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As filed with the U.S. Securities and Exchange Commission on December 30, 1997
Registration Statement No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM SB-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
(Name of Small Business Issuer in Its Charter)
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<S> <C> <C>
South Carolina 7373 57-0910139
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) No.)
</TABLE>
Suite 128, 115 Atrium Way
Columbia, South Carolina 29223
(803) 736-5595 (Phone)
(803) 736-5639 (Fax)
(Address and Telephone Number of Principal Executive Offices)
Harry P. Langley
President
Integrated Business Systems and Services, Inc.
Suite 128, 115 Atrium Way
Columbia, South Carolina 29223
(803) 736-5595 (Phone)
(803) 736-5639 (Fax)
(Name, Address and Telephone Number of Agent For Service)
Copy to:
Augustus M. Dixon
Nelson Mullins Riley & Scarborough, L.L.P.
1330 Lady Street
P. O. Box 11070
Columbia, SC 29201
(803) 733-9491 (Phone)
(803) 343-5598 (Fax)
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Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
--------------
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
--------------
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<PAGE> 2
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
---------------
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box.
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- ---------------------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
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Title Of Each
Class of Number of Shares Maximum Offering Maximum
Securities To Be Registered Price Per Aggregate Amount Of
To Be Registered Share (1) Offering Price(1) Registration Fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 500,000 $.81 $405,000 $120
no par value
- ---------------------------------------------------------------------------------------------------------------------
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(1) The shares being registered are issuable upon the exercise of
non-transferable share purchase warrants previously issued by the Company. The
purchase price per share of common stock under the warrants is $1.00 (cdn.)
until November 28, 1998 and $1.15 (cdn.) until November 28, 1999. The amount
stated in the table is based on the December 18, 1997, exchange rate between the
Canadian dollar and the US dollar of C $1.43 = US$1.00.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Disclosure alternative used(check one): Alternative 1
Alternative 2 X --------
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ITEM 2 - SIGNIFICANT PARTIES
(a) The issuer's directors:
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Business Address Home Address
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<S> <C> <C>
Harry P. Langley Suite 128, 115 Atrium Way 6628 Christie Road
Chairman Columbia, SC 29223 Columbia, SC 29209
George E. Mendenhall Suite 128, 115 Atrium Way Rt. 1, Box 300E
Director Columbia, SC 29223 Ridgeway, SC 29130
Stuart E. Massey Suite 128, 115 Atrium Way 515-C Maple Street
Director Columbia, SC 29223 Columbia, SC 29205
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(b) The issuer's officers:
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Business Address Home Address
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<S> <C> <C>
Harry P. Langley Suite 128, 115 Atrium Way 6628 Christie Road
President and Treasurer Columbia, SC 29223 Columbia, SC 29209
George E. Mendenhall Suite 128, 115 Atrium Way Rt. 1, Box 300E
Executive Vice President Columbia, SC 29223 Ridgeway, SC 29130
Stuart E. Massey Suite 128, 115 Atrium Way 515-C Maple Street
Vice President Columbia, SC 29223 Columbia, SC 29205
</TABLE>
(c) The issuer's general partners: None.
(d) Record owners of 5 percent or more of any class of the issuer's equity
securities
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<CAPTION>
Name Business Address Home Address
- ----------------------- ---------------------------- -------------------
Common Stock
<S> <C> <C>
Harry P. Langley Suite 128, 115 Atrium Way 6628 Christie Road
Columbia, SC 29223 Columbia, SC 29209
George E. Mendenhall Suite 128, 115 Atrium Way Rt. 1, Box 300E
Columbia, SC 29223 Ridgeway, SC 29130
Stuart E. Massey Suite 128, 115 Atrium Way 515-C Maple Street
Columbia, SC 29223 Columbia, SC 29205
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(e) Beneficial owners of 5 percent or more of any class of the issuer's
equity securities:
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Name Business Address Home Address
- ----------------------- ---------------------------- -------------------
Common Stock
- ------------
<S> <C> <C>
Harry P. Langley Suite 128, 115 Atrium Way 6628 Christie Road
Columbia, SC 29223 Columbia, SC 29209
George E. Mendenhall Suite 128, 115 Atrium Way Rt. 1, Box 300E
Columbia, SC 29223 Ridgeway, SC 29130
Stuart E. Massey Suite 128, 115 Atrium Way 515-C Maple Street
Columbia, SC 29223 Columbia, SC 29205
Wolverton Securities Ltd. 17th Floor, 777 Dunsmuir Street N/A
Vancouver, British Columbia
V7Y1J5
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(f) Promoters of the issuer:
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<CAPTION>
Name Business Address Home Address
- ----------------------- ---------------------------- -------------------
<S> <C> <C>
Harry P. Langley Suite 128, 115 Atrium Way 6628 Christie Road
Columbia, SC 29223 Columbia, SC 29209
George E. Mendenhall Suite 128, 115 Atrium Way Rt. 1, Box 300E
Columbia, SC 29223 Ridgeway, SC 29130
Stuart E. Massey Suite 128, 115 Atrium Way 515-C Maple Street
Columbia, SC 29223 Columbia, SC 29205
</TABLE>
(g) Affiliates of the issuer: See Items 1(a), (b), (d) and (f). These
determinations of affiliate status are not necessarily conclusive for
other purposes.
(h) Counsel to the issuer with respect to the proposed offering:
Nelson Mullins Riley & Scarborough, L.L.P.
1330 Lady Street
P.O. Box 11070
Columbia, South Carolina 29201
(i) Each underwriter with respect to the proposed offering: Not applicable.
(j) The underwriter's directors: Not applicable.
(k) The underwriter's officers: Not applicable.
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(l) The underwriter's general partners: Not applicable.
(m) Counsel to the underwriter: Not applicable.
ITEM 3 - RELATIONSHIP WITH ISSUER OF EXPERTS NAMED IN REGISTRATION STATEMENT
(a) No expert named in this prospectus was paid on a contingent basis or
had a material interest in the Company or any of its subsidiaries or
was connected with the Company or any of its subsidiaries as a
promoter, underwriter, voting trustee, director, officer or employee.
ITEM 4- LEGAL PROCEEDINGS
Not applicable.
ITEM 5 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 6 - DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
The Company's Articles of Incorporation provide that a director of the Company
shall not be personally liable to the Company or any of its shareholders for
monetary damages for breach of fiduciary duty as a director, except liability
for the following:
(a) any breach of the director's duty of loyalty to the Company or its
shareholders;
(b) acts or omissions not in good faith or which involve gross
negligence intentional misconduct or a knowing violation of law;
(c) any unlawful distribution as set forth in the Code of Laws of South
Carolina; or
(d) any transaction from which the director derived an improper
personal benefit.
These provisions may have the effect in certain circumstances of reducing the
likelihood of derivative litigation against directors. While these provisions
may eliminate the right to recover monetary damages from directors in various
circumstances, rights to seek injunctive or other non-monetary relief are not
eliminated.
The Company's By-laws provide for indemnification of the Company's directors to
the fullest extent permitted by law. The Company's Bylaws also permit the
Company, through action of the Board of Directors, to indemnify the Company's
officers or employees to the fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "1933 Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission (the "Commission") such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any
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action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to Completion Dated December 30, 1997
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
500,000 Shares
Common Stock
This Offering Circular relates to up to 500,000 shares of common stock,
no par value (the "Common Stock") which will be issued by Integrated Business
Systems and Services, Inc. (the "Company") in connection with the exercise of
non-transferable share purchase warrants (the "Warrants") previously issued by
the Company.
The Common Stock is traded on the Vancouver Stock Exchange (the "VSE") under the
Symbol "IBS" On December 24, 1997, the last sale price of the Common Stock
as reported on the VSE was $1.15 (Cdn.) per share.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE _____.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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Offering Information(1)
=============================================================================================
Proceeds to
Price Company(2)
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<S> <C> <C>
Per Share.......................................... $ .70 $ .70
=============================================================================================
Total.............................................. $ 350,000 $350,000
=============================================================================================
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(1) The purchase price per share of Common Stock under the Warrants is
$1.00 (cdn.) until November 28, 1998, and $1.15 (cdn.) until November
28, 1999. The amount stated in the table assumes the Warrants are
exercised before November 28, 1998, and is based on the December 18,
1997, exchange rate between the Canadian dollar and the U.S. dollar of
C $1.43=U.S. $1.00.
(2) Before deducting estimated expenses of approximately $75,000 payable by
the Company.
The date of this Prospectus is December _____, 1997.
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, all information in this Offering
Circular assumes that the maximum number of shares being offered is sold at a
price of $1.00 (cdn.) per share.
THE COMPANY
The Company is in the business of providing computer technology
products and services to industrial manufacturers and on-line transaction
processing businesses primarily in the United States. The Company's principal
business areas are: (1) installing, licensing and servicing in the US software
developed by the Company that helps manage the shop floor transactions of
manufacturing facilities (the "FIS System") using the Company's software known
as Synapse, which manages on-line computer transactions; (2) providing systems
integration services to manufacturing companies in the US; and (3) developing
and marketing Synapse worldwide. The Company's FIS System is still under
development. In addition, the Company continues to develop user and
administrative manuals for Synapse.
The Company was incorporated in South Carolina in 1990, and its
principal office is located at Suite 128, 115 Atrium Way, Columbia, South
Carolina 29223, and its telephone number is (803) 736-5595.
THE OFFERING
The Offering consists of 500,000 common shares to be issued upon the
exercise of non-transferable share purchase warrants previously issued by the
Company. The Company intends to use any proceeds from the Offering for general
working capital.
RISK FACTORS
The securities offered hereby are speculative, involve a high degree of
risk and immediate and substantial dilution, and should not be purchased by
investors who cannot afford the loss of their entire investment. See "Risk
Factors."
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RISK FACTORS
The securities offered hereby are speculative and involve a high and
substantial degree of risk, including, but not necessarily limited to, the risk
factors described below. Prior to making an investment decision, a prospective
investor should carefully consider the risk factors listed below, together with
the other factors and financial data included herein, in relation to his or her
financial circumstances and the possible loss of his or her entire investment.
DEVELOPMENT RISKS. Investment in the shares may be considered to be speculative
due to the nature of the business in which the Company is engaged, the limited
extent of the Company's assets and the Company's stage of development. The
Company has only a limited operating history and is subject to the risks
associated with start-up companies, including start-up losses, liquidity
problems, uncertainty of revenues, markets, profitability and the need for
additional funding. The Company incurred net losses of approximately US$253,000
for the year ended December 31, 1996 and has incurred losses in previous years
that have adversely affected the Company's liquidity. The Company's financial
viability depends on the Company achieving a significant increase in sales
revenue and the development of the FIS System Version 2.0 is not yet complete.
The Company's shareholders' deficiency as of September 30, 1997 was US$1,005,208
and its working capital deficit was US$1,306,171.
FUTURE FINANCINGS. The Company likely will require additional financing to
implement its strategies and achieve its objectives. The Company may seek such
additional financing through private financings, debt or equity offerings or
collaborative arrangements with others. If adequate funds are not available when
required or on acceptable terms, the Company may be required to delay, scale
back or eliminate its product development activities and sales and marketing
efforts. If this becomes necessary, it could materially adversely affect the
Company's business, results of operations and prospects. Any equity offering
will result in dilution to the ownership interests of shareholders and may
result in dilution to the value of such interests.
COMPETITION. The Company operates in the competitive computer technology
environment. Many of the Company's competitors are more established, benefit
from greater market recognition and have substantially greater technical,
financial and marketing resources. There can be no assurance that existing or
future competitors will not develop products that are superior to the Company's
or that will achieve greater market acceptance. The Company's future success
will depend in large part upon its ability to attract new clients, license
additional products and deliver product enhancements and services to existing
clients. There can be no assurance that the Company will be able to develop and
maintain the financial, technical, distribution and support capabilities to do
this.
The Company and its products are not well known in the marketplace and the
Company faces intense competition from a variety of competitors, most of which
have significantly greater resources and market acceptance. Because the Company
has from inception primarily focused on product development, it has little
experience in marketing and selling its products. It recently began assembling a
sales and marketing team, establishing a sales and marketing strategy and
implementing that strategy. There can be no assurance that the Company will be
successful in marketing and selling its products nor that is products will
achieve market acceptance. Even if they do achieve market acceptance, there can
be no assurance that the Company's products can be sold at prices that are
sufficient to enable the Company to sustain and expand its operations.
TECHNOLOGY RISK. The Company's ability to compete effectively and meet its
clients' needs are dependent upon its continuing significant investment in
software development. The Company has
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invested significantly in technology and anticipates that it will be necessary
to continue to do so. Moreover, the technologies upon which the Company depends
are evolving rapidly and require the Company to anticipate and adapt to
technological shifts. There can be no assurance that the Company will be
successful in anticipating or adapting to technological changes or in selecting
and developing new and enhanced technology on a timely basis.
Future technological advances in the continually changing computer technology
industry may result in the availability of new products and services that could
compete with the products and services currently provided by the Company.
Moreover, decreases in the cost of existing products or services could enable
the Company's current or potential clients to fulfill their own needs for
process management systems and services or integrated on-line data collection
products and services in a more cost efficient manner than through the purchase
of the Company's products and services. There can be no assurance that the
Company will not be adversely affected in the event of such technological
change, or that changes in technology will not enable additional companies to
offer services that could replace some or all of the products and services
presently offered by the Company.
DEPENDENCE ON KEY CLIENTS. In 1996, one client accounted for approximately 22%
of the Company's total revenues. In the first nine months of 1997, this client
accounted for approximately 27% of the Company's total revenues. It is expected
that revenues from this client will substantially decrease following the
completion of its project, which is expected to occur by the end of the first
quarter of 1998. In 1996, three other clients together accounted for
approximately 32% of the Company's revenues. In the first nine months of 1997,
these three clients accounted for a total of approximately 33% (12%, 15% and 6%,
respectively) of the Company's total revenues. Although the projects for these
clients are nearing completion, the project accounting for 15% of the Company's
total revenues was a new project for this client during 1997.
The loss of any one of these clients or the diminution in work from these
clients (which is likely due to certain projects nearing completion) could have
a material adverse effect on the Company to the extent that this business cannot
be replaced with new business.
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend to a significant
extent upon the skills of certain key personnel. The Company has a small core
management and development team and the unexpected loss of any of these
individuals would have a serious impact on the business. In addition, the
Company's failure to attract additional qualified employees or to retain the
services of key personnel could adversely affect the Company's business.
DEPENDENCE ON RESELLER AGREEMENTS. The Company relies on reseller agreements
with Oracle Corporation, Intermec Corporation and Connectware Solutions Inc. The
termination of any of these agreements could have a material adverse effect on
the Company. For a discussion of the terms and termination provisions of the
agreements, refer to "Business - Products and Services - Integration Business
Unit - Products and Services".
BUSINESS EXPANSION -- DEMANDS ON MANAGEMENT. The Company's success will depend
in part upon a number of managerial personnel, technical employees and sales
personnel, some of which are not yet hired or known. The Company's operations to
date have been somewhat limited due to extensive product development. The
Company's management team, accordingly, has not had substantial experience in
managing broader operations. Increased marketing activities will place
additional demands upon management, and it is expected that these demands will
intensify as the Company grows. The effective management of growth will require
the hiring of additional management personnel skilled in sales, operations and
cost control. The competition for such personnel is intense. The inability to
attract, integrate and retain additional management personnel,
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to address additional management needs or to manage growth effectively could
have a material adverse effect on the Company's business, results of operations
and prospects.
INTELLECTUAL PROPERTY RIGHTS. The Company relies primarily on a combination of
copyright, trademark and trade secret laws, confidentiality procedures,
contractual provisions and the complex nature of the technologies to protect its
intellectual property. While the Company believes that its products and
technologies are adequately protected against infringement, there can be no
assurance of effective protection. The Company's clients, for example, may
disclose confidential information relating to the Company's technology, which
may have a material adverse effect on the Company's financial position.
Monitoring and identifying unauthorized use of the Company's technology may
prove difficult, and the prohibitive cost of litigation may impair the Company's
ability to prosecute any infringement. In addition, the Company may become
liable to its clients for any breach of a third party's intellectual property
rights.
The commercial success of the Company may also depend upon its products not
infringing any intellectual property rights of others and upon no claims for
infringement being made against the Company. The Company has not conducted any
patent searches to determine whether or not it may be infringing the patent or
trademark rights of a third party. The Company believes that it is not
infringing any intellectual property rights of third parties, but there can be
no assurance that such infringement will not occur. An infringement claim
against the Company by a third party, even if it were eventually found to be
invalid, could have a material adverse effect on the Company because of the cost
of defending such a claim.
Further, insofar as the Company relies on trade secrets and unpatented know-how
to establish and maintain its competitive technological position, there can be
no assurance that others may not independently develop the same or similar
technologies. Presently, the Company does not have any patent protection for its
technology in Canada or the US nor has it registered any copyrights.
LENGTH OF SALES CYCLE. Certain of the Company's products and services are often
used as part of a client's larger business process re-engineering initiative. As
a result, the purchase and implementation of the Company's products generally
involves a significant commitment of management attention and resources by
prospective clients. Accordingly, the Company's sales process is often subject
to delays associated with a long approval process.
For these and other reasons, the sales cycle for the Company's products is often
lengthy and subject to a number of significant delays over which the Company has
little or no control. Such delays may result in significant fluctuations on the
Company's quarterly financial results. Certain of the Company's products and
services are capable of having a pervasive effect on the information systems of
an enterprise. Products that are capable of having such an effect are typically
purchased from large organizations that have a lengthy track record in the
marketplace. Purchasers of such products are typically reluctant to purchase
from a small firm such as the Company out of concern for the long-term viability
of the firm.
RELIANCE ON MANAGEMENT. While subscribers have voting rights, they will not be
able to take a direct role in the management of the Company. The success of the
Company is contingent on the judgment and expertise of the directors and
officers of the Company. Persons who are not willing to rely on the expertise of
the directors and officers of the Company should not purchase shares.
FINANCIAL STATEMENTS. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and expenses
during
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the reporting period. Amounts affected by these estimates include, but are not
limited to, the estimated useful lives, related amortization expense and
carrying values of the Company's intangible assets and capitalized software
development costs. Changes in the status of certain matters or facts or
circumstances underlying these estimates could result in material changes to
these estimates, and actual results could differ from these estimates.
ENFORCEMENT OF CIVIL CLAIMS. The Company was incorporated under the laws of
South Carolina in the US. All of the Company's directors and officers reside,
and all of its assets are located, outside of Canada. It may not be possible for
investors to effect service of process within Canada upon the directors and
officers of the Company. It may also not be possible to enforce judgments
obtained in Canadian courts predicated upon the civil liability provisions of
the securities laws of British Columbia against the Company or its directors and
officers.
PRODUCT LIABILITY RISKS. The Company's license agreements with its clients
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. There can be no assurance that such
provisions will protect the Company from such claims in the markets in which it
sells its products. The Company does not maintain product liability insurance. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, results of operations and
prospects.
PREFERRED SHARES AND CHANGE OF CONTROL. The Company currently has no issued and
outstanding preferred shares and has no plans to issue any preferred shares. The
issuance of preferred shares could materially adversely affect the rights of
holders of common shares and, therefore, could reduce the value of the common
shares. In addition, specific rights granted to future holders of preferred
shares could be used to restrict the Company's ability to merge with, or sell
its assets to, a third party. In addition, certain other provisions of the
Company's Articles, By-laws and the South Carolina Business Corporation Act will
likely have the effect of deterring or preventing a change in control of the
Company.
ESCROWED SHARES. Local Policy Statement 3-07 of the British Columbia Securities
Commission requires that 3,600,000 of the Company's outstanding common shares
that are owned by the Company's three principals be held in escrow as
performance shares pursuant to the terms of an Escrow Agreement. The performance
shares may be released from escrow on a pro-rata basis, based upon the Company's
cumulative cash flow, as evidenced by the Company's annual audited financial
statements. "Cash flow" is defined to mean net income or loss before tax,
adjusted for certain add-backs. For each $0.91 of cumulative cash flow generated
from the Company's operations, one performance share may be released from
escrow.
The Company expects that the release of these escrowed shares will be deemed
compensatory and, accordingly, will result in a substantial non-cash charge to
reportable earnings equal to the fair market value of the shares on the date of
release. Such charge could substantially increase the Company's loss or reduce
or eliminate net income, if any, for financial reporting purposes for the
periods during which such shares are, or likely will be, released from escrow.
Accordingly, such charge may reduce the market price of the Company's shares.
GOVERNMENT REGULATION/MARKET ENVIRONMENT. Changes in government regulation in
Canada or the US could materially adversely affect the Company's ability to
carry on business. In addition, due to the current focus of the Company's
business within the manufacturing and hosiery industries, changes in the
regulatory or market environments in these industries could have a material
adverse impact on demand for the Company's products and services.
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TAXES. Until April 18, 1997, the Company's shareholders had elected for the
Company to have the income tax treatment provided by Subchapter S of the United
States Internal Revenue Code. Pursuant to Subchapter S, the Company's income
passed through to the individual shareholders and the Company itself was not
required to pay any federal or state income taxes. Accordingly, the Company's
financial statements do not reflect the effect that the payment of federal and
state income taxes would have had on the Company. The Company is now subject to
federal and state income taxation.
ARBITRARY OFFERING PRICE. The price for which the Company's shares are being
offered in the Offering was determined arbitrarily and may not be indicative of
fair market value. The Offering price may bear no relationship to the Company's
assets, book value, operating results, net worth or other recognized criteria of
value.
DILUTION. The net tangible book value of the Company's shares immediately after
the completion of the Offering will be less than the Offering price. As a
result, purchasers will experience an immediate and substantial dilution in the
net tangible book value per share of the shares purchased.
USE OF PROCEEDS
Assuming the maximum number of shares being offered hereby are sold at
$1.00 (cdn.), the gross proceeds to the Company would be approximately
US$350,000. After deducting the estimated expenses of the Offering in the amount
of $75,000, the net proceeds to the Company from the sale of the 500,000 shares
of Common Stock in this Offering are estimated to be approximately US$275,000.
None of the proceeds from this Offering have been allocated for
particular purposes, but rather the Company intends to use the proceeds for
general working capital purposes. Accordingly, the Board of Directors of the
Company will have complete discretion with respect to the application of the
proceeds.
DILUTION
The net tangible book deficiency of the Issuer as of September 30, 1997 was
US$1,317,470 or US$0.27 per common share. "Net tangible book value (deficiency)
per share" represents the amount of total tangible assets of the Issuer reduced
by the amount of its total liabilities, divided by the number of outstanding
common shares.
Without taking into account any changes in such net book deficiency after
September 30, 1997, other than to give effect to the Issuer's receipt of
US$350,000 pursuant to the issuance of 500,000 common shares at $1.00 (cdn.) per
share in the Offering, the pro forma net tangible book deficiency of the Company
as of September 30,1997 would have been US$967,470 or US$0.18 per common share.
This represents an immediate increase in the net tangible book value
(deficiency) of US$0.09 per common share to existing shareholders and an
immediate dilution of US$0.88 per share to the new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C>
Offering price per share US $0.70
Net tangible book deficiency per share as at September 30, 1997 $0.27
Increase in net tangible book deficiency per share attributable to
the Offering $0.09
Net tangible book deficiency per share after the Offering $0.18
Dilution to subscribers per share $0.88
Percentage of dilution relative to the offering price 126%
</TABLE>
6
<PAGE> 14
The Company consummated an initial public offering of its common stock on
November 26, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -Liquidity and Capital Resources."
Accordingly, the dilution to new investors upon exercise of the Warrants would
be substantially less than indicated above.
DIVIDEND POLICY
The Company expects to retain its earnings to finance further growth and, when
appropriate, retire existing debt. As a result, the Directors of the Company
expect that, for the foreseeable future, the Company will not declare or pay any
dividends on any of its shares. In addition, the Company's loan agreement dated
February 7, 1996 with Carolina Capital Investment Corporation restricts the
payment of dividends by the Company.
BUSINESS
GENERAL
The Company is in the business of providing computer technology products and
services to industrial manufacturers and on-line transaction processing
businesses primarily in the US. The Company's principal business areas include:
- installing, licensing and servicing in the US software
developed by the Company that helps manage the shop floor
transactions of manufacturing facilities (the "FIS System")
using the Company's software tool known as Synapse, which
manages on-line computer transactions
- providing systems integration products and services to
manufacturing companies in the US
- marketing Synapse worldwide
The FIS System provides on-line process management for manufacturing shop
floors. The FIS System is designed to shorten the process time on order,
manufacturing and shipping functions (in some cases from days to hours) and to
provide management with the ability to forecast production needs minutes after
receiving an order. The Company's systems integration projects include the
provision of products and services to help integrate clients' on-line shop floor
data collection equipment (e.g., bar coding equipment) with the clients'
manufacturing software (e.g., inventory tracking software), which typically do
not communicate without integration. Synapse is a software tool that is used to
develop on-line transaction processing applications.
The Company was incorporated in 1990 to develop and license shop floor computer
systems solutions for manufacturing clients. The Company's integration business
complimented this objective and has served as a source of revenue for the
Company while it has developed the FIS System and Synapse. During the fiscal
years ended December 31, 1995 and 1996, the Company had research and development
costs of US$292,850 and US$362,983, respectively. During the next twelve months,
the Company intends to pursue the following business objectives: (i) to complete
the
7
<PAGE> 15
research and development of Version 2.0 of the FIS System; (ii) to expand
marketing of the FIS System; and (iii) to expand marketing of Integration
products and services.
PRODUCTS AND SERVICES
INTRODUCTION
The Company has three business units: (1) the FIS System; (2) Integration; and
(3) Synapse. The following table lists the approximate percentage of total
revenue derived from product and service sales within each of these business
units for fiscal years 1994 through 1997.
<TABLE>
<CAPTION>
===================================================================================================================
PERCENTAGE OF TOTAL REVENUE
BUSINESS UNIT JAN 1 - SEPT. 30
1994 1995 1996 1997
($1,212,754) ($2,202,869) ($2,357,939) ($1,460,378)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIS System 53% 23% 54% 45%
Integration 39% 56% 45% 55%
Synapse 8% 21% 1% 0%
===================================================================================================================
</TABLE>
The Company's products and services and the nature of the market and competition
within each business unit are described below.
FIS SYSTEM BUSINESS UNIT
PRODUCTS AND SERVICES
The FIS System business unit includes the design, development, installation and
servicing of the FIS System. The FIS System provides on-line process management
for manufacturing shop floors. The FIS System utilizes Synapse, the Company's
on-line transaction processing configuration software tool which runs on the
Unix operating system (refer to "Synapse Business Unit" below), to provide
maximum configurability, maintainability and efficiency for clients' systems.
The FIS System is designed to shorten the process time on order, manufacturing
and shipping functions (in some cases from days to hours) and to provide
management with the ability to forecast production needs minutes after receiving
an order.
The FIS System is based on a "bill of operations" concept and can be configured
specifically to provide shop floor management for a particular manufacturing
facility, in many cases without requiring the client to modify its manufacturing
shop floor methodologies or procedures. As a result, most clients are likely to
achieve a return on their computer technology investment more quickly than by
using other manufacturing scheduling systems. Many other manufacturing
scheduling software applications are based on a less adaptable "bill of
materials" concept. A bill of materials consists of a list of materials and
assembly instructions to manufacture a given product. A bill of operations, in
contrast, includes the operations (or procedures) to be performed, their
sequence, the various work centers involved, the standards for setup and run as
well as information on other manufacturing matters such as tooling, operator
skill levels, inspection operations and testing requirements.
8
<PAGE> 16
As part of its FIS System projects, the Company provides clients with system
customization and integration services as well as necessary computer hardware
and software. The Company has installed Version 1.0 of the FIS System, which
tracks inventory, work in process and finished goods, for two manufacturers in
the knitted hosiery industry and one manufacturer in the plastic injection
molding industry.
Version 2.0 of the FIS System, which is currently under development, is designed
to enable users to perform the following tasks on-line:
- enter and track client orders
- manage work-in-process and finished goods inventory
- schedule and report production of orders
- manage shipping and all labour and materials associated with
particular orders
Version 2.0 will be comprised of the following core groups of modules:
- ORDER MANAGEMENT - includes, for example, electronic data
interchange ("EDI"), manual order processing and invoicing,
managing credit and debit memos, royalty and commission
tracking and interfacing to various client modules (e.g.,
shipping, scheduling and other vendor accounting systems)
- INVENTORY MANAGEMENT - facilitates detailed inventory control
from receiving through finished goods (including work in
process, intermediate holding inventories, etc.)
- MANUFACTURING EXECUTION MANAGEMENT ("MEM") - controls, for
example, the process management schedulers and bills of
operations data structure
- SHIPPING MANAGEMENT - manages all aspects of shipping
(including cartonizing, weighing, labeling, etc.) and
interfacing with various EDI products
Version 2.0 of the FIS System will also provide interfaces into various data
collection device networks and system networks; shop floor machinery and
equipment; general ledger and other accounting modules; time and attendance
systems; purchasing systems; and EDI systems for receiving vendor ship notice
manifests, generating vendor orders, receiving orders and sending ship notice
manifests.
Version 2.0 will require additional research and development expenditures of
approximately US$100,000, which will be partially funded by Americal, an FIS
System development sponsor. Version 2.0 is scheduled to be completed during the
first quarter of 1998.
The Order Management Module, the EDI interface and the FIS System base Product
Process Structure (the foundation of the MEM Module) applications were completed
and installed at Americal in the first quarter of 1997. During the second and
third quarters of 1997, the FIS System unit focused on completing the Finished
Goods Inventory Management Module and Shipping Management Modules. The Finished
Goods Inventory Management Module was installed at Americal during July 1997,
and the Shipping Management Module was installed in early December 1997. Once
the Shipping Management Module has been installed, the FIS System will include
all EDI processing of orders in and shipments out. The Company anticipates
completing the development of the MEM module during the first quarter of 1998.
9
<PAGE> 17
If the Company is able to obtain a development sponsor, the Company further
intends to modify the FIS System so that it will run on an Oracle platform. The
Company currently has no such sponsor, and there are no assurances that the
Company will be able to obtain such a development sponsor in the future.
In 1996, one client accounted for approximately 43% of the FIS System business
unit's revenues and another client accounted for approximately 24% of such
revenues.
MARKET
The Company will continue to market the FIS System in the US to manufacturing
companies with annual sales between US$20 million and US$350 million and between
100 and 2,500 employees. The Company intends to focus on smaller strategic
market segments within the manufacturing business. Each strategic market segment
must conform to the following criteria:
- the segment must have no dominant providers of computer
systems and services OR must traditionally require computer
systems that are custom designed and built for individual
manufacturers
- the companies operating in the segment must conduct business
in a manner that provides a good fit with the Company's
products and services
- the companies operating in the segment must possess common
technologies, operational processes, clients and suppliers
The Company has identified the US apparel manufacturing industry as a market
segment that satisfies the above criteria and accordingly intends to focus its
initial marketing efforts within this industry.
In recent years, there has been a fundamental shift in market power from apparel
manufacturers to retailers and consumers. Historically, apparel manufacturers
dictated the terms of trade with retailers and consumers and, consequently,
organized their businesses and utilized their information systems primarily to
increase manufacturing efficiency and output. Today, customers increasingly are
choosing suppliers based on their ability to match product flow to actual
customer demand. As a result, apparel manufacturers are finding it necessary to
re-engineer their businesses and re-direct their information systems to focus on
satisfying customer demand through effective order fulfillment.
The FIS System has been designed specifically for the sophisticated order
fulfillment requirements of apparel manufacturers, enabling them to better match
product flow to actual customer demand, thereby enhancing revenue opportunities
and reducing administrative and logistics costs. Based on industry data obtained
by the Company, the Company estimates that there are approximately 3,200 plants
in the US apparel manufacturing industry operated by companies meeting the
Company's market criteria.
Within the US apparel manufacturing industry, the Company intends initially to
market the FIS System to US hosiery manufacturers. In 1996, there were 334
companies in the hosiery business operating 440 plants in the US. Hosiery
manufacturing facilities are concentrated mainly in the southeastern region of
the US. A majority of US hosiery items are produced in North Carolina; other top
producing states include Alabama, Tennessee, Georgia, Kentucky and South
Carolina (source: National Association of Hosiery Manufacturers 1995-96 Annual
Industry Report). Since 1994, the Company has provided FIS System hardware and
software products and related integration and consulting services to five
clients, two of which are hosiery manufacturers.
10
<PAGE> 18
MARKETING STRATEGY
The Company's objective is to be a leading provider of a cost effective and
flexible on-line process management system to the apparel manufacturing
industry. Version 2.0 of the FIS System is still under development and marketing
efforts have just recently begun. The Company has developed a marketing strategy
with several key components, including the following:
- Finalizing Version 2.0 of the FIS System. The Company is
completing the final product development of Version 2.0 of the
FIS System. Version 2.0 of the FIS System is expected to be
installed at Americal by the end of the first quarter 1998.
Americal is one of the largest private label manufacturers of
women's knitted hosiery in the US. The management of Americal
has been, and is expected to continue to be, willing to
showcase the Company's products and services. The Company
intends to utilize the installation at Americal to showcase
the capabilities of the FIS System.
- Developing and enhancing sales and marketing materials. The
Company intends to update and develop new sales and marketing
literature that publicizes the new features, functions and
benefits of the FIS System. The Company intends to design and
develop new industry specific material to support the
marketing effort in the US hosiery and apparel industries.
- Implementing and continuing marketing support activities. To
support the FIS System and promote it to the apparel
manufacturing industry, the Company intends to use direct
mail, telemarketing and direct selling activities. The Company
has completed a limited mailing to approximately 61 potential
customers. The goal of marketing support is to accelerate
sales potential by presenting the FIS System to prospective
customers prior to completing the System's development in an
effort to establish a "pipe line" of qualified prospects
and/or development partners.
- Attending trade shows. During 1998, the Company expects to
attend at least two specific industry trade shows (Bobbin/The
American Apparel Manufacturing Association and The Hosiery
Manufacturers Association trade shows) and expects to display
and promote the FIS System at these shows.
The sales and marketing efforts relating to the FIS System are currently being
conducted, and are expected to continue to be conducted, primarily by Harry P.
Langley, President; George Mendenhall, the Company's Executive Vice President;
and one sales representative devoted exclusively to the FIS System.
The Company intends to license the FIS System rather than sell it. The license
will be comprised of two components: (1) a software initiation fee and (2) a
monthly license charge. The initiation fee provides the initial license for the
availability of the then current licensed system and is paid one time at the
execution of the contract. The monthly fee funds a continuing license to use the
system and provides the client with the ability to receive the advantages of
future education and developments.
COMPETITION
There are many suppliers of manufacturing software in the US. Certain of these
suppliers are very large and supply comprehensive solutions to multinational and
other large manufacturing companies. Examples of these suppliers are Baan
Company N.V., J.D. Edwards & Company, Oracle Corporation, SAP AG and PeopleSoft,
Inc. Many of the companies in the US hosiery industry, however, are privately
owned companies that cannot afford to purchase integrated solutions from such
major software suppliers.
11
<PAGE> 19
There are a myriad of other smaller providers of manufacturing solutions as
well. Certain of these suppliers focus at least partially on the US apparel
manufacturing industry. These competitors include Manhattan Associates, LLC
(based in Atlanta, Georgia); i-Tech Systems, Inc. (based in Greensboro, North
Carolina); Byte Systems, Inc. (based in Mauldin, South Carolina), Network
Systems International, Inc. (based in Greensboro, North Carolina); The PRO;MAN
Group, Inc. (based in Springbrook, New York); Signature Software Systems, Inc.
(based in Sebastopol, California) and Apparel Data Systems (based in New York,
New York). All of these companies have designed software solutions specifically
for the apparel business. In addition to the above, the Company will also
compete against other providers of manufacturing solutions as well as in-house
information systems management personnel.
Since the Company only recently began actively marketing the FIS System, the
level and extent to which the Company will compete with other manufacturing
software providers is unknown. The competition in this market is intense, and
the FIS System may not be accepted by the market to the degree that is hoped by
the Company's management. Many of the Company's competitors have greater name
recognition, more extensive engineering, management and marketing capabilities
and significantly greater financial, technological and personnel resources than
the Company. Further, to the extent that the Company competes in other strategic
industry market segments in the future, the Company will face competition from
many other competitors.
The Company competes in the manufacturing software market primarily on the basis
of product and price. The FIS System addresses a variety of needs specific to
apparel manufacturers. Other software solutions, by contrast, address primarily
either the financial and material requirements or the warehouse management and
order fulfillment needs of apparel manufacturers. The Company's management is
not aware of any other software application that provides order fulfillment,
manufacturing execution, inventory management and shipping management
functionalities designed specifically for apparel manufacturers. The FIS System,
which generally costs less than manufacturing systems developed by larger
companies, is priced competitively in the targeted mid-tier manufacturer market.
INTEGRATION BUSINESS UNIT
PRODUCTS AND SERVICES
The Integration business unit provides products and services to help integrate
clients' on-line shop floor data collection equipment (e.g., bar coding
equipment) with the clients' manufacturing software (e.g., inventory tracking
software), which typically do not communicate without integration. The Company
supplies clients with the necessary hardware and integration services or with
integration services only. The Company's revenues from integration projects have
ranged from US$1,000 to approximately US$200,000 per project.
A substantial amount of the Company's business in this area involves integrating
Intermec Corporation ("Intermec") bar coding equipment with Oracle Corporation
("Oracle") manufacturing software. Oracle Corporation is a large supplier of
software for information management. Under a Business Alliance Program Agreement
dated May 22, 1996 between the Company and Oracle, the Company became a member
of Oracle's Business Alliance Program ("BAP"). As a BAP member, the Company may
resell certain Oracle products in exchange for varying percentages of the sales
revenues generated. The BAP Agreement has an indefinite term but can be
terminated by Oracle if the Company breaches the Agreement and fails to correct
the breach within 30 days following written notice specifying the breach.
The Company also has an agreement with Intermec dated April 10, 1997, pursuant
to which the Company is a non-exclusive Premier Value Added Reseller of
Intermec's bar coding equipment. Intermec is a large provider of data collection
equipment. Under this Agreement, the Company receives a discount on the Intermec
equipment that the Company resells in connection with its
12
<PAGE> 20
integration services projects. The Company also resells various hardware
products of IBM and Hewlett-Packard Company. This Agreement has an indefinite
term; however, Intermec can terminate the Agreement for any reason, with or
without cause, upon 30 days prior written notice.
To facilitate the integration process, the Company often uses a suite of data
collection connectivity software tools and utilities developed by Connectware
Solutions Inc. (the "Connectware Tools"). By Reseller Agreement dated as of July
26, 1994 between the Company and Connectware Solutions Inc., the Company agreed
to market the Connectware Tools on a non-exclusive basis in exchange for a
discount on the purchase price of the Connectware Tools. This Agreement
automatically renews for successive periods of one year unless terminated by one
of the parties by written notice at least three months prior to the expiration
of the current term. Either party can terminate this Agreement if the other
fails to abide by any of the Agreement's terms and conditions, which failure
continues for a period of 10 days after written notice to remedy such failure.
In 1996, one client accounted for approximately 28% of the Integration business
unit's revenues and another client accounted for approximately 23% of such
revenues.
MARKET
The worldwide market for systems integration services to manufacturing clients
is large and diverse. The market can be segmented according to project size,
relevant computer technology, industry and geographic location. The Company
plans to market its integration-related products and services in the US mostly
to large manufacturing clients that use Oracle manufacturing applications given
the substantial numbers of such manufacturers. Oracle is one of the world's
leading independent suppliers of software for information management.
The Company intends to focus its marketing efforts on those manufacturing
clients that use Intermec bar coding equipment. The market for Intermec's
products is extensive because automated data collection equipment can be
utilized by a variety of companies. Intermec is one of the larger participants
in this industry.
MARKETING STRATEGY
The Company has historically focused on integrating Intermec bar coding data
collection equipment with Oracle manufacturing solutions applications. The
Company has generally obtained most of this business through referrals from
Intermec. Recently, the Company has also begun receiving referrals from Oracle.
As a result, the Company has in the past, and intends to continue, to primarily
market its services and expertise to the proper personnel at Oracle and
Intermec. In particular, the Company intends to focus on developing and
strengthening its relationship with Oracle. In this connection, the Company has
joined the Oracle Applications Users Group Organization which allows it to
participate in Oracle related trade shows and events.
The Company does not currently expect to target its marketing efforts directly
to potential customers; rather, the Company intends to focus on developing its
relationships with Oracle and Intermec for referrals. Yet once the Company
receives a referral, it is still required to negotiate a contract with the
potential customer to use its services. Accordingly, the Company intends to
update and develop new marketing and sales materials to support its integration
business. In addition, the Company plans to attend selected trade shows and
implement a web page to publicize its products and services.
The sales and marketing efforts relating to the Integration business are
currently being conducted, and are expected to continue to be conducted,
primarily by Harry Langley, the Company's President, and the Company's project
manager for integration projects.
13
<PAGE> 21
The Company prices its integration work primarily on a time and materials basis
and obtains contracts on the basis of the Company's expertise and reputation.
The Company's prices are competitive, but there can be no assurance that they
will continue to be so in the future.
COMPETITION
Most of the companies that the Company targets for bar coding integration work
have the ability to have their in-house management information systems personnel
perform these services, and many of these companies use their own personnel to
provide integration services. For a variety of reasons, including time
constraints and prioritizing work loads, however, companies may choose to
outsource their bar coding systems integration work. Companies of varying sizes,
including hardware and software manufacturers as well as service vendors,
provide a wide range of systems integration services. While some of these
companies are large, many of them are quite small as providing these integration
services on a limited basis does not require a great deal of resources.
Accordingly, competition for the bar coding integration business is intense.
The Company receives most of its integration opportunities through referrals
from Intermec. The Company is aware of only two other vendors that Intermec
considers to be solutions providers for Oracle integration products. The other
two vendors are Radley Corporation (which is partially owned by Oracle), located
in the midwestern US and specializing in providing services to the automotive
industry, and Brouwer Palmer, based in the southwestern US specializing in
providing software products and services to programmers who are developing
applications for data collection within the Oracle programming environment.
These two companies typically compete with the Company for integration business
referrals from Intermec. In addition, recently Connectware Solutions Inc., the
Company's vendor for most of the software tools and utilities used by the
Company in its integration business, has also begun providing integration
services in competition with the Company.
SYNAPSE BUSINESS UNIT
PRODUCTS AND SERVICES
The Synapse business unit focuses on developing, marketing, licensing and
servicing Synapse to those organizations that need on-line transaction
processing services software, including organizations in the financial
transaction processing industry. Synapse is a software tool that is used to
develop on-line transaction processing ("OLTP") applications. During 1996, this
business unit provided minimal revenue to the Company while it focused on
completing the research and development of Version 2.3 of Synapse.
Synapse-based OLTP applications are distinguishable from many other OLTP
applications used today. Most other OLTP applications are rigidly structured
with fixed file or database formats and hard-coded routing and processing
techniques, making these software packages expensive to customize and maintain.
Other current tools do offer some application development configuration
capabilities but are still basic and make the configuration of complex
transaction processing difficult.
Synapse, by contrast, is intended to be adaptable and to provide facilities for
the configuration of all aspects of complex OLTP applications. With Synapse, new
applications or updates to existing applications, for example, can be installed
and distributed on-line without the need to restart operating OLTP systems or
interrupt transaction traffic. This capability is particularly important to
providers of critical, around-the-clock OLTP services, such as on-line financial
transaction (e.g., automated teller machine) providers.
The development of Version 2.3, which finishes the Synapse product as originally
designed, is complete. To market Synapse as an "off the shelf" development tool,
the Company must complete a more detailed version of user and administrative
manuals. The manuals currently being used by the
14
<PAGE> 22
Company and clients were developed for "in-house" use where programmers have
access to the developers of the base Synapse product. Therefore, the
documentation was not required to be as extensive and non-technical as it should
be for clients and non-Company developers. If funds become available, the
Company plans to continue research and development efforts to create a more
detailed version of user and administrative manuals.
MARKET, STRATEGY AND COMPETITION
The Company is not currently marketing Synapse as a stand-alone product; rather,
the Company markets Synapse as part of its FIS System applications that are
licensed to clients as a package (the Company does not separately license
Synapse). As a result, the Synapse business unit does not currently face direct
competition.
The Company has not yet developed a specific strategy for the marketing of
Synapse. The Company's management intends to discuss Synapse-related projects
with potential clients as inquiries and opportunities arise while devoting
greater time and resources to the Company's other two business units.
If funds become available in the future, the Company intends to hire a Synapse
marketing director as well as to develop marketing materials and attend selected
trade shows to promote Synapse. Because Synapse is not specific to any
particular industry but rather provides a solution for the development of
on-line transaction processing in a variety of contexts, the potential markets
for Synapse include the hotel industry as well as the claims processing, retail
transaction processing and financial transaction processing industries.
PROPRIETARY PROTECTION
The Company relies on unpatented proprietary know-how and trade secrets. The
Company does not have any patent protection for its technology in Canada or the
US and has not registered any copyrights. The Company does not intend to attempt
to patent any of its software technology or to register any copyrights. Instead,
as with many software developers, the Company relies primarily on a combination
of copyright, trademark and trade secret laws, confidentiality procedures,
contractual provisions and the complex nature of the technologies to protect its
intellectual property.
The Company's license agreements with clients contain provisions whereby the
clients agree not to copy or reproduce any of the software or documentation
provided by the Company (including copyright notices) except for back-up or
recovery purposes and not to reverse engineer the Company's software. The
Company's FIS System license agreements provide for the ownership rights of FIS
System applications to remain exclusively with the Company. The FIS System
applications are written in the Synapse fourth generation language developed by
the Company which is made available only to clients that purchase a development
version of the Synapse software. Further, the Company does not provide the
source code for Synapse to clients.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings and is not aware of any
threatened litigation that could have a material adverse effect on the Company's
business, financial condition and results of operations.
EMPLOYEES
At December 15, 1997, the Company employed 23 persons. The Company is not
subject to any collective bargaining agreements and believes that its
relationship with its employees is good.
15
<PAGE> 23
FACILITIES
The Company does not own any real estate and operates principally from
leased premises in Columbia, South Carolina where the Company leases
approximately 7,000 square feet of office space pursuant to a Lease Agreement
dated November 8, 1995 between the Company and Atrium Northeast Limited
Partnership. The base rent amount is approximately US$120,000 per year. The
lease expires on October 1, 1999 and may be renewed for a five-year term at
market rates.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes thereto included elsewhere in this Prospectus.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
FINANCIAL OPERATIONS SUMMARY
The following table summarizes the consolidated financial statements of the
Company for the nine months ended September 30, 1997 and months ended December
31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
====================================================================================================================
NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
(UNAUDITED) (AUDITED) (AUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
- --------------------------------------------------------------------------------------------------------------------
Sales 1,460,378 2,357,939 2,202,869 1,212,754
- --------------------------------------------------------------------------------------------------------------------
Cost of Sales 701,697 1,045,500 1,160,639 562,899
- --------------------------------------------------------------------------------------------------------------------
Gross Profit 758,682 1,312,439 1,042,230 649,855
- --------------------------------------------------------------------------------------------------------------------
Research and Development Expenses 277,802 362,983 292,850 160,253
- --------------------------------------------------------------------------------------------------------------------
Sales and Marketing Expenses 228,077 207,460 173,768 101,512
- --------------------------------------------------------------------------------------------------------------------
General and Administrative Expenses 752,832 995,261 691,235 356,717
(including interest expense)
- --------------------------------------------------------------------------------------------------------------------
Total Expenses 1,258,711 1,565,704 1,157,853 618,482
- --------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (500,029) (253,265) (115,623) 31,373
- --------------------------------------------------------------------------------------------------------------------
Other Revenue (Loss) 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (500,029) (253,265) (115,623) 31,373
- --------------------------------------------------------------------------------------------------------------------
Income Taxes 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) (500,029) (253,265) (115,623) 31,373
=====================================================================================================================
</TABLE>
16
<PAGE> 24
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
AS AT SEPT. 30, AS AT DEC. 31, AS AT DEC. 31, AS AT DEC. 31,
1997 1996 1995 1994
(Unaudited) (Audited) (Audited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
- -----------------------------------------------------------------------------------------------------------------------
Working Capital (1,306,171) (956,920) (792,332) (534,185)
- -----------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment 125,106 156,447 149,548 100,607
- -----------------------------------------------------------------------------------------------------------------------
Deferred Research and Development 113,854 50,950 71,353 91,756
- -----------------------------------------------------------------------------------------------------------------------
Deferred Costs 178,221 0 0 0
- -----------------------------------------------------------------------------------------------------------------------
Other Assets 20,186 3,218 2,154 2,054
- -----------------------------------------------------------------------------------------------------------------------
Total Assets 744,585 528,928 620,220 412,771
- -----------------------------------------------------------------------------------------------------------------------
Long Term Liabilities 136,404 114,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Deficiency)
- -----------------------------------------------------------------------------------------------------------------------
Dollar amount (1,005,208) (860,305) (569,277) (339,768)
- -----------------------------------------------------------------------------------------------------------------------
Number of shares issued and 4,900,000 3,600,000 3,600,000 (1)
outstanding
=======================================================================================================================
</TABLE>
(1) 4,530,000 Class A common shares (retroactively adjusted for the stock split
of the Company's shares discussed in note (2) below) and 250 Class B common
shares.
(2) As of the date of this offering circular, the Company has 7,987,763 shares
issued and outstanding, of which 3,600,000 constitute performance shares
that will be released from escrow at the rate of one share for each $0.91
of cumulative cash flow generated by the Company from its operations. All
share numbers in the table retroactively reflect the Company's stock split,
which occurred on March 5, 1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Total revenues decreased US$388,161 (approximately 21%) from
US$1,848,539 in the first nine months of 1996 to US$1,460,378 in the first nine
months of 1997. This decrease was primarily attributable to a 37% decrease in
revenues in the FIS System business unit due to the increased emphasis in the
FIS System business unit on research and development activities, as well as no
revenue being generated by the Synapse business unit during the first nine
months of 1997, as compared to US$80,500 in the first nine months of 1996. In
addition, in the first nine months of 1996, the Company received payment of
US$123,844 for services rendered during 1994 and 1995 the collection of which
the Company did not view to be realizable until 1996. This decrease was
partially offset due to a 7% increase in revenues in the Integration business
due to increased sales.
Cost of Sales. Cost of Sales decreased US$118,335 (approximately 14%) from
US$820,032 in the first nine months of 1996 to US$701,697 in the first nine
months of 1997. This decrease was primarily attributable to the Company having
one less designer employee in the first nine months of 1997 than in the first
nine months of 1996, the Company having less direct project expenses due to less
travel to client sites and a decrease in hardware costs as a result of less
sales of hardware. The cost of sales as a percentage of total revenues was 44%
and 48% for the first nine months of 1996 and 1997, respectively.
17
<PAGE> 25
Accordingly, the gross margin for the first nine months of 1996 and 1997 was 56%
and 52%, respectively.
Research and Development Costs. Research and development costs increased
US$5,565 (approximately 2%) from US$272,237 in the first nine months of 1996 to
US$277,802 in the first nine months of 1997. During the first nine months ended
September 30, 1997, the Company also capitalized US$78,204 in costs relating to
the development of Version 2.0 of the FIS System. This increase was primarily
attributable to the Company's increased focus on completing the FIS System
Version 2.0. Research and development costs represented approximately 15% and
19% of total revenues for the first nine months of 1996 and 1997, respectively.
It is expected that Version 2.0 of the FIS System will be available for general
release during the first quarter of 1998.
General and Administrative. General and administrative expenses, including
interest expense, increased US$49,867 (approximately 7%) from US$702,965 in the
first nine months of 1996 to US $752,832 in the first nine months of 1997. This
increase was primarily attributable to the cost of the Company's new in-house
counsel and a US$23,454 increase in interest expense primarily due to the
convertible notes issued by the Company in March 1997 and the note payable
executed by the Company in favor of a significant vendor in March 1997. During
August and September 1997, the Company attempted to reduce certain expenses. See
"Liquidity and Capital Resources" below. General and administrative expenses
represented approximately 38% and 52% of total revenues for the first nine
months of 1996 and 1997, respectively. During the first nine months of 1997,
various costs relating to the Company's initial public offering and the
convertible notes were included in Deferred Costs in the Company's Balance Sheet
and were not expensed. Upon the consummation of the Company's initial public
offering on November 26, 1997, these deferred costs were netted against proceeds
from the offering. See "Liquidity and Capital Resources" below.
Sales and Marketing. Sales and marketing expenses increased US$66,775
(approximately 41%) from US$161,302 in the first nine months of 1996 to
US$228,077 in the first nine months of 1997. This increase was primarily
attributable to a write-off of prepaid commissions in the amount of US$74,312 in
September as a result of the departure of the Company's sales and marketing
director, and an increase in marketing salaries as a result of the hiring of a
new sales representative in April 1997. This increase was slightly offset by a
decrease in commissions earned by the Company's sales representatives because of
a decrease in FIS System sales and a decrease in marketing travel. Sales and
marketing expenses represented approximately 9% and 16% of total revenues for
the first nine months of 1996 and 1997, respectively.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenues increased by US$155,070 (approximately 7%) from
US$2,202,869 in 1995 to US$2,357,939 in 1996. This increase was primarily
attributable to an approximately 139% increase in revenue in the Company's FIS
System business unit. As previously discussed, included in this increase in
revenue for the FIS System business unit was a payment of US$123,844 for
services previously rendered. This increase was offset partially by an
approximately 18% decrease in revenues in the Company's integration business and
an approximately 86% decrease in the Company's Synapse business unit, which was
due to the winding down of the large project relating to the financial
transaction processing industry. As a result of the decrease in the integration
business, revenues from hardware sales decreased approximately 40% in 1996 from
1995.
18
<PAGE> 26
Cost of Sales. Cost of sales decreased US$115,139 from US$1,160,639 in 1995 to
US$1,045,500 in 1996 or approximately 10%. This decrease was primarily
attributable to a decrease in hardware costs as a result of the purchase of less
hardware in the integration business. This decrease was partially offset by an
increase in labour costs primarily resulting from the hiring of project
managers. The cost of sales as a percentage of total revenues was 53% and 44%
for 1995 and 1996, respectively. Accordingly, the gross margin for 1995 and 1996
was 47% and 56%, respectively.
Research and Development Costs. Research and development costs increased
US$70,133 (approximately 24%) from US$292,850 in 1995 to US$362,983 in 1996.
This increase was primarily attributable to a substantial increase in the
research and development activities relating to the FIS System, which was
partially offset by the winding down of the large project relating to the
financial transaction processing industry. Research and development costs
represented approximately 13% and 15% of total revenues for 1995 and 1996,
respectively.
General and Administrative. General and administrative expenses, including
interest expense, increased US$304,026 (approximately 44%) from US$691,235 in
1995 to US$995,261 in 1996. This increase was primarily attributable to moving
the owners' compensation almost entirely from corporate draws to salary as
permitted by Subchapter S of the US Internal Revenue Code which resulted in an
increase to salary expense of US$236,605; an increase of US$42,627 or
approximately 64% in the rent expense due to the full year effect of the Company
leasing additional space in its building beginning in 1995; and the payment of
US$16,453 in interest relating to a loan in the principal amount of US$180,000
obtained by the Company in February 1996. General and administrative expenses
represented approximately 31% and 42% of total revenues for 1995 and 1996,
respectively.
Sales and Marketing. Sales and marketing expenses increased US$33,692
(approximately 19%) from US$173,768 in 1995 to US$207,460 in 1996. This increase
was due primarily to an increase in sales commissions because of increased
commissioned sales and increased marketing travel. Sales and marketing expenses
represented approximately 8% and 9% of total revenues for 1995 and 1996,
respectively.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue. Total revenues increased US$990,115 (approximately 82%) from
US$1,212,754 in 1994 to US$2,202,869 in 1995. This increase was primarily
attributable to an approximately 125% increase in revenues in the Company's
integration business and a 437% increase in revenues in the Company's Synapse
business unit. These increases were partially offset by a 31% decrease in
revenues in the Company's FIS System business unit. The substantial increase in
the Company's Synapse business unit was attributable to the Company devoting a
major portion of its resources in support of a project relating to the
development of a debit and credit card financial transaction processing system
for MCI. In connection with the increase in integration business, revenues from
hardware sales increased approximately 102% from US$391,746 in 1994 to
US$791,479 in 1995.
Cost of Sales. Total cost of sales increased US$597,740 (approximately 106%)
from US$562,899 in 1994 to US$1,160,639 in 1995. This increase was attributable
to the increased cost of billable labour as a result of the hiring of additional
technical personnel to support the major project relating to the financial
transaction processing industry and an increase in billable labour and hardware
costs as a result of the increased integration business. Total cost of sales as
a percentage of total revenue was 46% and 53% for 1994 and 1995, respectively.
Accordingly, the gross margin for 1994 and 1995 was 54% and 47%, respectively.
Research and Development Costs. Research and development costs increased
US$132,597 (approximately 83%) from US$160,253 in 1994 to US$292,850 in 1995.
This increase was primarily
19
<PAGE> 27
attributable to additional labour costs in connection with the Company's efforts
regarding the major project relating to the financial transaction processing
industry. Research and development costs represented approximately 13% of total
revenues for both 1994 and 1995, respectively.
General and Administrative. General and administrative expenses, including
interest expense, increased US$334,518 (approximately 94%) from US$356,717 in
1994 to US$691,235 in 1995. This increase was primarily attributable to the
recognition of a substantial bad debt in the amount of US$116,806; the Company
beginning to pay Messrs. Langley and Massey partially in salary, which led to an
increase of US$77,500 in salary expense and an attendant increase in payroll
taxes; an increase of US$41,168 or approximately 75% in the rent expense due to
the Company leasing additional space in its building and leasing space in
Raleigh, North Carolina for a sales representative; and an increase of US$20,534
in travel expenses relating to the travel expenses of an employee who was a
designer that was commuting during 1995. General and administrative expenses
represented approximately 29% and 31% of total revenues in 1994 and 1995,
respectively.
Sales and Marketing. Sales and marketing expenses increased US$72,256
(approximately 71%) from US$101,512 in 1994 to US$173,768 in 1995. This increase
was primarily attributable to adding a sales representative, increased travel
and an increase in commissions due to increased sales in the integration
business. Sales and marketing expenses represented approximately 8% of total
revenues for both 1994 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception the Company has primarily attempted to finance its
operations through revenues from operations, including funded research and
development revenues, and occasional short term loans from the Company's
principals or their acquaintances. The Company, however, has had a net loss
every year of its existence except 1994, in which year it had net income of
US$31,373; therefore, the Company's operations have led to a growing working
capital deficit and a growing shareholders' deficit. Accordingly, the Company
has had liquidity problems from time to time. As of December 31, 1994, 1995 and
1996, the shareholders' deficit of the Company was US$339,768, US$569,277 and
US$860,305, respectively. As of September 30, 1997, the shareholders' deficit
was US$1,005,208. As of December 31, 1994, 1995 and 1996, the Company's working
capital deficit was US$534,185, US$792,232 and US$956,920, respectively. As of
September 30, 1997, the Company's working capital deficit was US$1,306,171.
In December 1995, the Company entered into a factoring arrangement that is
currently being administered as a short term borrowing arrangement
collateralized by accounts receivable, which generally permits borrowings of up
to 75% of accounts receivable. In February 1996, the Company entered into a loan
for US$180,000 collateralized by substantially all of the assets of the Company.
This loan is being repaid in sixty equal monthly installments.
The Company also issued two convertible promissory notes in March 1997 in the
principal amount of approximately US$190,000 to several investors, and, in March
1997, executed a promissory note to a significant vendor of the Company in the
amount of approximately US$320,000 in connection with various payments owed to
this vendor.
On June 3, 1997, the Company sold 1,300,000 common shares at a price of $0.50
(cdn.) per share for gross proceeds to the Company, after payment of a
commission to Wolverton Securities Ltd. ("Wolverton"), of approximately
US$420,000. After deducting offering costs of approximately US$100,000 the net
proceeds to the Company from this Offering were approximately US$320,000.
In the fourth quarter of 1996, the Company made a strategic decision to
concentrate on completing its research and development relating to the FIS
System Version 2.0, and initiating the sales and marketing
20
<PAGE> 28
efforts relating thereto. Accordingly, during the period this research and
development continues, the Company expects a reduction in revenues and an
increase in research and development costs and sales and marketing expenses.
During August and September 1997, the Company reduced its expenses by
approximately US$350,000 per year as a result of the elimination of one
programmer position (effective August 12); the elimination of the in-house
counsel position (effective September 15); the departure of the Company's sales
and marketing director, whose duties will be performed by the President and
other personnel (effective September 19); and a reduction in the salaries of
several executives and administrative personnel (effective September 1). This
reduction, which primarily related to administrative overhead, should not
disrupt the current sales process, continuing revenue generation or research and
development. In addition, in October 1997, the Company's sales representative
who primarily focused on integration sales left the Company. As a result of this
departure, the Company wrote off in October 1997, US$67,261 in prepaid
commissions.
On November 26, 1997, the Company consummated an initial public offering of its
common stock. In this initial public offering, the Company sold 2,500,000 common
shares at a price of $1.00 (cdn.) per share for gross proceeds to the Company,
after payment of Wolverton's commission, of approximately US$1,586,966. After
deducting offering costs of approximately US$367,692 the net proceeds to the
Company from this Offering were approximately US$1,219,274. The Company used a
portion of these proceeds to repay the promissory note to a significant vendor
of the Company in the amount of approximately US$320,000 discussed above.
In addition, in connection with the consummation of the public offering, one of
the convertible notes issued by the Company in March 1997 in the principal
amount of approximately US$111,825 was converted into shares of common stock.
The other convertible note in the principal amount of approximately US$70,532
plus approximately $5,100 in interest was repaid by the Company with a portion
of the proceeds from the initial public offering.
The Company expects that the proceeds from its initial public offering along
with revenues generated from operations will be adequate to meet the Company's
projected working capital and other cash requirements for at least 12 months
following completion of the Offering, which is the period the Company believes
will be required to implement and achieve its business objectives described
under "Business - General." Management intends, however, to closely follow the
Company's progress and to reduce expenses if the Company's strategies outlined
herein do not result in sufficient revenues within a reasonable period. Any such
reduction will involve scaling back, delaying or postponing those development
activities that are not essential to the Company achieving its stated
objectives. In any event, the working capital deficit will continue to grow
unless and until revenues increase sufficiently to meet expenditure levels.
As it is likely that the Company will require additional financing in the
future, the Company will continue to evaluate additional means of financing,
including additional debt or equity financing. Yet there can be no assurance
that such financing will be available. If the Company is not successful in
increasing its revenues or securing such financing, it could be forced to delay
or eliminate some of its product development and/or sales and marketing
initiatives which would have an adverse impact upon the Company's business,
results of operations and prospects. Refer to "Risk Factors."
21
<PAGE> 29
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
The following table sets forth certain information with respect to each of the
directors and executive officers, and a member of management, of the Company.
<TABLE>
<CAPTION>
Name Age Positions with the Company
---- --- --------------------------
<S> <C> <C>
Harry P. Langley (1) 40 President, Treasurer, Chief Executive Officer, Chief
Financial Officer and Chairman of the Board of Directors
George E. Mendenhall, Ph.D. (1) 59 Executive Vice President and Director
Stuart E. Massey (1) 38 Vice President and Director
Donald J. Crossley 58 Accountant and Controller
</TABLE>
- ----------------------------
(1) Executive Officer.
Mr. Langley has served as the President, Treasurer, Chief Executive Officer,
Chief Financial Officer, Chairman of the Board and a director of the Company
since the Company's incorporation in 1990. As a full-time employee of the
Company, Mr. Langley's responsibilities include overseeing the day-to-day
management of the business, performing duties as treasurer and chairing Board
meetings. Mr. Langley attended Midlands Technical College in Columbia, SC and
received an Associates degree in Computer Sciences in 1987. Mr. Langley first
began working in the area of computer software integration as an on-site project
coordinator in South Carolina for Synergistic Business Infrastructures
Corporation ("SBI"). SBI was a computer systems integrator based in Fort Wayne,
Indiana that specialized in the conceptualization, design and implementation of
manufacturing shop floor systems, data collection systems and material tracking
systems (among other things).
Dr. Mendenhall became an employee of the Company in February 1994, serving as
the director of industrial consulting. In May 1995, Dr. Mendenhall became the
Executive Vice President and a director of the Company. As a full-time Company
employee, Dr. Mendenhall's responsibilities include overseeing the day-to-day
management of the FIS System business unit. Dr. Mendenhall received a Bachelor
of Science degree in Economics from Manchester College in 1960 and a masters
degree and a Ph.D. in Economics from Indiana University in 1968 and 1978,
respectively. Dr. Mendenhall has conducted academic research and taught
economics and other courses at Indiana University and Indiana Institute of
Technology. In addition, he has published articles concerning research and
evaluation techniques and has been quoted in such periodicals as Computer World
and Industry Week. Before joining the Company, Dr. Mendenhall provided
consulting services and/or computer systems to various large manufacturing
companies on an independent basis and, from 1990 through February 1994, provided
consulting services to the Company. From 1984 until 1989, Dr. Mendenhall was the
President of SBI.
Mr. Massey has served as a Vice President and director of the Company since
April of 1991. Mr. Massey is also the Company's Secretary. As a full-time
Company employee, his responsibilities include the day-to-day management and
coordination of large projects, including the continuing maintenance of the
Synapse software configuration tool. Mr. Massey received a Bachelor of Science
degree in Electrical and Computer Engineering from the University of South
Carolina in 1986. Before joining the Company, Mr. Massey managed the
implementation of an inter-bank financial transaction switch for automated
teller machine and point-of-sale systems and assisted in the design of financial
transaction processing software products for Applied Communications, Inc. (among
other things) Mr. Massey's experience in the industrial automation industry
includes the design of a
22
<PAGE> 30
variety of computer control systems, such as airport lighting, industrial
machine tool control, inventory control and shop floor control systems.
Mr. Crossley has served as the Accountant and Controller for the Company since
July of 1995. As a full-time Company employee, Mr. Crossley's responsibilities
include making general ledger entries; generating financial statements;
budgeting expenses; managing accounts receivable and accounts payable;
administering, analyzing and reconciling the Company's accounts (e.g., wage and
salary accounts); reporting withholding taxes; administering the Company's
401(k) plan and employee insurance; and interfacing with outside accountants.
Mr. Crossley attended Jacksonville University in Jacksonville, Florida and
graduated from Georgia State University in Atlanta, Georgia with a Bachelor of
Business Administration degree and major in Accounting. Mr. Crossley has an
extensive background in accounting. Prior to joining the Company, Mr. Crossley
worked as controller for SOF International, Inc. in Columbia, SC from October of
1993 until July of 1995. SOF International, Inc.'s principal business was the
manufacturing and sale of medical products. Mr. Crossley worked as General
Manager and Controller of American Health Services, Inc. in Columbia, SC from
February of 1991 through October of 1993. American Health Services, Inc.'s
principal business is retail sales of durable medical equipment. Mr. Crossley's
experience in the computer software for the manufacturing and financial
transaction industry began with his employment with the Company.
BOARD OF DIRECTORS
The Company's Articles of Incorporation provide that the number of directors of
the Company may not be less than three or more than eleven. If, at any time, the
Board is constituted of six or more directors, then the Board of Directors must
be divided by the Board into three classes as nearly equal in number as possible
with the terms of office for the classes staggered over a three-year period.
Directors chosen to succeed those whose terms expire will be elected for three
year terms. Currently, the Board only has one committee - the Option Committee.
See "Stock Option Plan" below.
The Board has nominated Bartow Gilbert, the President of MidSouth Capital, Inc.,
a company located in Columbia, SC, to serve on the Board of Directors contingent
upon a fifth director being nominated and elected. In addition, Wolverton
Securities Ltd., the Agent for the Company's initial public offering (the
"Agent"), is entitled to designate an individual to serve as a member of the
Company's Board of Directors.
DIRECTOR COMPENSATION
The directors of the Company, who are all executive officers of the Company as
well, are not compensated for serving as directors of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation provide that a director of the Company
shall not be personally liable to the Company or any of its shareholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its shareholders, (ii) for acts or omissions not in good faith or which involve
gross negligence, intentional misconduct or a knowing violation of law, (iii)
for any unlawful distribution as set forth in the Code of Laws of South Carolina
(the "South Carolina Code") or (iv) for any transaction from which the director
derived an improper personal benefit. These provisions may have the effect in
certain circumstances of reducing the likelihood of derivative litigation
against directors. While these provisions may eliminate the right to recover
monetary damages from directors in various circumstances, rights to seek
injunctive or other non-monetary relief is not eliminated.
23
<PAGE> 31
EXECUTIVE COMPENSATION
The following table is a summary of the compensation paid to the executive
officers of the Company for services rendered to the Company during the three
most recently completed financial years and the nine months ended September 30,
1997:
<TABLE>
<CAPTION>
=========================================================================================================================
ANNUAL COMPENSATION LONG TERM COMPENSATION
- -------------------------------------------------------------------------------------------------------------------------
NAME AND PRINCIPAL PERIOD ENDED SALARY(1) SECURITIES ALL OTHER
POSITION (US$) UNDER OPTION COMPENSATION (US$)(2)
(#)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HARRY P. LANGLEY Dec 31/94 0 nil 54,700
President, Treasurer, Dec 31/95 38,750 nil 37,443
Chief Executive Officer,
Chief Financial Officer Dec 30/96 100,957 nil 12,558
and Chairman of the Board
Sept 30/97 72,497 50,000(3) 17,703
- -------------------------------------------------------------------------------------------------------------------------
GEORGE E. MENDENHALL Dec 31/94 78,125 nil nil
Executive Vice-President Dec 31/95 41,875 nil 34,500
Dec 30/96 100,957 nil 12,558
Sept 30/97 72,497 50,000(3) 17,703
- -------------------------------------------------------------------------------------------------------------------------
STUART E. MASSEY Dec 31/94 0 nil 54,700
Vice-President and Dec 31/95 38,750 nil 37,443
Secretary
Dec 30/96 100,957 nil 12,558
Sept 30/97 72,497 50,000(3) 17,703
=========================================================================================================================
</TABLE>
(1) The Company entered into employment agreements with each of Messrs. Langley,
Mendenhall and Massey dated on or about January 1, 1997. These employment
agreements were amended as of September 1, 1997 to provide for a reduction
of salary paid to each executive officer from US$100,000 to US$70,000. These
salaries cannot be increased until February 1998 when the Company's Board of
Directors may review these salaries and, in light of the Company's
performance, as it relates to the Company's budget approved by the Board of
Directors, consider an increase. For 1998, these salaries cannot exceed
US$100,000. In addition, Messrs. Mendenhall and Massey may receive bonuses
at the discretion of the Company's President, and the President (Harry
Langley) may receive a bonus at the discretion of the Company's Board of
Directors.
(2) These amounts represent funds withdrawn by the Company's principals as
permitted by Subchapter S of the United States Internal Revenue Code
("Subchapter S"). The Company's shareholders had elected to have the income
tax treatment provided by Subchapter S until April 18, 1997. Effective
April 18, 1997, the Company's Subchapter S corporation status was
terminated.
24
<PAGE> 32
(3) At an exercise price of $1.00 (cdn.) per share. All of the options granted
to Messrs. Langley, Mendenhall and Massey will vest and become exercisable
on April 7, 1998.
STOCK OPTION PLAN
The Issuer's Board of Directors on April 29, 1997, adopted a stock option plan
(the "Option Plan") pursuant to which directors, officers, and employees, as
well as consultants to the Company may be granted stock options. The effective
date of the Option Plan is April 29, 1997. The Option Plan will terminate ten
years from the effective date. The maximum number of common shares of the
Company reserved for issuance under the Option Plan, including options currently
outstanding, will not exceed 960,000. The number of common shares reserved for
issuance to any one person cannot exceed 5% of the number of issued and
outstanding common shares, and no person is entitled to receive in any one year
grants regarding more than 50,000 shares. The Option Plan is administered by a
committee (the "Option Committee") of the Issuer's Board of Directors currently
comprised of Messrs. Langley, Mendenhall and Massey. Currently, 274,960 options
are outstanding under the Option Plan, including 50,000 options each to Messrs.
Langley, Mendenhall and Massey.
EMPLOYMENT CONTRACTS
Messrs. Langley, Mendenhall and Massey have each entered into a two-year
employment contract with the Company effective on or about January 1, 1997,
which was amended effective September 1, 1997. Under the terms of their
employment contracts, Messrs. Langley, Mendenhall and Massey agree to act as the
Company's President and Treasurer, Executive Vice President and Vice President,
respectively, in exchange for annual compensation each of US$70,000. In
addition, Messrs. Mendenhall and Massey may receive bonuses at the discretion of
the Company's President and the President (Harry Langley) may receive a bonus at
the discretion of the Company's Board. Each of these employment contracts
contains a non-competition clause restricting the employee's ability to compete
with the business of the Company during the term of the contract and for a
period of two years thereafter in those states where the Company had clients
when the employment contract was terminated. Each contract also contains a
provision limiting the disclosure of confidential or trade secret information of
the Company.
In addition to the foregoing, the Company has also agreed to provide each
executive officer with life insurance, medical insurance, vacation leave, sick
leave and other benefits, such as stock options, as may be approved by the Board
of Directors. Each executive officer is also eligible to participate in the
Company's employee benefit plans, including any established retirement, profit
sharing or deferred compensation plan.
The initial term of the employment agreements is two years from December 31,
1996 or January 1, 1997. The employment agreements renew automatically for one
year terms unless the Company or the executive officer provides written notice
of termination at least 90 days before the end of the contract term. If
terminated by the Company without cause, the Company will be required to pay the
affected executive officer an amount equal to the greater of (1) the total
salary and benefits due to the executive officer for the remainder of the term
of the employment agreement or (2) one year's total salary and benefits.
CERTAIN TRANSACTIONS
Other than their employment agreements with the Company (refer to
"Management-Employment Contracts" above), no material transactions involving the
directors, senior officers or principal holders of the Company's securities have
occurred since the Company was incorporated except for several loans previously
made to the Company by the Company's principals. As at March 31, 1997,
25
<PAGE> 33
the Company owed Messrs. Langley, Mendenhall and Massey and Mr. Langley's father
an aggregate outstanding principal amount of US$33,554 under various notes. The
loan from Mr. Massey bore interest at the rate of 10% per annum; the loans from
Mr. Langley and his father bore interest at the rate of 18% per annum to mirror
the cost to them of the money loaned to the Company; and the loan from Dr.
Mendenhall bore no interest. In 1997, the Company repaid these notes (and
accrued interest thereon) in full.
In July 1997, Messrs. Langley, Mendenhall and Massey loaned US$30,000, US$10,000
and US$10,000, respectively, to the Company under demand notes bearing interest
at the rate of 18% per annum, which interest rate mirrors the cost to Messrs.
Langley, Mendenhall and Massey of the money loaned to the Company. Effective as
of August 29, 1997, Messrs. Langley, Mendenhall and Massey agreed to convert
outstanding amounts of US$11,000, US$9,000 and US$9,000 under these notes into a
further capital contribution to the Company. As of August 31, 1997, the only
remaining note was a demand note to Mr. Langley in the principal amount of
US$18,000. This note was repaid by the Company using a portion of the proceeds
from the initial public offering.
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNERSHIP
- ------------------------ --------------------- --------------------
<S> <C> <C>
Harry P. Langley ...................................... 1,300,000 15%
George E. Mendenhall .................................. 1,300,000 15%
Stuart E. Massey ...................................... 1,300,000 15%
Wolverton Securities Ltd.(2) .......................... 806,000 9.2%
All executive officers and directors as a group
(3 persons)(3) ..................................... 3,600,000 45%
</TABLE>
- ----------
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission (the "Commission"). Shares of Common
Stock subject to options or warrants currently exercisable or
exercisable within 60 days of the date of this Prospectus are deemed
outstanding for computing the percentage beneficially owned by such
holder but are not deemed outstanding for purposes of computing the
percentage beneficially owned by any other person. As of the date of
this Prospectus, 7,987,763 shares of Common Stock of the Company are
issued and outstanding. All of the shares owned by Messrs. Langley,
Mendenhall and Massey are performance shares. See "Description of
Capital Stock - Performance Shares."
(2) Includes 486,000 shares issuable upon exercise of the Warrants.
Wolverton's address is 17th Floor, 777 Dunsmuir Street, Vancouver,
British Columbia, V7Y1J5.
(3) The address of Messrs. Langley, Mendenhall and Massey is Suite 128, 115
Atrium Way, Columbia, South Carolina 29223.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000
shares of Common Stock, no par value, and 10,000,000 shares of preferred stock
(the "Preferred Stock"). As of the date of this Prospectus, there are 7,987,763
shares of Common Stock issued and outstanding. No shares of Preferred Stock are
currently outstanding.
COMMON STOCK
Subject to the rights of the holders of any outstanding shares of
Preferred Stock and any restrictions that may be imposed by applicable laws or
regulations or by any lender to the Company, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared
26
<PAGE> 34
by the Board of Directors out of legally available funds. See "Dividend Policy."
In the event of the liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably, based on the number of
shares held, in the assets, if any, remaining after payment of all of the
Company's debts and liabilities and the liquidation preference of any
outstanding series of Preferred Stock having a liquidation preference over the
Common Stock.
Holders of Common Stock are entitled to one vote per share for each
share held of record on any matter submitted to the holders of Common Stock for
a vote. Because holders of Common Stock do not have cumulative voting rights,
the holders of a majority of the shares of Common Stock represented at a meeting
can elect all of the directors. Holders of Common Stock do not have conversion,
redemption or preemptive rights.
PREFERRED STOCK
The Company's authorized shares of Preferred Stock may be issued in one
or more series, and the Board of Directors is authorized, without further action
by the shareholders, to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Board of Directors also may designate par
value, preferences in liquidation and the numbers of shares constituting any
series. The Company believes that the availability of Preferred Stock issuable
in series will provide increased flexibility in structuring possible future
financings and acquisitions, if any, and in meeting certain other corporate
needs. It is not possible to state the actual effect of the authorization and
issuance of any series of Preferred Stock upon the rights of holders of Common
Stock until the Board of Directors determines the specific terms, rights and
preferences of a series of Preferred Stock. However, such effects might include,
among other things, restricting dividends on the Common Stock, diluting the
voting power of the Common Stock, or impairing liquidation rights of such shares
without further action by holders of the Common Stock. In addition, the Board of
Directors is authorized at any time to issue Preferred Stock with voting,
conversion or other features that may have the effect of impeding or
discouraging a merger, tender offer, proxy contest, the assumption of control by
a holder of a large block of the Company's securities or the removal of
incumbent management. Issuance of Preferred Stock could also adversely affect
the price of the Common Stock. The Company has no present plan to issue any
shares of Preferred Stock.
CERTAIN PROTECTIVE PROVISIONS
General. The Articles and Bylaws of the Company and the South Carolina
Code contain certain provisions designed to enhance the ability of the Board of
Directors to deal with attempts to acquire control of the Company. These
provisions may be deemed to have an anti-takeover effect and may discourage
takeover attempts which have not been approved by the Board of Directors
(including potential takeovers which certain shareholders may deem to be in
their best interest) and may adversely effect the price that a potential
purchaser would be willing to pay for the Company's stock. These provisions also
could discourage or make more difficult a merger, tender offer or proxy contest,
even though such transaction may be favorable to the interests of shareholders,
and could potentially adversely effect the price of the Common Stock.
The following briefly summarizes protective provisions contained in the
Articles, the Bylaws and the South Carolina Code. This summary is necessarily
general and is not intended to be a complete description of all the features and
consequences of these provisions, and is qualified in its entirety by reference
to the Articles, the Bylaws and the provisions of the South Carolina Code.
Preferred Stock. The issuance of shares of Preferred Stock with special
voting rights, liquidation preferences, redemption privileges or conversion
rights could delay, defer or prevent a
27
<PAGE> 35
change in control of the Company. As stated above, the Company has no present
intention to issue any Preferred Stock.
Classification of Directors. Once the Board of Directors is constituted
of six of more directors, the Company's Board of Directors will be classified so
that, as nearly as possible, one-third of the Board of Directors will be elected
each year to serve a three-year term. This classification would delay an attempt
by dissatisfied shareholders or anyone who obtains a controlling interest in the
Company to elect a new Board of Directors, because, absent the removal,
resignation or death of the members of the Board, it would take three annual
meetings of shareholders to change fully the composition of the Board.
Removal of Directors. The Articles provide that a director of the
Company may be removed only for "Cause" as defined in the South Carolina Code.
Under the South Carolina Code, "Cause" means fraudulent or dishonest acts, or
gross abuse of authority in the discharge of duties to the Company, and must be
established after written notice of specific charges and an opportunity to meet
and refute such charges.
Evaluation of Offers. The Articles provide that, when evaluating any
offer relating to a tender offer, merger, consolidation, sale of assets or
similar transaction, the Board may, in its discretion, give due consideration to
a variety of factors, in addition to the offered price, including (a) the
social, legal, and economic effects on the employees, customers, suppliers, and
other constituencies of the Company, on the communities and geographical areas
in which the Company operates or is located, and on any of the business and
properties of the Company, as well as such other factors as the directors deem
relevant; and (b) all features of the consideration being offered, not only in
relation to the then current market price for the Company's outstanding shares
of capital stock, but also in relation to the then current value of the Company
in a freely negotiated transaction and in relation to the Board of Director's
estimate of the future value of the Company (including the unrealized value of
its properties and assets) as an independent ongoing concern.
Advance Notice Procedure. The Bylaws of the Company establish an
advance notice procedure for (1) shareholder proposals to be brought before a
meeting of shareholders of the Company and (2) nominations by shareholders of
candidates for election as directors at an annual meeting or a special meeting
at which directors are to be elected. Subject to any other applicable
requirements, only such business may be conducted at a meeting of shareholders
as has been brought before the meeting by, or at the direction of, the Board or
by a shareholder who has given to the Secretary of the Company timely written
notice, in proper form, of the shareholder's intention to bring that business
before the meeting. Only the presiding officer at such meeting has the authority
to make such determinations. Only persons who are selected and recommended by
the Board or by a committee of the Board designated to make nominations, or who
are nominated by a shareholder who has given timely written notice, in proper
form, to the Secretary of the Company prior to a meeting at which directors are
to be elected, will be eligible for election as directors of the Company.
To be timely, notice of business to be brought before any annual
meeting must be received by the Secretary of the Company not later than 90 days
in advance of the annual meeting. Notice of nominations must be received by the
Secretary 90 days in advance of an annual meeting, and, with respect to an
election to be held at a special meeting of shareholders for the election of
directors, the close of business on the seventh day following the date on which
notice of such meeting is first given to shareholders. The notice of any
shareholder proposal or nomination for election as a director must set forth the
various information required under the Bylaws. The person submitting the notice
of nomination must provide, among other things, the name and address under which
the shareholder appears on the Company's books (if he so appears) and the class
and number of shares of the Company's capital stock owned by such shareholder.
28
<PAGE> 36
PERFORMANCE SHARES
Under Local Policy Statement 3-07 of the British Columbia Securities Commission
(the "Policy"), the 1,200,000 common shares owned by each of Messrs. Langley,
Mendenhall and Massey constitute performance shares. These performance shares
constitute approximately 45% of the total number of issued and outstanding
shares of the Company.
The performance shares are being held pursuant to the terms of an escrow
agreement among the Company, Pacific Corporate Trust Company, as Escrow Agent,
and the holders of the performance shares (the "Escrow Agreement"). The Escrow
Agreement is in the form required by the Policy and provides that the
performance shares must remain in escrow until the Exchange permits them to be
released from escrow or requires them to be canceled. The performance shares may
be released from escrow, on a pro-rata basis, based upon the cumulative cash
flow of the Company beginning January 1, 1998, as evidenced by the Company's
annual audited financial statements. "Cash flow" is defined in the Policy to
mean net income or loss before tax, adjusted for certain add-backs. For each
$0.91 of cumulative cash flow generated by the Company from its operations, one
performance share may be released from escrow.
The holders of the performance shares may not transfer their performance shares
except in accordance with the Policy and only with the consent of the Executive
Director of the British Columbia Securities Commission or the Exchange. A holder
of performance shares has the right to vote the shares, except on a resolution
to cancel the shares, but has waived the right to receive dividends and to
participate in the assets and property of the Company on a winding-up or
dissolution of the Company. A holder of performance shares who ceases to be a
principal, as that term is defined in the Policy, dies or becomes bankrupt, is
entitled to retain any performance shares then held by him and is not obligated
to transfer or surrender the shares to the Company or to any other person. The
performance shares must be surrendered for cancellation if the Company's shares
are the subject of a cease trade order for two consecutive years. Any
performance shares that are not released from escrow 10 years from the later of
the date of the issue of the shares and the date of the receipt for the
Company's final prospectus (October 7, 1997) must be surrendered for
cancellation.
SEED SHARE RESALE RESTRICTIONS
Except for the 3,600,000 Performance shares issued to the Company's principals
discussed above, all common shares of the Company sold prior to the Company's
initial public offering (the "Seed Shares") are subject to the seed share resale
restrictions of the VSE. The purchase price of the Seed Shares and the date they
were purchased relative to the date of receipt of the Issuer's preliminary
prospectus by the British Columbia Securities Commission (June 30, 1997)
determines how quickly the purchasers of the Seed Shares may sell their Seed
Shares.
As of the date hereof, the Company has 650,000 Seed shares subject to
restriction, which constitute 8.1% of the Company's issued and outstanding
shares, and 50 seed shareholders. These 650,000 Seed Shares are eligible for
release on February 28, 1998.
WARRANTS
In consideration for Wolverton agreeing to purchase any shares not sold at the
conclusion of the Company's initial public offering (the "Guarantee"), the
Company granted to Wolverton or its designees the Warrants. The Warrants entitle
Wolverton and two of its designees to purchase 486,000, 10,000 and 4,000 common
shares, respectively, of the Company at any time up to the close of business two
years from the date the shares are listed, posted and called for trading on the
Exchange (November 28, 1997) (the "Listing Date"), at a price of $1.00 (cdn.)
per share if exercised in the first year and at a price of $1.15 (cdn.) per
share if exercised thereafter and up to the close of
29
<PAGE> 37
business two years from the Listing Date. The Warrants contain, among other
things, standard anti-dilution provisions and provisions for the appropriate
adjustment in the class, number and price of shares issuable pursuant to any
exercise thereof upon the occurrence of certain events, including any
subdivision, consolidation or reclassification of the shares of the Company or
payment of stock dividends. This prospectus relates to the offer and sale of the
Company's Common Stock pursuant to these Warrants.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent of the Company is Pacific Corporate Trust
Company at its principal office in Vancouver, Suite 830, 625 Howe Street,
Vancouver, British Columbia, V6C 3B8.
PLAN OF DISTRIBUTION
The Warrant holders may exercise their Warrants in whole or in part by providing
notice and tendering the necessary funds. The shares of Common Stock purchased
under the Warrants could be sold, if desired, by the exercising Warrant holder
on the VSE.
AGREEMENTS WITH WOLVERTON
Pursuant to the terms of a Sponsorship Agreement dated as of May 28, 1997,
Wolverton has agreed to provide the following sponsorship services to the
Company in exchange for an oversight fee of $18,000 and the payment of a $5,000
retainer to be applied against expenses incurred by Wolverton:
(a) prepare and deliver a sponsorship letter to the VSE in support of the
Company's application for listing on the VSE; and
(b) for the twelve months following the Company's listing on the VSE,
monitor the management, operations and performance of the Company, the
financial, corporate and other securities filings filed by the Company
with the VSE and the British Columbia Securities Commission (including,
without limitation, news releases, quarterly reports and financial
information) and the overall direction of the Company.
Wolverton may terminate the Sponsorship Agreement upon the occurrence of certain
events, such as a material change in the assets, liabilities, business
operations or capital of the Company; a breach of the terms of the Sponsorship
Agreement by the Company; the commencement (or threatened commencement) of an
inquiry or investigation against the Company by a regulatory authority. The
Company may terminate the Sponsorship Agreement upon 30 days' notice.
Pursuant to the terms of an Agency Offering Agreement dated as of May 27, 1997,
as amended on September 25, 1997, the Company granted to Wolverton a right of
first refusal to provide further public equity financing to the Company for a
period of 12 months from the date the British Columbia Securities Commission
issued a receipt for the Company's final prospectus (October 7, 1997).
INVESTOR RELATIONS ARRANGEMENTS
The Company has not entered into any written or oral agreement or understanding
with any person to provide any promotional or investor relations services for
the Company or its securities, either now or in the future; however, the
Company's management expects to enter into such an agreement shortly.
30
<PAGE> 38
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Nelson Mullins Riley & Scarborough, L.L.P., Columbia, South Carolina.
EXPERTS
The auditor for the Company is Scott, Holloway & McElveen, L.L.P., Suite 400,
1400 Pickens Street, Columbia, South Carolina 29202.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form SB-1
(the "Registration Statement") under the Securities Act, with respect to the
shares of Common Stock offered hereby. This prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted from this
prospectus as permitted by the rules and regulations of the commission.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to herein are not necessarily complete and,
where such agreement or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions of
such exhibit, to which reference is hereby made for a full statement of the
provisions thereof. For further information with respect to the Company and the
Common Stock, reference is hereby made to the Registration Statement and to the
exhibits thereto.
The Registration Statement and the exhibits may be inspected, without charge,
and copies may be obtained, at prescribed rates, at the public reference
facilities of the Commission maintained at Judiciary Plaza, 450 Fifth Street,
N.W., room 1024, Washington, DC 20549, or on the internet at http://www.sec.gov.
Copies of the Registration Statement and the exhibits may also be inspected,
without charge, at the Commission's regional offices at 7 World Trade Center,
Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. In addition, copies of the Registration Statement and
the exhibits may be obtained by mail, at prescribed rates, from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, DC
20549.
In connection with this offering, the Company will become subject to the
information and periodic reporting requirements of the Exchange Act, and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the public
reference facilities and regional offices referred to above. The Company intends
to furnish its shareholders with annual reports containing audited financial
statements certified by independent public accountants and with quarterly
reports containing unaudited financial statements for the first three quarters
of each fiscal year.
31
<PAGE> 39
CONTENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Accountants..............................................................................F-2
Financial Statements:
Balance Sheets.............................................................................................F-3
Statements of Operations...................................................................................F-4
Statements of Changes in Shareholders' Deficiency..........................................................F-5
Statements of Cash Flows...................................................................................F-6
Notes to Financial Statements......................................................................F-7 to F-22
</TABLE>
F-1
<PAGE> 40
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
-----
To the Board of Directors
Integrated Business Systems and Services, Inc.
We have audited the accompanying balance sheet of Integrated Business Systems
and Services, Inc. as of December 31, 1996, and the related statements of
operations, changes in shareholders' deficiency and cash flows for the two years
ended December 31, 1996. These financial statements are the responsibility of
Integrated Business Systems and Services, Inc.'s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Integrated Business Systems and
Services, Inc. as of December 31, 1996, and the results of its operations and
its cash flows for the two years ended December 31, 1996, in conformity with
generally accepted accounting principles.
Columbia, South Carolina
December 18, 1997
<PAGE> 41
F-3
Integrated Business Systems and Services, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,625 $ 2,792
Accounts receivable 158,374 187,410
Inventory 12,804 3,962
Prepaid commissions 124,362 96,910
Other prepaid expenses 7,148 16,143
----------- -----------
Total current assets 318,313 307,217
Property and equipment, net (Note 4) 156,447 125,107
Capitalized software costs, net (Note 3) 50,950 113,854
Deferred costs -- 178,221
Other assets 3,218 20,186
----------- -----------
Total assets $ 528,928 $ 744,585
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Notes payable (Note 6) $ -- $ 309,583
Related party payable (Note 11) 36,055 18,000
Long-term debt, current portion (Note 7) 42,000 231,554
Accounts payable 429,936 263,777
Accrued liabilities:
Accrued compensation and benefits 148,566 96,564
Accrued payroll taxes 198,563 394,226
Other 99,313 229,088
Deferred revenue (Note 5) 320,800 70,597
----------- -----------
Total current liabilities 1,275,233 1,613,389
Long-term debt, net of current portion (Note 7) 114,000 136,404
----------- -----------
Total liabilities 1,389,233 1,749,793
----------- -----------
Commitments and contingencies
Shareholders' deficiency (Note 8):
Class A common shares, voting, no par value, 100,000,000 shares authorized,
4,900,000 shares outstanding at September 30, 1997;
3,600,000 shares outstanding at December 31, 1996 3,000 358,126
Class B common shares, nonvoting, par value $1 per share, 500 shares
authorized, 0 shares outstanding in 1997 and 1996 -- --
Accumulated deficit (863,305) (1,363,334)
----------- -----------
Total shareholders' deficiency (860,305) (1,005,208)
----------- -----------
Total liabilities and shareholders' deficiency $ 528,928 $ 744,585
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> 42
F-4
Integrated Business Systems and Services, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Nine months
Ended Ended
December 31, September 30,
--------------------------- ---------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Funded development and other services $ 1,323,105 $ 1,639,680 $ 1,305,068 $ 1,007,556
Hardware sales 791,479 479,297 334,094 279,659
Software licensing -- 122,400 122,400 46,150
Maintenance 88,285 116,562 86,977 127,013
----------- ----------- ----------- -----------
Total revenues 2,202,869 2,357,939 1,848,539 1,460,378
----------- ----------- ----------- -----------
OPERATING EXPENSES
Cost of revenues 1,160,639 1,045,500 820,032 701,697
Research and development costs 292,850 362,983 272,237 277,802
General and administrative 662,306 939,206 657,297 683,710
Sales and marketing 173,768 207,460 161,302 228,077
----------- ----------- ----------- -----------
Total operating expenses 2,289,563 2,555,149 1,910,868 1,891,286
----------- ----------- ----------- -----------
Loss from operations (86,694) (197,210) (62,329) (430,908)
Interest expense 28,929 56,055 45,670 69,121
----------- ----------- ----------- -----------
Net Loss $ (115,623) $ (253,265) $ (107,999) $ (500,029)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> 43
F-5
Integrated Business Systems and Services, Inc.
Statements of Changes in Shareholders' Deficiency
<TABLE>
<CAPTION>
Number of Class A Number of Class B
Class A Share Class B Share Additional Total
Shares Carrying Shares Carrying Paid-in Accumulated Shareholders'
Outstanding Value Outstanding Value Capital Deficit Deficiency
----------- --------- ----------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 (unaudited) 4,530,000 $ 3,775 250 $ 250 $ 3,475 $ (347,268) $ (339,768)
Shareholders' distributions -- -- -- -- -- (109,386) (109,386)
Cancellation of common shares, net (Note 8) (930,000) (775) (250) (250) (3,475) -- (4,500)
Net loss -- -- -- -- -- (115,623) (115,623)
---------- --------- ---- ----- ------- ----------- -----------
Balance, December 31, 1995 3,600,000 3,000 -- -- -- (572,277) (569,277)
Shareholders' distributions -- -- -- -- -- (37,763) (37,763)
Net loss -- -- -- -- -- (107,999) (107,999)
---------- --------- ---- ----- ------- ----------- -----------
Balance, September 30, 1996 (unaudited) 3,600,000 3,000 -- -- -- (718,039) (715,039)
Net loss -- -- -- -- -- (145,266) (145,266)
---------- --------- ---- ----- ------- ----------- -----------
Balance, December 31, 1996 3,600,000 3,000 -- -- -- (863,305) (860,305)
Sale of common shares 1,300,000 322,126 -- -- -- -- 322,126
Shareholder' contribution -- 33,000 -- -- -- -- 33,000
Net loss -- -- -- -- -- (500,029) (500,029)
---------- --------- ---- ----- ------- ----------- -----------
Balance, September 30, 1997 (unaudited) 4,900,000 $ 358,126 -- $ -- $ -- $(1,363,334) $(1,005,208)
========== ========= ==== ===== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 44
F-6
Integrated Business Systems and Services, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months
Years Ended Ended
December 31, September 30,
----------------------- -----------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income loss $(115,623) $(253,265) $(107,999) $(500,029)
Adjustments to reconcile net loss to cash used
by operating activities:
Depreciation 34,856 43,137 28,700 38,031
Amortization of software costs 20,403 20,403 15,303 15,300
Loss on sale of equipment -- 828 --
Decrease (increase) in:
Accounts receivable (123,838) 78,366 (49,685) (29,036)
Inventory 26,816 (10,101) (30) 8,842
Prepaid commissions (39,905) (19,650) (9,246) 27,452
Prepaid expenses and other assets (2,723) (5,589) (17,929) (25,963)
Increase (decrease) in:
Book overdraft (3,440) -- -- --
Accounts payable (45,333) 148,344 109,572 156,841
Accrued expenses 306,638 (124,807) (214,146) 273,436
Deferred revenue 171,637 40,476 111,314 (250,203)
Payable to a related party (14,772) 12,251 (4,971) 14,945
--------- --------- --------- ---------
Cash provided (used) by operating activities 214,716 (69,607) (139,117) (270,384)
--------- --------- --------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment, net (72,669) (50,864) (26,129) (6,691)
Capitalized internal software development costs -- -- -- (78,204)
--------- --------- --------- ---------
Cash used by investing activities (72,669) (50,864) (26,129) (84,895)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Proceeds from (payments on) notes payable, net (10,878) (32,528) 24,706 309,583
Proceeds from long-term debt 50,979 180,000 180,000 --
Payments on long-term debt (17,876) (24,000) (21,000) (111,042)
Sale of common shares -- -- -- 322,126
Deferred costs -- -- -- (178,221)
Payments to reacquire stock (4,500) -- -- --
Shareholder distributions (109,385) (37,763) (37,763) --
--------- --------- --------- ---------
Cash provided (used) by financing activities (91,660) 85,709 145,943 342,446
--------- --------- --------- ---------
Net increase (decrease) in cash 50,387 (34,762) (19,303) (12,833)
Cash and cash equivalents at beginning of period -- 50,387 50,387 15,625
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 50,387 $ 15,625 $ 31,084 $ 2,792
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> 45
F-7
Integrated Business Systems and Services, Inc.
Notes To Financial Statements
NOTE 1. COMPANY BACKGROUND AND SIGNIFICANT RISKS:
Integrated Business Systems and Services, Inc. ("IBSS") is in the business of
providing computer technology products and services to industrial manufacturers
and on-line transaction businesses primarily in the United States. IBSS'
principal business areas are: (1) installing, licensing and servicing a system
developed by IBSS that helps manage the shop floor transactions of manufacturing
facilities (the "FIS System") using IBSS' software Synapse, which manages
on-line computer transactions; (2) providing systems integration services to
manufacturing companies; and (3) developing and marketing Synapse to on-line
financial transaction processing businesses.
IBSS has incurred net losses of approximately $500,000 and $253,000 for the nine
months ended September 30, 1997 and for the year ended December 31, 1996,
respectively. The continuing losses have adversely affected the liquidity of
IBSS. At September 30, 1997, IBSS has an accumulated deficit of approximately
$1,005,000 (unaudited) and negative working capital of approximately $1,306,000
(unaudited).
A major customer funded a portion of the development of Synapse and has received
a paid-up license to the programs and development work for use in the financial
market. This funding represents a significant amount of IBSS' revenue to date.
Since the end of fiscal 1994, funding from this customer has significantly
decreased as most deliverables have been met.
Another major customer funded a portion of the development of FIS and has
received a paid-up license to the programs and development work for use in the
hosiery market. This customer represents a significant amount of IBSS' revenue
to date. As of September 30, 1997, the customer continues to partially fund
development of FIS 2.0.
IBSS' primary efforts are now directed to the development of a market for its
FIS 2.0 software and integration services. Like other companies at this stage of
development, it is subject to numerous risks, including the uncertainty of its
chosen market, its ability to develop its markets and its ability to finance
operations and other risks.
UNAUDITED FINANCIAL STATEMENTS - Information for the nine months ended September
30, 1997 and 1996, is unaudited.
<PAGE> 46
F-8
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS - IBSS considers all highly liquid investments with a
maturity of three months or less at date of acquisition to be cash equivalents.
Under IBSS' cash management system, checks issued but not presented to banks
that result in overdraft balances for accounting purposes are classified as
"book overdraft" in the balance sheet.
INVENTORIES - Inventories, consisting primarily of computer parts, are stated at
the lower of cost (determined on first-in, first-out basis) or market. IBSS
periodically reviews its inventories for potential slow-moving or obsolete items
and reduces specific items to net realizable value as appropriate.
PREPAID COMMISSIONS - Included in prepaid expenses are commission advances to
several sales representatives. These commissions are advances against future
anticipated sales and are to be used to cover commissions owed against future
sales. Commissions for IBSS' sales representatives average approximately 8.75%.
Upon employee termination, IBSS may not have the ability to collect the
commission advances from the terminated employee, and therefore, charges such
unreimbursed advances to sales and marketing expenses.
REVENUE RECOGNITION - IBSS' revenues are generated primarily by licensing to
customers standardized manufacturing software systems and providing integration
services, automation and administrative support and information services to the
manufacturing industry. IBSS recognizes revenues related to software licenses
and software maintenance in compliance with the American Institute of Certified
Public Accountants Statement of Position No. 91-1, "Software Revenue
Recognition."
Software systems are licensed under the terms of substantially standard
nonexclusive and nontransferable license agreements. The license charge, which
grants a right to use the software system currently available at the time the
license is signed, is recognized as revenue upon delivery of the product and
receipt of a signed contractual obligation, if collectibility is probable and no
significant vendor obligations remain. The software systems may also be
supported by a yearly maintenance charge. If maintenance is included in a
license agreement, such amounts are unbundled from the license fee at its fair
market value basis on the value established by independent sale of such
maintenance to customers. The yearly maintenance charge is recognized as revenue
on a monthly basis throughout the term of the agreement.
<PAGE> 47
F-9
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION (CONTINUED) - IBSS provides professional support services,
including systems implementation and integration assistance, consulting and
educational services, which are available under service agreements and charged
for separately. These services are generally provided under time and material
contracts and revenue is recognized as the services are provided. In some
circumstances, services are provided under fixed price arrangements in which
revenue is recognized on the basis of the estimated percentage of completion of
service provided using the cost-to-cost method.
Revisions in estimates of costs to complete and losses, if any, are reflected in
operations in the period in which facts requiring those revisions become known.
From time to time IBSS enters into certain funded development arrangements.
Although these arrangements are varied, IBSS principally will undertake custom
development of a product or enhancement and typically retain all marketing
rights and title to such development. Funded development arrangements are
generally provided for under fixed price agreements and in some circumstances on
a time and material basis. If a separate licensing fee is included in the
customer funding, the licensing fee is unbundled from the funded development
funding and is recognized as described above. IBSS recognizes revenue on the
same basis as professional support services; however, where technological
feasibility has already been established, IBSS will capitalize the portion of
development costs which exceed customer funding provided under the funded
development arrangement.
RESEARCH AND DEVELOPMENT - Research and development costs consist of
expenditures incurred during the course of planned search and investigation
aimed at discovery of new knowledge which will be useful in developing new
products or processes, or significantly enhancing existing products or
production processes, and the implementation of such through design, testing of
product alternatives or construction of working models. Such costs are charged
to operations as incurred.
<PAGE> 48
F-10
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
PROPERTY AND EQUIPMENT - Property and equipment, including certain support
software acquired for internal use, are stated at cost less accumulated
depreciation and amortization. Property and equipment are depreciated on a
straight-line basis over their estimated useful lives, ranging from five to
seven years. Expenditures for major renewals and betterments that extend the
useful lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred.
Upon retirement or sale, the cost of the disposed asset and the related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is credited or charged to income.
SOFTWARE DEVELOPMENT COSTS - Under the provisions of Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed," issued by the Financial Accounting
Standards Board, certain costs incurred in the internal development of computer
software which is to be licensed to customers are capitalized. Amortization of
capitalized software costs is provided upon commercial release of the products
at the greater of the amount using (i) the ratio that current gross revenues for
a product bear to the total of current and anticipated future gross revenues of
that product or (ii) the straight-line method over the remaining estimated
economic life of the product including the period being reported on. IBSS
generally amortizes capitalized software costs on a straight-line basis over
five years. Costs that are capitalized as part of internally developed software
primarily include direct and indirect costs associated with payroll, computer
time and allocable depreciation and other direct allocable costs, among others.
All costs incurred prior to the establishment of technological feasibility,
which IBSS defines as establishment of a detail design, have been expensed as
research and development costs during the periods in which they were incurred.
Once technological feasibility has been achieved, costs of producing the product
master are capitalized. Capitalization stops when the product is available for
general release. The amount by which unamortized software costs exceeds the net
realizable value, if any, is recognized in the period it is determined. IBSS
evaluates the net realizable value of capitalized computer software costs and
intangible assets on an ongoing basis relying on a number of factors, including
operating results, business plans, budgets and economic projections.
DEFERRED COSTS - Deferred costs consist principally of professional fees
relating to a public offering of the Company. In November 1997, at completion of
the planned offering, these issuance costs were netted against the proceeds of
the offering. (See Note 15)
<PAGE> 49
F-11
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INCOME TAXES - Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in future periods
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Prior to April 18, 1997, IBSS' shareholders had elected for IBSS to have the
income tax treatment provided by Subchapter S of the United States Internal
Revenue Code. Pursuant to Subchapter S, IBSS' income passed through to the
individual shareholders and IBSS was not required to pay any federal or state
income taxes. Accordingly, IBSS' financial statements do not reflect the effect
that the payment of federal and state income taxes would have had on IBSS.
(See Note 10.)
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Accordingly, actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash, accounts
receivable, accounts payable, and accrued liabilities approximate fair value due
to the short-term maturities of these assets and liabilities. The interest rates
on substantially all borrowings are adjusted regularly to reflect current market
rates. Accordingly, the carrying amounts of short-term and long-term borrowings
approximate fair value.
CONCENTRATIONS OF CREDIT RISK - Financial instruments, which potentially subject
IBSS to concentrations of credit risk, consists principally of accounts
receivable and cash in banks.
Management believes that all accounts receivable are realizable. IBSS performs
ongoing credit evaluations on certain of its customers' financial condition, but
generally does not require collateral to support customer receivables. IBSS
places its cash and cash equivalents with high credit quality entities and
limits the amount of credit exposure with any one entity.
<PAGE> 50
F-12
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
MAJOR CUSTOMERS - Customers comprising 10% or greater of IBSS' total revenues
are summarized as follows:
<TABLE>
<CAPTION>
Nine months
Years Ended December 31, Ended September 30,
- ---------------------------------------------------- ------------------------------------------------------
1995 1996 1996 1997
- ----------------------- ------------------------- ------------------------ -------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
EMS - 18% Americal - 22% Americal - 25% Americal - 27%
Coty, Inc. - 10% Coty, Inc. - 12% Coty, Inc. - 12%
NCR. - 12% NCR - 12% Motorola, Inc. - 16%
</TABLE>
FOREIGN CURRENCY TRANSACTION - Transaction gains and losses, resulting from
convertible promissory notes to Canadian parties, are included in the results of
operations of the period in which they occur. Liabilities are translated
utilizing year-end exchange rates. Transaction losses for the nine months ended
September 30, 1997 were not material.
NEW PRONOUNCEMENTS - In March 1995, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which IBSS adopted as of January 1, 1996. The statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Because IBSS' accounting policies provide for similar accounting treatment, the
effect of the adoption had no material impact on IBSS' financial position or
results of operations.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." IBSS adopted this required
statement in 1996 under the disclosure method. The adoption did not have an
impact on the reported results of operations or financial position. (See Note
9.)
Effective for IBSS in 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP 97-2) on software revenue recognition that supersedes
SOP 91-1. Management does not believe that the adoption of SOP 97-2 will have a
material impact on IBSS' financial position or results of operations.
<PAGE> 51
F-13
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 3. CAPITALIZED SOFTWARE COSTS:
Capitalized software costs at the reporting dates included in these financial
statements consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------- --------
(Unaudited)
<S> <C> <C>
Internally developed software $102,014 $180,220
Less accumulated amortization 51,064 66,366
-------- --------
Capitalized software costs, net $ 50,950 $113,854
======== ========
</TABLE>
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
1995 1996 1996 1997
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Amortization charged to cost of revenue $20,403 $20,403 $15,303 $15,300
======= ======= ======= =======
</TABLE>
IBSS has determined that no write-down of capitalized software costs is
necessary for the reporting periods included in these financial statements.
NOTE 4. PROPERTY AND EQUIPMENT:
Property and equipment at the reporting dates included in these financial
statements consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Furniture and fixtures $ 24,249 $ 24,664
Office and other equipment 30,498 31,292
Computer software 6,821 8,024
Computer equipment 205,202 207,716
-------- --------
266,770 271,696
Less accumulated depreciation 110,323 146,589
-------- --------
Property and equipment, net $156,447 $125,107
======== ========
</TABLE>
<PAGE> 52
F-14
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 4. PROPERTY AND EQUIPMENT (CONTINUED):
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
----------------------- ---------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Depreciation charged to expense $ 34,856 $ 43,137 $ 28,700 $ 38,031
========= ========= ========= =========
</TABLE>
NOTE 5. DEFERRED REVENUE:
Revenues from several major customers for funded development are recognized
using the percentage of completion method as work is performed. For the
reporting dates included in these financial statements, IBSS had negative
working capital, which includes deferred revenue as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------- September 30,
1995 1996 1997
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Negative working capital $ 897,044 $ 956,920 $1,306,172
========== ========== ==========
Deferred revenue $ 280,324 $ 320,800 $ 70,597
========== ========== ==========
</TABLE>
NOTE 6. NOTE PAYABLE:
Factoring Arrangement - In 1995, IBSS established an agreement with Liberty
Finance Company, Inc. for short-term borrowing. Under the terms of the
agreement, IBSS may borrow funds based on a specified percentage of accounts
receivable. Borrowings are collateralized by accounts receivable balances. In
addition, all borrowings are guaranteed by IBSS' three principal shareholders.
Borrowings bear interest at the prime rate plus 3%. IBSS must also pay a monthly
administrative fee equal to 1.25% of the gross original invoice amount for all
accounts receivable presented to the lender. At September 30, 1997, and December
31, 1996, the outstanding balance under this agreement was approximately
$121,000 and $0, respectively. Administrative fees paid under this agreement for
the nine months ended September 30, 1997 and the year ended December 31, 1996,
were approximately $12,000 and $7,000, respectively, and are included in
interest expense.
<PAGE> 53
F-15
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 6. NOTE PAYABLE (CONTINUED):
Convertible Promissory Notes - Pursuant to a Note Purchase Agreement dated March
6, 1997, between IBSS and certain investors, IBSS sold approximately $190,000
principal amount convertible promissory notes. The notes bear a 10% interest
rate and mature on February 28, 1998. To the extent IBSS consummates an initial
public offering of its common stock in British Columbia prior to February 28,
1998, the notes will be convertible at the option of the holders into shares of
common stock on the basis of $.50 per share (in Canadian funds). If the public
offering is consummated, the holders will also receive a total of 103,000 bonus
shares of common stock of IBSS, which will be accounted for as additional
interest expense. Assuming that the convertible notes, including all interest,
are converted at maturity, the effective interest rate on the convertible notes,
including the payment of the bonus shares, would be approximately 86%. The Note
Purchase Agreement contains various restrictive covenants to which IBSS must
adhere. (See Note 15)
NOTE 7. LONG-TERM DEBT:
Long-term debt at the reporting dates included in these financial statements
consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
--------- -------------
(unaudited)
<S> <C> <C>
Note payable to Carolina Capital Investment Corporation
("CCIC") bearing interest at 11.25%, maturing
February 2001, for working capital $ 156,000 $ 123,000
Note payable to Intermec Corporation bearing interest at the
prime rate plus 3%, maturing March 1999 -- 244,958
--------- ---------
156,000 367,958
Less current portion (42,000) (231,554)
--------- ---------
$ 114,000 $ 136,404
========= =========
</TABLE>
The note payable to CCIC is collateralized by substantially all of the assets of
IBSS and the residence of a principal shareholder of IBSS, and guaranteed by the
three principals of IBSS. The note payable to Intermec Corporation is
collateralized by substantially all of the assets of IBSS.
<PAGE> 54
F-16
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 7. LONG-TERM DEBT: (CONTINUED)
The maturities of long-term debt as of September 30, 1997 are as follows:
<TABLE>
<S> <C>
Period ended December 31, 1997 $ 59,407
Year ended December 31, 1998 204,812
Year ended December 31, 1999 61,739
Year ended December December 36,000
Year ended December 31, 2001 6,000
---------
$ 367,958
=========
</TABLE>
Debt Restructuring - In March 1997, IBSS refinanced approximately $323,000 of
accounts payable with Intermec Corporation, a significant supplier of IBSS, in
the form of a note bearing interest at prime plus 3%. The note requires 24
monthly payments in the amount of $15,400. In connection with this note, IBSS
has agreed that it will pay the note in full after the closing of the public
offering described in Note 15.
Management believes that the most restrictive covenant of the loan agreement
with CCIC is the restriction of IBSS raising additional capital through either
debt or equity arrangements, without prior written consent from CCIC.
NOTE 8. SHAREHOLDERS' EQUITY:
Stock Split - On January 28, 1997, IBSS' Board of Directors approved a motion to
increase and modify IBSS' authorized shares of common stock from 1,000 at $1 par
to 100,000,000 no par value and cancelled the Class B common shares. On March 5,
1997, IBSS' Board of Directors and its shareholders authorized a split of the
IBSS outstanding shares by the issuance of 5,999 additional shares of IBSS
common stock for each one share presently outstanding. For comparative purposes
all common stock share information presented in these financial statements have
been restated to reflect the current share structure.
Stock Cancellation - On May 12, 1995, IBSS received and cancelled 2,130,000
shares of its Class A stock, and received 250 shares of its Class B stock from
the two principals of the Company. Contemporaneously with the cancellation of
the common shares, IBSS issued 1,200,000 shares of Class A stock to a third
principal.
Private Offering - In June 1997, IBSS sold 1,300,000 common shares without par
value, in the capital of IBSS at a price of $0.50 (in Canadian funds) per share.
Deferred costs and commissions in the approximate amounts of $103,000 and
$47,000, respectively, have been netted out of the proceeds of the private
offering.
Preferred Stock - IBSS' authorized shares of Preferred Stock may be issued in
one or more series, and the Board of Directors is authorized, without further
action by the shareholders, to designate the rights, preferences, limitations
and restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Board of Directors also may designate par
value, preferences in liquidation and the numbers of shares constituting any
series.
<PAGE> 55
F-17
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 9. EMPLOYEE BENEFITS:
Retirement Plan - IBSS maintains a 401(k) retirement savings plan, which is
managed by an outside trustee. All employees are eligible to participate. IBSS
has not contributed to the 401(k) plan.
Stock Option Plan - IBSS' Board of Directors has adopted a stock option plan
(the "Option Plan"). The effective date of the Option Plan is April 29, 1997.
The Option Plan will terminate ten years from the effective date.
The maximum number of common shares of IBSS reserved for issuance under the
Option Plan, including options currently outstanding, will not exceed 960,000.
The number of common shares reserved for issuance to any one person cannot
exceed 5% of the number of issued and outstanding common shares, and no person
is entitled to receive in any one year grants regarding more than 50,000 shares.
NOTE 10. INCOME TAXES:
The components of the provision for income taxes for the period ended September
30, 1997 is summarized as follows:
<TABLE>
<CAPTION>
September 30,
1997
-------------
<S> <C>
Currently payable:
Federal $ --
State --
-------------
--
-------------
Change in deferred income taxes:
Federal --
State --
-------------
--
-------------
Income tax benefit $ --
=============
</TABLE>
<PAGE> 56
F-18
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 10. INCOME TAXES (CONTINUED):
A summary of the Company's deferred income tax accounts as of September 30, 1997
follows:
<TABLE>
<CAPTION>
September 30,
1997
----------
<S> <C>
Deferred tax assets $ 239,765
Deferred tax liabilities (60,500)
Valuation allowance (179,265)
----------
Total $ --
==========
</TABLE>
The principle sources of temporary differences and the related tax effects are
as follows:
<TABLE>
<CAPTION>
September 30,
1997
-----------
<S> <C>
Decrease in deferred revenue $ 11,031
Increase in net operating loss carryforward 129,087
Increase in capitalized software (14,875)
Other (2,405)
-----------
Temporary differences attributable to continuing operations 122,838
Change in valuation allowance (122,838)
-----------
Change in deferred income taxes $ --
===========
</TABLE>
Prior to April 19, 1997, the Company was a Subchapter S corporation, and as such
it was not subject to federal or state income taxes. Effective April 18, 1997,
the Company voluntarily revoked its Subchapter S status. Therefore, beginning
April 19, 1997 the Company is subject to the regular Subchapter C income tax
rules. For the period April 19, 1997 to September 30, 1997 the Company had a net
operating loss of approximately $543,000. This loss will be available to offset
future taxable income and will expire in 2012.
<PAGE> 57
F-19
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 11. RELATED PARTY TRANSACTIONS:
Included in related party payable at September 30, 1997, are demand notes
payable to the three principal holders of IBSS' securities. The notes bear
interest of 18% with interest payable monthly. On June 3, 1997, IBSS repaid
approximately $34,000 of related party notes. In July 1997, the three principal
shareholders advanced IBSS $50,000 for working capital.
Effective as of August 29, 1997, three principal holders of IBSS' securities
agreed to convert $33,000 of demand notes (see Note 11) into contributed
capital.
NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION:
During the periods presented below, interest paid amounted to:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
----------------------------- ------------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest paid $ 11,187 $ 57,584 $ 55,087 $ 67,919
=========== =========== =========== ===========
</TABLE>
The following table summarizes non-cash investing and financing activities:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
---------------------- ------------------------
1995 1996 1996 1997
--------- --------- --------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Transfer of inventory to property
and equipment $ 11,126 $ -- $ -- $ --
========= ========= ========= =========
Conversion of note into
contributed capital (Note 11) $ -- $ -- $ -- $ 33,000
========= ========= ========= =========
Refinancing of accounts payable
with a note payable (long-term
debt) $ -- $ -- $ -- $ 323,000
========= ========= ========= =========
</TABLE>
<PAGE> 58
F-20
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 13. COMMITMENTS AND CONTINGENCIES:
Operating Lease Commitments - IBSS leases its principal facilities under a
noncancelable operating lease expiring in October 1999. The lease is subject to
annual adjustments for facility operating costs in excess of an established base
year. Rent expense for the reporting periods included in these financial
statements were approximately as follows:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
----------------------------- ----------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Rent expense $ 90,000 $ 140,000 $ 82,000 $ 75,000
=========== =========== =========== ===========
</TABLE>
Future minimum rental payments for operating leases, excluding operating cost
adjustments, with initial or remaining terms of one year or more consisted of
the following at September 30, 1997:
<TABLE>
<S> <C>
Period ended December 31, 1997 $ 38,752
Year ended December 31, 1998 117,286
Year ended December 31, 1999 97,738
---------
$ 253,776
=========
</TABLE>
Employment Contracts - IBSS has employment agreements with its executive
officers and many of its employees. These agreements, which have been revised
from time to time, provide for minimum salary levels, adjusted annually for
cost-of-living changes, as well as for incentive bonuses which are payable if
specified management goals are attained. The aggregate commitment for future
salaries at September 30 1997, excluding bonuses, is approximately $417,000.
<PAGE> 59
F-21
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 14. SIGNIFICANT RISKS AND UNCERTAINTIES:
IBSS' operating results and financial condition can be impacted by a number of
factors, including but not limited to the following, any of which could cause
actual results to vary materially from current and historical results or IBSS'
anticipated future results.
Currently, IBSS' business is focused principally within the manufacturing and
hosiery industry. Significant changes in the regulatory or market environment of
these industries could impact demand for IBSS' software products and services.
Additionally, there is increasing competition for IBSS' products and services,
and there can be no assurance that IBSS' current products and services will
remain competitive, or that IBSS' development efforts will produce products with
the cost and performance characteristics necessary to remain competitive.
Furthermore, the market for IBSS' products and services is characterized by
rapid changes in technology. IBSS' success will depend on the level of market
acceptance of IBSS' products, technologies and enhancements, and its ability to
introduce such products, technologies and enhancements to the market on a timely
and cost effective basis, and maintain a labor force sufficiently skilled to
compete in the current environment.
The timing and amount of IBSS' revenues are subject to a number of factors,
including, but not limited to, the timing of customers' decisions to enter into
large license agreements with IBSS, which make estimation of operating results
prior to the end of a year extremely uncertain. Additionally, while management
believes that IBSS' financing needs for the foreseeable future will be satisfied
from cash flows from operations and IBSS' currently existing credit facilities
and planned sales of common stock, unforeseen events or adverse economic or
business trends may significantly increase cash demands beyond those currently
anticipated or affect IBSS' ability to generate/raise cash to satisfy financing
needs.
As discussed in Note 2, the preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Amounts affected by these estimates
include, but are not limited to, the estimated useful lives, related
amortization expense and carrying values of IBSS' intangible assets and
capitalized software development costs. Changes in the status of certain matters
or facts or circumstances underlying these estimates could result in material
changes to these estimates, and actual results could differ from these
estimates.
<PAGE> 60
F-22
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 15. SUBSEQUENT EVENTS:
Initial Public Offering - On November 26, 1997, IBSS issued 3,087,763 shares of
common stock in connection with an initial public offering in British Columbia,
Canada as follows: (a) 2,500,000 shares issued in the public offering; (b)
150,000 shares issued as a corporate finance fee to Wolverton Securities Ltd.;
and (c) 437,763 shares issued in connection with IBSS' outstanding convertible
notes. Upon the consummation of this offering, IBSS' shares were approved for
listing and began trading on the Vancouver Stock Exchange.
In addition, in connection with the consummation of the public offering, one of
the convertible notes issued by IBSS in March 1997, in the principal amount of
approximately $112,000, was converted into shares of common stock. The other
convertible note in the principal amount of approximately $70,500 plus
approximately $5,100 in interest was repaid by IBSS with a portion of the
proceeds from the initial public offering.
As a requirement of the British Columbia Securities Commission, the total common
shares of management (3,600,000) were held pursuant to the terms of an escrow
agreement, as performance shares ("Escrowed Shares").
The performance shares may be released from escrow, on a pro-rata basis, based
upon the cumulative cash flow of IBSS, as evidenced by annual audited financial
statements. "Cash flow" is defined to mean net income or loss before tax,
adjusted for certain add-backs. For each $0.91 of cumulative cash flow generated
by IBSS from its operations, one performance share may be released from escrow.
IBSS expects that the release of the Escrowed Shares to officers, directors,
employees and consultants of IBSS will be deemed compensatory and, accordingly,
will result in a substantial non-cash charge to reportable earnings, which would
equal the fair market value of such shares on the date of release. Such charge
could substantially increase IBSS' loss or reduce or eliminate IBSS' net income,
if any, for financial reporting purposes for the period(s) during which such
shares are, or become probable of being, released from escrow. Such charge may
have a depressive effect on the market price of IBSS securities.
Prepaid Commissions - In October 1997, a sales representative, who primarily
focused on integration sales, left employment of IBSS. As a result of this
departure, IBSS wrote off approximately $67,000 of prepaid commissions in
October 1997.
<PAGE> 61
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OF ANY SECURITIES OTHER THAN THE COMMON STOCK TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
Prospectus Summary
Risk Factors
Use of Proceeds
Dilution
Dividend Policy
Business
Managements Discussion and Analysis of Financial
Condition and Results of
Operations Management
Certain Transactions
Principal Shareholders
Description of Capital Stock
Plan of Distribution
Agreements with Wolverton
Investor Relations Arrangements
Legal Matters
Experts
Additional Information
Financial Statements
------------------------
UNTIL __________, 1998 (45 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK OFFERED HEREUNDER MAY BE
REQUIRED TO DELIVER A PROSPECTUS.
================================================================================
================================================================================
Integrated Business
Systems and Services, Inc.
500,000 Shares
Common Stock
-------------
PROSPECTUS
-------------
____________, 1997
================================================================================
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that a director of the Company
shall not be personally liable to the Company or any of its shareholders for
monetary damages for breach of fiduciary duty as a director, except liability
for the following:
(a) any breach of the director's duty of loyalty to the Company or
its shareholders;
(b) acts or omissions not in good faith or which involve gross
negligence intentional misconduct or a knowing violation of
law;
(c) any unlawful distribution as set forth in the Code of Laws of
South Carolina; or
(d) any transaction from which the director derived an improper
personal benefit.
These provisions may have the effect in certain circumstances of reducing the
likelihood of derivative litigation against directors. While these provisions
may eliminate the right to recover monetary damages from directors in various
circumstances, rights to seek injunctive or other non-monetary relief are not
eliminated.
The Company's By-laws provide for indemnification of the Company's directors to
the fullest extent permitted by law. The Company's Bylaws also permit the
Company, through action of the Board of Directors, to indemnify the Company's
officers or employees to the fullest extent permitted by law.
ITEM 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the sale of the shares are estimated as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............................................. $ 120
Legal fees and expenses.......................................................................... 60,000
Accounting fees and expenses..................................................................... 10,000
Miscellaneous.................................................................................... 4,880
TOTAL.................................................................................. $75,000
=======
</TABLE>
II-1
<PAGE> 63
ITEM 3. UNDERTAKINGS.
The Company hereby undertakes to do the following:
(a) the Company will:
(1) File, during any period in which it offers or
sells securities, a post-effective amendment to this
registration statement to:
(i) Include any prospectus required by
Section 10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or
events which, individually or together, represent a
fundamental change in the information in the
registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement.
(iii) Include any additional or changed
material information on the plan of distribution.
(2) For determining liability under the Securities
Act, treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the
end of the offering.
(b) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant
to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 64
ITEM 4. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR.
(a) On March 5, 1997, the Board of Directors approved a stock split
resulting in the issuance of 5,999 additional shares of the Company's
Common Stock for each share then outstanding. At the time, all of the
outstanding stock was owned by the three directors of the Company with
each of them then owning 200 shares. This transaction did not
constitute a sale as no value was given for the stock split.
On March 6, 1997, the Company sold approximately $190,000 principal
amount convertible notes. These notes were convertible at $.50 (cdn)
per share upon the effectiveness of the prospectus filed by the Company
with the British Columbia Securities Commission relating to the
proposed offering in British Columbia. These notes were sold to two
investors in British Columbia, Canada: 460216 B.C. Ltd. and Ray
Melissa. For this offering, the Company relied upon Regulation S of the
1933 Act.
On June 2, 1997, the Company sold 1,300,000 shares for $.50 (cdn) per
share. These shares were sold to the following 50 investors in British
Columbia, Canada:
<TABLE>
<S> <C> <C>
Robert Ram Dennis Bruce Doug Lahay
Gregory G. Loewen Ken Schaffers 529453 BC Ltd.
Rodney Schofield Douglas Coakwell Pam Vandy
Douglas G. Gardner Charlene Krepiakevich Danielle Oliver
Loon Properties, Inc. Jim Timms Stephanie Weterings
Alvin Bissett Cory Stewart Paviland Finance (Canada)
Nirbhai Virk David MacAdam Prospect Ventures Limited
Laurena Catalano Eugene Tsang Calaudio Grubner
Thomas Waldron Laura Currie John Winkler
Keld B. Pedersen John Murphy National Trust Co. ITF
Dr. Mark W. Stewart, Inc. Dean Harding Isaac Klassen
Helmut Lobmeier Donna Hewson Nancy Gray
Tony Pezzotti Gordon Clokie David Kepkay
Irwin A. Olian, Jr. Brian Bell Ray Melissa
524658 BC Ltd. Ianin McLellan Dawson Campbell
Pom Pom Enterprises, Inc. George J.C. Woodward Greybrook Capital Corp.
Southern Ridge Holdings Martin Woodward
</TABLE>
For this offering, the Company relied upon Rule 504 of the 1933 Act.
On June 30, 1997, the Company issued 318,000 options for 318,000 shares
with an exercise price equal to the price of the Company's common stock
in its initial public offering in British Columbia, Canada, which was
$1.00 (cdn.), to 27 employees. On September 30, 1997, the Company
granted 1,360 options for 1,360 shares with the same exercise price as
the earlier grants to a new employee. With respect to the 50,000
options granted for 50,000 shares to each of Messrs. Langley,
Mendenhall and Massey, the Company relied upon Section 4(2) of the 1933
Act and Rule 701 promulgated under the 1933 Act ("Rule 701") as each of
Messrs. Langley, Mendenhall and Massey, as the principals of the
Company, has substantial knowledge regarding the Company and its
operations. With respect to the remaining 169,360 options granted for
169,360 shares, the Company relied upon Rule 701, as all of the options
were issued to employees of the Company pursuant to the Integrated
Business Systems and Services, Inc. Stock
II-3
<PAGE> 65
Option Plan and the total amount of securities offered pursuant to the
options in reliance on Rule 701 was less than $500,000.
On November 26, 1997, the Company issued 3,087,763 shares of Common
Stock in connection with its initial public offering in British
Columbia, Canada as follows: (a) 2,500,000 shares issued in the public
offering; (b) 150,000 shares issued as a corporate finance fee to
Wolverton; and (c) 437,763 shares issued in connection with the
Company's outstanding convertible notes. Upon the consummation of this
offering, the Company's shares were approved for listing and began
trading on the Vancouver Stock Exchange. A Regulation A Offering
Statement was filed by the Company with the Commission for flow back
purposes to accommodate resale in the United States of these shares.
The Offering Statement was declared qualified by the Commission on
October 8, 1997.
(b) No unregistered securities of the Company or any of its predecessor's
or affiliated issuers were sold within one year prior to the filing of
this Form SB-1 by or for the account of any person who at the time was
a director, officer, promoter or principal security holder of the
Company of such securities, or was an underwriter of any securities of
the Company.
(c) For a discussion of the Section of the 1933 Act or Commission rule or
regulation relied upon for exemption from the registration requirements
of the 1933 Act for each of the offerings listed in Item 5(a), please
see Item 5(a).
ITEM 5. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
1.1 Agency Offering Agreement dated May 27, 1997, between the Company and
Wolverton Securities, Ltd. incorporated by reference to Exhibit 1.1 to the
Company's Form 1-A filed July 9, 1997...............................................
1.2 Sponsorship Agreement dated May 28, 1997, between the Company and Wolverton
Securities, Ltd. incorporated by reference to Exhibit 1.2 to the Company's
Form 1-A filed July 9, 1997.........................................................
1.3 Form of Agent's Warrant incorporated by reference to Exhibit 1.3 to the
Company's Amendment No. 1 to Form 1-A filed September 15, 1997......................
1.4 Amendment No. 1 dated September 25, 1997, to Agency Offering Agreement dated
May 27, 1997, between the Company and Wolverton Securities, Ltd. incorporated
by reference to Exhibit 1.4 to the Company's Amendment No. 2 to Form 1-A filed
October 8, 1997.....................................................................
2.1 Amended and Restated Articles of Incorporation of the Company incorporated by
reference to Exhibit 2.1 to the Company's Form 1-A filed July 9, 1997...............
2.2 Amended and Restated Bylaws of the Company incorporated by reference to
Exhibit 2.2 to the Company's Form 1-A filed July 9, 1997............................
</TABLE>
II-4
<PAGE> 66
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
6.1 Finder's Fee Letter Agreement dated as of April 17, 1996 between the Company
and MidSouth Capital, Inc. incorporated by reference to Exhibit 6.1 to the
Company's Form 1-A filed July 9, 1997...............................................
6.2 Employment Agreement dated as of December 31, 1996 between the Company and
Harry P. Langley incorporated by reference to Exhibit 6.2 to the Company's
Form 1-A filed July 9, 1997.........................................................
6.3 Employment Agreement dated as of January 1, 1997 between the Company and
George E. Mendenhall incorporated by reference to Exhibit 6.3 to the Company's
Form 1-A filed July 9, 1997.........................................................
6.4 Employment Agreement dated as of December 31, 1996 between the Company and
Stuart E. Massey incorporated by reference to Exhibit 6.4 to the Company's
Form 1-A filed July 9, 1997.........................................................
6.5 Loan Agreement dated February 7, 1996 between the Company and Carolina Capital
Investment Corporation incorporated by reference to Exhibit 6.5 to the
Company's Form 1-A filed July 9, 1997...............................................
6.6 Promissory Note dated February 7, 1996 given by the Company to Carolina
Capital Investment Corporation incorporated by reference to Exhibit 6.6 to the
Company's Form 1-A filed July 9, 1997...............................................
6.7 Assignment of Contracts dated February 7, 1996, between the Company and
Carolina Capital Investment Corporation incorporated by reference to Exhibit
6.7 to the Company's Form 1-A filed July 9, 1997....................................
6.8 Security Agreement dated February 7, 1996, between the Company and Carolina
Capital Investment Corporation incorporated by reference to Exhibit 6.8 to the
Company's Form 1-A filed July 9, 1997...............................................
6.9 Recourse Factoring Contract and Security Agreement dated December 22, 1995
between the Company and Liberty Finance Company incorporated by reference to
Exhibit 6.13 to the Company's Form 1-A filed July 9, 1997...........................
6.10 Lease Agreement dated November 8, 1995 between the Company and Atrium
Northeast Limited Partnership incorporated by reference to Exhibit 6.14 to the
Company's Form 1-A filed July 9, 1997...............................................
6.11 Premier Reseller Agreement dated April 10, 1997 between the Company and
Intermec Corporation incorporated by reference to Exhibit 6.15 to the
Company's Amendment No. 1 to Form 1-A filed September 15, 1997......................
6.12 Business Alliance Program Agreement dated May 22, 1996 between the Company and
Oracle Corporation, together with a Runtime Sublicense Addendum dated May 22,
1996, and a Full Use and Deployment Sublicense Addendum dated May 22, 1996
incorporated by reference to Exhibit 6.16 to the Company's Form 1-A filed July
9, 1997.............................................................................
</TABLE>
II-5
<PAGE> 67
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
6.13 Reseller Agreement dated as of July 26, 1994 between the Company and
Connectware Solutions, Inc. incorporated by reference to Exhibit 6.17 to the
Company's Form 1-A filed July 9, 1997...............................................
6.14 Integrated Business Systems and Services, Inc. Stock Option Plan incorporated
by reference to Exhibit 6.18 to the Company's Form 1-A filed July 9, 1997...........
6.15 Employment Agreement dated as of July 3, 1995, between the Company and Donald
J. Crossley incorporated by reference to Exhibit 6.20 to the Company's Form
1-A filed July 9, 1997..............................................................
6.16 Amendment No. 1 dated as of September 1, 1997, to Employment Agreement dated
as of December 31, 1996, between the Company and Harry P. Langley incorporated
by reference to Exhibit 6.21 to the Company's Amendment No. 1 to Form 1-A
filed September 15, 1997............................................................
6.17 Amendment No. 1 dated as of September 1, 1997, to Employment Agreement dated
as of January 1, 1997, between the Company and George E. Mendenhall
incorporated by reference to Exhibit 6.22 to the Company's Amendment No. 1 to
Form 1-A filed September 15, 1997...................................................
6.18 Amendment No. 1 dated as of September 1, 1997, to Employment Agreement dated
as of December 31, 1996, between the Company and Stuart E. Massey incorporated
by reference to Exhibit 6.23 to the Company's Amendment No. 1 to Form 1-A
filed September 15, 1997............................................................
6.19 Escrow Agreement among Pacific Corporate Trust Company, the Company, Harry P.
Langley, George E. Mendenhall and Stuart E. Massey incorporated by reference
to Exhibit 6.24 to the Company's Amendment No. 2 to Form 1-A filed October 8,
1997................................................................................
10(a).1 Consent of Nelson Mullins Riley & Scarborough, L.L.P. (contained in Exhibit
11.1)...............................................................................
10(a).2 Consent of Scott, Holloway & McElveen, L.L.P........................................
11.1 Opinion of Nelson Mullins Riley & Scarborough, L.L.P................................
99.1 Consent of Bartow Gilbert, Nominee for Director incorporated by reference to
Exhibit 99.1 to the Company's Amendment No. 1 to Form 1-A filed September 15,
1997................................................................................
</TABLE>
- ---------
II-6
<PAGE> 68
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-1 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of
Columbia, state of South Carolina, on December 30, 1997.
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
By: /s/ Harry P. Langley
---------------------------------------------
Harry P. Langley
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Harry P. Langley, George E.
Mendenhall and Stuart E. Massey, and each of them acting individually, as his
attorney-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Offering Statement, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to any and
all amendments to said Registration Statement.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
indicated on December 30, 1997.
<TABLE>
<S> <C>
/s/ Harry P. Langley Director, President, Treasurer, Chief Executive
- --------------------------------- Officer and Chief Financial Officer
Harry P. Langley
/s/ George E. Mendenhall Director and Executive Vice President
- ---------------------------------
George E. Mendenhall
/s/ Stuart E. Massey Director, Vice President and Secretary
- ---------------------------------
Stuart E. Massey
</TABLE>
II-7
<PAGE> 1
EXHIBIT 10(a).2
ACCOUNTANTS' CONSENT
We consent to the inclusion in Form SB-1 of our report dated December 18, 1997,
on our audit of the financial statements of Integrated Business Systems and
Services, Inc. as of December 31, 1996, and for the two years then ended,
respectively.
Columbia, South Carolina
December 30, 1997
<PAGE> 1
EXHIBIT 11.1
[NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. LETTERHEAD]
December 30, 1997
Integrated Business Systems and Services, Inc.
115 Atrium Way, Suite 128
Columbia, SC 29223
Gentlemen:
We have examined the Registration Statement on Form SB-1 to be filed by you with
the Securities and Exchange Commission in connection with the registration under
the Securities Act of 1933 of the possible issuance of up to 500,000 shares (the
"Shares") of common stock, no par value per share (the "Common Stock") upon the
exercise of outstanding warrants. We have also examined the proceedings taken by
you in connection with the contemplated offering of the Shares.
It is our opinion that the Shares, when issued and sold in the manner referred
to in the Registration Statement, will be validly issued, fully paid and
nonassessable.
This opinion is being furnished to you solely in connection with the issuance of
the Shares. The opinion expressed herein is rendered and speaks only as of the
date hereof, and we specifically disclaim any undertaking to update such opinion
or to advise you of subsequent developments effecting the same that hereafter
may come to our attention.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P.
