follows:
Income Shares Per-Share (Numerator) (Denominator) Amount --------------- --------------- -------------- For the three months ended March 31, 2002 ------------------------------------------------ Basic Loss per Share Continuing operations $ (108,748) 79,516,835 $ - Discontinued operations - 79,516,835 - --------------- --------------- -------------- Income to common shareholders $ (108,748) 79,516,835 $ - =============== =============== ============== For the three months ended March 31, 2001 ------------------------------------------------ Basic Loss per Share Continuing operations $ (56,107) 72,287,946 $ - Discontinued operations (23,002) 72,287,946 - --------------- --------------- -------------- Loss to common shareholders $ (79,109) 72,287,946 $ - =============== =============== ==============
The effect of outstanding common stock equivalents would be anti-dilutive for March 31, 2002 and 2001 and are thus not considered. CBQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ---------------------------------------------------------------- Concentration of Credit Risk The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. Reclassifications Certain reclassifications have been made in the March 31, 2001 financial statements to conform with the March 31, 2002 presentation. NOTE 3 - ACQUISITIONS On November 18, 1998, Freedom Funding, Inc., a Colorado corporation ("FFI"), entered into a reorganization agreement (Reorganization Agreement) with CyberQuest, Inc., a Colorado corporation (CyberQuest), as well as the shareholders of CyberQuest, pursuant to which FFI acquired all of the outstanding proprietary interest of CyberQuest in a stock for stock exchange which resulted in CyberQuest becoming a wholly owned subsidiary of FFI and the shareholders of CyberQuest acquiring control of the Company through their stock ownership. FFI also changed its name to CBQ, Inc. on this date. FFI, under the Reorganization Agreement, issued 18,000,000 common shares and 70,000 shares of the Class A: Redeemable, Convertible Preferred Stock of the Company to the shareholders of CyberQuest in exchange for the issued and outstanding shares of this subsidiary. The acquisition of CyberQuest was treated as a reverse acquisition of FFI by CyberQuest. In a reverse acquisition the shareholders of a Company own less than 50% of the post acquisition shares. The shareholders of CyberQuest received approximately 80% of the post acquisition shares of the Company and therefore, CyberQuest is the accounting acquirer. Common stock and additional paid-in capital have been restated to reflect the same ratio as the Company's common stock and additional paid-in capital at that time. This business combination was accounted for as a purchase. On March 15, 1999, the Company merged with Reliance and its subsidiary in a tax-free exchange. All of the outstanding shares of Reliance were exchanged for 1,000,000 restricted common shares of the Company. This business combination was accounted for as a pooling of interests. On April 9, 1999, the Company merged with Priority One in a tax-free exchange. All of the outstanding shares of Priority One were exchanged for 900,000 restricted common shares of the CBQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Continued) NOTE 3 - ACQUISITIONS (continued) Company. This business combination was accounted for as a pooling of interests. On November 15, 1999, Quantum Group acquired all of the outstanding shares of Quantum Distribution for 250 shares of Quantum Group's Series B preferred stock, valued at $250,000, plus $125,000 in cash. This business combination was accounted for as a purchase. On January 14, 2000, the Company merged with ChinaSoft in a tax-free exchange. All of the outstanding shares of ChinaSoft were exchanged for 30,000,000 restricted common shares of the Company. This business combination was accounted for as a pooling of interests. On April 1, 2000 Quantum Group, prior to its merger with the Company, acquired all of the outstanding shares of DPI for $200,000 in cash, 290,000 shares of Quantum Group's Series A common stock, 275 shares of Quantum Group's Series C preferred stock, plus 550 shares of Quantum Group's Series D preferred stock. This business combination was accounted for as a purchase, resulting in $972,000 of goodwill that is being amortized over five years. On August 8, 2000, the Company merged with Quantum Group and its subsidiaries in a tax- free exchange. All of the outstanding common stock of Quantum Group was exchanged for 11,508,568 restricted common shares of the Company. This business combination was accounted for as a pooling of interests. 450 shares of Quantum Group's Series D preferred stock were converted into 720,000 shares of the Company's common stock on August 31, 2000. On March 1, 2001, the Company purchased Easy Soft International, Inc. ("Easy Soft"). The purchase price was 5,625,000 shares of common stock in exchange for all of the outstanding preferred and common shares of Easy Soft. On March 27, 200l the Company purchased certain assets of Technet Computer Services, Inc. and Networkland, Inc. for 7,800,000 shares of voting common stock and a 10% note payable of $700,000 in exchange for which the Company received assets valued at $1,106,720. In addition, the Company assumed an $80,000 liability of the Parent, Socrates Technologies Corp, Inc. NOTE 4 - INVESTMENTS On May 11, 1999, the Company acquired 19% of the outstanding interest of Global Logistics Partners, LLC ("GLP"), a privately held Texas limited liability company in a tax-free exchange. This interest was acquired solely for the issuance of 4,233,200 common shares. CBQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Continued) NOTE 5 - PREFERRED STOCK OF SUBSIDIARY Quantum Group has two classes of preferred stock outstanding. Class B preferred stock has no dividend rights and an aggregate liquidation preference of $250,000. Class C preferred stock has total stated amount of $275,000. All of the Class C preferred stock has 8% cumulative dividend rights on the stated amount, which aggregates $275,000. Dividends on the Class C preferred stock were last declared and paid during the third quarter of 2000. NOTE 6 - LINE OF CREDIT Quantum Group has an outstanding balance of $577,157 under its line of credit payable to a bank at December 31, 2001 with interest at the bank's prime rate or LIBOR plus 2.5% which expired on April 1, 2001. The line of credit is collateralized by substantially all of the company's assets, and is personally guaranteed by certain of the company's officers and stockholders. The line of credit agreement with the bank contains various covenants pertaining to maintenance of certain debt coverage and leverage ratios. In addition, the agreement restricted entrance into any merger or acquisition agreement without prior written consent of the bank. At December 31, 2001 the company was not in compliance with the covenants. Under the terms of the agreement, the bank may call the loan if the company is in violation of any restrictive covenant. NOTE 7 - DUE TO SHAREHOLDERS Due to shareholders at March 31, 2002 and December 31, 2001 consists of the following:
March 31, December 31, 2002 2001 --------------- -------------- Demand note payable, unsecured, with interest at 15%, payable monthly. Principal and accrued interest due on this note payable are subordinated to all bank debt. $ 50,000 $ 50,000 Advances, unsecured, non-interest bearing, due on demand 89,000 65,000 --------------- -------------- $ 139,000 $ 115,000 =============== ==============
CBQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Continued) NOTE 8 - LONG-TERM DEBT Long-term debt at March 31, 2002 and December 31, 2001 consists of the following:
March 31, December 31, 2002 2000 --------------- -------------- Note payable, bank, with interest at 8.66%, payable in monthly installments of principal of $5,555 plus interest through April 30, 2003 $ 144,384 $ 144,384 Capital lease obligations, at interest rates ranging from 4.90% to 14.17%, payable in monthly installments of $3,461 through the maturity dates ranging from November 2000 to February 2004 - - Subordinated debenture due in monthly installments of 12% interest only until April 30, 2003; 13.5% beginning May 1, 2003; 14% beginning May 1, 2004 and continuing thereafter. Beginning May 1, 2002 monthly principal installments of $20,000 are due until maturity on April 30, 2006 1,476,076 1,476,076 Subordinated debenture due in monthly installments of 12% interest only until December 31, 2001; 13% beginning October 1, 2001; 14% beginning October 1, 2002 and continuing thereafter. Principal and any unpaid interest due at maturity date on October 1, 2005 500,000 500,000 Note payable, with interest of 10% payable in Quarterly installments of interest only. Principal and any unpaid interest due at maturity date on March 1, 2004 740,000 740,000 --------------- -------------- 2,860,460 2,860,460 Less amounts due within one year 2,860,460 2,860,460 --------------- -------------- $ - $ - =============== ==============
CBQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Continued) NOTE 9 - LEASES As of March 31, 2002 all activities of the Company have been conducted by corporate officers from either their homes or business offices. Currently, there are no outstanding debts owed by the company for the use of these facilities and there are no commitments for future use of the facilities. NOTE 10 - PREFERRED STOCK The Company has the option to call the preferred stock as follows: 42,000 shares at the greater of $11.905 per share or the traded market value of the preferred stock on or before October 23, 2001 70,000 shares at the greater of $12.50 per share or the traded market value of the preferred stock on or before October 23, 2002 NOTE 11 - CONTINGENCIES CBQ, Inc. had an agreement with a funding source to sell certain receivables with recourse. In the event of the customer's default the company must repurchase the receivables from the funding source. As of December 31, 2001, the company is contingently liable in the amount of $935,275 relating to such receivables sold with recourse. In November, 2001 the funding source sued the Company, several of its subsidiaries and on officer of the Company in the Superior Court of New Jersey, Bergen County, Case No. BER-L-9684-01, alleging the sum of $935,275.25 was due from the defendants under the factoring arrangement. The Company and the remaining defendants have filed an answer and are vigorously defending the action. Management feels there is no merit to the claims. In September, 2001, a confession of judgement was entered against the Company and several of its subsidiaries by the Circuit Court in Annapolis, Maryland (Case No. C-2001-74735), in favor of Allegiance Capital Limited partnership. The confession was in the amount of $1,976,076.04, plus attorneys's fees of $296,411.41 and prejudgement interest in the amount of $802.75 per day after September 25, 2001, until the date of entry of final judgement. This suit was based on loans which Quantum had obtained prior to being acquired by the Company, all of which were guaranteed by the Company and its subsidiaries, as well as several individuals. The amount of the judgement has been included in the financial statements as part of the current portion of long-term debt and accrued expenses. CBQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Continued) NOTE 11 - CONTINGENCIES (continued) On October 15, 2001, Anthony M. Sanders sued the Company and several of its former affiliates, in the United States District Court for the District of Maryland (Northern Division). The case number is MJG 01 CV 3062. Mr Sanders was a former officer, director and controlling shareholder of Quantum Technology who transferred his interest to the Company. The gravaman of Mr. Sanders' complaint is that the Company failed to redeem preferred shares in Quantum held by Mr. Sanders. Mr. Sanders is claiming breach of contract, negligent misrepresentation, intentional infliction of emotional distress and securities violations against the Company for this failure. Management feels there is no merit to Mr. Sanders' allegations as against the Company and that the complaint as filed is completely groundless. The Company has elected not to defend the case insofar as the Maryland court has no jurisdiction over this matter as it pertains to the Company and any judgement obtained by Mr. Sanders would be unenforceable against the Company. NOTE 14 - DISCONTINUED OPERATIONS On September 15, 2001 the Company closed its operations in Hunt Valley, Maryland. The Hunt Valley operations included the Quantum Group and its subsidiaries. The Company is attempting to collect any remaining account receivables and negotiate settlement of liabilities and will likely abandon any remaining assets of the Quantum Group. The Company is attempting to sell CBQ Networkland, Inc. and has abandoned the majority of the assets of CBQ Technet Computer Services, Inc. Item 2. Management's Discussion and Analysis or Plan of Operation This Quarterly Report contains certain 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, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the ability of the Company to continue its expansion strategy, changes in costs of raw materials, labor, and employee benefits, as well as general market conditions, competition and pricing. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward- looking statements included herein, the inclusion of such information should not be regarded as a presentation by the Company or any other person that the objectives and plans of the Company will be achieved. As used herein the term "Company" refers to CBQ, Inc., a Colorado corporation and its predecessors and subsidiaries, unless the context indicates otherwise. Business of the Company and its Subsidiaries: Beginning in late 2001 and continuing through early 2002, we entered into a series of transactions that we believe will result in our resuming business operations, although in a significantly different industry than the traditional industries in which we have operated. Those transactions include the following transactions: o During the third quarter the Board of Directors decided to discontinue the retail portion of the business. The Company will not proceed with the development of any software business in Asia. Similarly the Company has decided not to operate any retail business related to sale of and servicing of computer products. The Company will concentrate on opportunities in the Information Technology industry. o In November, 2001, the Company entered into a relationship with an unaffiliated third party to assist it in dealing with the events which transpired during the latter half of 2001 and to assist in the development and implementation of a viable business plan for the Company. As of the date of this filing, CBQI had filed answers to the suits to which it had defenses, identified its debts, worked an agreement to satisfy its obligations to its auditors and was in the process of determining the appropriate structure in which to pursue subsequent business opportunities. o The Company will continue to pursue opportunities in the wireless, broadband, and consulting aspects of the Information Technology industry, and is currently pursuing growth- related opportunities related to the development of certain software platforms. The Company will seek to develop international trade-related opportunities, particularly with regard to the People's Republic of China, and United States Government procurement opportunities in the Information Technology arena. Our management believes these actions had a beneficial effect on our financial position. Some of the transactions described below occurred, or are anticipated to occur, after March 31, 2002, the closing date of the period covered by this report. We have included descriptions of these matters in this report to provide a more balanced description of our operations, business and prospects on a going-forward basis. CBQ exhibits core competency in the United States Information Technology software industry with significant private industry and governmental relationships in the People's Republic of China. In January 2000, CBQ merged with ChinaSoft Inc., the private industry partner of the state-owned software development companies. CBQ may call on ChinaSoft's substantial programmer resources for contract software development or outsourcing. CBQ also works jointly with a privately owned China based software development and outsourcing company with English language expertise in both management and staff. These resources are capable of offering software services in virtually any programming language to the US. CBQ can deliver these services through software product offerings and outsourcing and/or project development, both in the US and in China. CBQ's lines of businesses include software development outsourcing, web development, custom software development, network systems integration and management. These lines of business are reflective of the Company's renewed focus on these business segments. The Company is in the process of attempting to identify and acquire favorable business opportunities. The Company has reviewed and evaluated a number of business ventures for possible acquisition or participation by the Company. Other than previously mentioned the Company has not entered into any agreement, nor does it have any commitment or understanding to enter into or become engaged in a transaction as of the date of this filing. The Company continues to investigate, review, and evaluate business opportunities as they become available and will seek to acquire or become engaged in business opportunities at such time as specific opportunities warrant. During the period covered by this report, we conducted only minimal business operations. We currently have no employees. Certain administrative services relating to our minimal maintenance operations were provided by employees of our majority shareholders. Results of Operations Plan of Operations - The Company was organized for the purpose of creating a corporate vehicle to seek, investigate and, if such investigation warrants, acquire an interest in one or more business opportunities presented to it by persons or firms who or which desire to seek perceived advantages of a publicly held corporation. The Company may incur significant post-merger or acquisition registration costs in the event management wishes to register a portion of their shares for subsequent sale. The Company will also incur significant legal and accounting costs in connection with the acquisition including the costs of preparing post- effective amendments, Forms 8-K, agreements and related reports and documents. The Company will not have sufficient funds (unless it is able to raise funds in a private placement) to undertake any significant development, marketing and manufacturing of the products acquired. Accordingly, following the acquisition, the Company will, in all likelihood, be required to either seek debt or equity financing or obtain funding from third parties, in exchange for which the Company may be required to give up a substantial portion of its interest in the acquired product. There is no assurance that the Company will be able either to obtain additional financing or interest third parties in providing funding for the further development, marketing and manufacturing of any products acquired. Results of Operations - The Company, as a result of the liquidating trust, had no operations during 2001 and to the date of this report, other than its search for a business opportunity. During 2001 and 2000 the Company attempted to provide retail software, computer services and products that has since proved uneconomical and has been abandoned. Accordingly, comparisons with prior periods are not meaningful. Capital Resources and Liquidity The Company, as a result of the liquidating trust, has not generated any cash flows from operating or investing activities since inception. Operating capital was primarily provided from the proceeds of equity financing, bank loans and receivables financing, the latter two of which the Company is presently no longer entitled to enjoy and is in litigation over. CBQI is presently seeking alternative sources of capital. The Company expects future development and expansion will be financed through cash flow from operations and other forms of financing such as the sale of additional equity and debt securities, capital leases and other credit facilities. There are no assurances that such financing will be available on terms acceptable or favorable to the Company. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is presently a party to several law suits. The material law suits are: Allegiance Capital: In September, 2001, a confession of judgement was entered against CBQI and several of its subsidiaries by Circuit Court in Annapolis, Maryland (Case No. C-2001- 74735), in favor of Allegiance Capital Limited Partnership. The confession was in the amount of $1,976,076.04, plus attorneys's fees of $296,411.41 and pre judgement interest in the amount of $802.75 per day after September 25, 2001, until the date of entry of final judgement. This suit was based on loans which Quantum had obtained prior to being acquired by CBQI, all of which were guaranteed by CBQI and its subsidiaries, as well as several individuals, including John Moran, Gino Manna, Raymond Kostkowski, Anne Sigman and J. Patrick Dowd. Pursuant to an Inter-Creditor Agreement between Suntrust Bank and Allegiance Capital, Allegiance Capital's claims are subordinate to such claims as Suntrust Bank may have against CBQ, Inc. Platinum Funding: In November, 2001, Platinum Funding Corp. (Platinum) sued CBQI, several of its subsidiaries, and Mr. Bart Fisher in the Superior Court of New Jersey, Bergen County, Case No. BER-L-9684-01, alleging that the sum of $935,275.25 was due from the defendants under a factoring arrangement which Platinum claims to have existed. CBQI and the remaining defendants have filed an answer and are vigorously defending the action. Management feels there is no merit to the claims. Anthony M. Sanders: On October 15, 2001, Anthony M. Sanders sued CBQ, Inc., and several of its former affiliates, including Raymond Kostkowski, in the United States District Court for the District of Maryland (Northern Division). The case number is MJG 01 CV 3062. Mr. Sanders was a former officer, director and controlling shareholder of Quantum Technology who transferred his interest to CBQI. The gravamen of Mr. Sanders' complaint is that CBQI failed to redeem preferred shares in Quantum held by Mr. Sanders. Mr. Sanders is claiming breach of contract, negligent misrepresentation, intentional infliction of emotional distress and securities violations against CBQI for this failure. Management feels there is no merit to Mr. Sanders' allegations as against CBQI and that the complaint as filed is completely groundless. CBQI has elected not to defend the case insofar as the Maryland court has no jurisdiction over this matter as it pertains to CBQI and any judgement obtained by Mr. Sanders would be unenforceable against CBQI. Suntrust Bank line of credit and term note: Quantum Technology Group had a $4 million line of credit with Crestar Bank, which was subsequently acquired by Suntrust. This line of credit was guaranteed by Quantum and five individual guarantors, including Ray Kostkowski, Anne Sigman, Skip Lewis, and Anthony Saunders. This line of credit was opened during April, 2000. On August 8, 2000, CBQI acquired all of the shares of Quantum Technology Group. $1.3 million of the line of credit had been used, and was owing to the bank and in addition to the line of credit, a $200,000 term loan from Suntrust, approximately $200,000 in accrued interest and $100,000 in attorney fees all of which Suntrust is attempting to collect from the individual guarantors. Suntrust has not sued CBQI but has threatened to sue. It is the position of CBQI that it does not owe the money to Suntrust. It never signed any loan, and indeed by freezing the line of credit, Suntrust greatly injured the business of CBQI ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None/Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None/Not Applicable. ITEM 5. OTHER INFORMATION Executive Officers and Directors The members of the Board of Directors of the Company serve until the next annual meeting of stockholders, or until their successors have been elected. The officers serve at the pleasure of the Board of Directors. The following table sets forth the name, age, and position of each executive officer and director of the Company:
Director's Name Age Office Term Expires Bart S. Fisher 59 Chairman of the Board next annual meeting of Directors John M. Albertine 58 President, Chief Executive next annual meeting Officer Howard Ullman III 42 Director next annual meeting Xu Ying 36 Director next annual meeting
Set forth below is certain biographical information, present occupation and business experience for the past five years of each director and executive officer of the Company. Officers of the Company are elected by the Board of Directors and hold office until their successors are chosen and qualified, until their death or until they resign or have been removed from office. All corporate officers serve at the discretion of the Board of Directors. Dr. Bart S. Fisher is the Chairman of the Board of Directors since January 14, 2000. He is currently Of Counsel to Bryan Cave LLP, and Senior Advisor, Plexus Consulting Group. Previously, he practiced law with Porter, Wright, Morris & Arthur, and with Patton, Boggs, and with Arent Fox Kintner Plotkin & Kahn, all based in Washington, D.C. While at Patton Boggs he was on the Management Committee and Chair of the International Trade Practice Group. Dr. Fisher attended Harvard Law School (JD 1972), The Johns Hopkins School of Advanced International Studies in Washington, D.C., and Bologna, Italy, (MA 1967 and PhD 1970) and Washington University (BA 1963). He was elected to Phi Beta Kappa at Washington University, and awarded the Brookings Institution Fellowship in 1968. Dr. Fisher is a member of the International Bar Association and an ex-officio member of the Board of Governors, International Practice Section, Virginia State Bar. He serves on the Program Committee of Georgetown University Leadership Seminar, which he co-founded in 1981, and as a participating member of the International Trade Working Group of the President's Council on Year 2000 Conversion, and is a nationally syndicated columnist for News/USA. Dr. Fisher is Managing partner of Capital House Merchant Banking, LLC, and resident of Capital Baseball, Inc. He formerly served as a Director of Total Health, a New York-based health maintenance organization. As a Managing Partner of Capital House, Dr. Fisher has been actively involved and engaged by Lycos (R( (Nasdaq: LCOS), to obtain financing and joint venture partners for unique Internet Portals. Dr. Fisher is a member of the Board of Directors of the National Marrow Donor Program, The Marrow Foundation, and the Aplastic Anemia Foundation (which he formed in 1983). He is a member of the American Legion, and listed in the Who's Who in the World, Who's Who in American Law, and Who's Who in America. Dr. John M. Albertine has been the President and Chief Executive Officer since April 23, 2002. For the past ten years Dr. Albertine has been the Chairman of Albertine Enterprises, Inc. a business consulting concern. Dr. Albertine served as Vice Chairman of Fruit of the Loom Company from 1986 to 1990, and was formerly President of the American Business Conference and Executive Director of the Congressional Joint Economic Committee under Chairman Lloyd Bentsen (D.-Tex.). Dr. Albertine also headed a presidential committee on aviation safety under President Reagan and holds a Ph.D. in economics from the University of Virginia. Dr. Albertine has served on 17 corporate boards, including several New York Stock Exchange companies such as Thermo Electron Corporation, American Precision Industries, Inc., and BBN, Inc. Dr. Albertine is currently a director of an American Stock Exchange company, Kadant, Inc., Intermagnetics General, A NASDAQ- listed company, Highstreet Capital Management, LLC, a financial management partnership, and the New York Stock Exchange company, Semco Energy, Inc. Paul F. Naughton has been Senior Vice President and Chief Financials Officer of the Company since April 24, 2002. For the past six years Mr. Naughton has been a partner in Thompson & Naughton a financial advisory concern. Mr. Naughton served as President, Chief Operating Officer and Director of Potomac Capital Investment Corporation from 1991 through 1996. He also served from 1986 until 1991 as Senior Vice President and Chief Financial Officer. Potomac Capital is a subsidiary of Potomac Electric Power Company in Washington, D.C. Mr. Naughton served as Senior Vice President, Finance, Chief Financial Officer and Treasurer of Primark Corporation from 1980 through 1986. He also served as the President, Chief Executive Officer, and Director of Westmark Savings Bank, a wholly owned subsidiary of Primark. Mr. Naughton served as Treasurer of American Natural Resources from 1973 through 1978, and holds an MBA in Finance from St. Johns University. Howard Ullman III has been a director of the Company since February 2002. He is currently President of Sourcelink Solutions, Inc. Mr. Ullman graduated from Tulane University with a BA in economics. In 1984 Mr. Ullman joint ventured the building of a injection molding magnet factory in China. At the same time he opened Fason Souvenirs and Novelties, a US distribution company for the magnets. In 1996 Mr. Ullman founded Magnet World Ltd., headquartered in Hong Kong and in 1997 founded China Direct Trading Company which was an add on of product lines to Magnet World's customer base. In 1998 Mr. Ullman founded a partnership in a retail magnet kiosk operation at Universal Studios, called Magnut Hut. In 2001 Mr. Ullman was elected on the board of the Florida China Chamber of Commerce. Ms. Xu Ying has been a director of the Company since January 14, 2000. She graduated in 1983 with Bachelors degree in from Yan Jing Overseas Chinese University. She is currently the general manager of Asia-European Bridge Corporation, Ltd. This firm specializes in international business transactions primarily in the high technology sector. Ms. Xu also provides consulting to foreign businesses seeking to do business in the Chinese market. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS (b) Reports on Form 8-K. No reports on Form 8-K were filed during the period covered by this Form 10-QSB. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 20th day of May, 2002. CBQ, Inc. /s/ John M. Albertine Chief Executive Officer /s/ Paul F. Naughton Chief Financial Officer