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INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
1997
ANNUAL REPORT TO SHAREHOLDERS
TABLE OF CONTENTS
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<TABLE>
<S> <C>
CORPORATE PROFILE............................................................ 2
LETTER TO SHAREHOLDERS....................................................... 5
MANAGEMENT'S DISCUSSION AND ANALYSIS......................................... 6
REPORT OF INDEPENDENT ACCOUNTANTS............................................ 12
FINANCIAL STATEMENTS......................................................... 13
CORPORATE INFORMATION / OFFICERS AND DIRECTORS............................... 30
</TABLE>
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CORPORATE PROFILE
THE COMPANY
The Company is in the business of providing computer technology
products and services to industrial manufacturers and on-line transaction
processing businesses in the United States. The Company's principal business
areas are: (1) installing, licensing and servicing 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; and (3) developing and marketing Synapse as
part of its FIS System applications.
The Company has three business units: (1) the FIS System; (2)
Integration; and (3) Synapse.
FIS SYSTEM BUSINESS UNIT
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 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 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 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.
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. The Company has installed Version 2.0 of
the FIS System (which tracks customer orders through the shipping process) for
one manufacturer in the knitted hosiery industry.
Version 2.0 of the FIS System is 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
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- 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. The MEM module of Version 2.0 is scheduled to be completed during the
third quarter of 1998.
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.
The Company intends to license the FIS System rather than sell it.
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.
INTEGRATION BUSINESS UNIT
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 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 mostly to large
manufacturing clients in the US 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 also 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.
SYNAPSE BUSINESS UNIT
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 1997 and
1996, this business unit provided minimal revenue to the Company because the
Synapse product was bridled with the FIS application revenue.
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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 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.
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Dear Fellow Shareholder:
Thank you for your interest in Integrated Business Systems and Services, Inc.
(IBSS). Our company provides innovative computer technology products and
services to manufacturers and the transaction processing industry.
A computer firm is only as good as its people. Since our incorporation in 1990,
IBSS has continued to combine the talents of highly-skilled professionals with
extensive experience in financial transactions and manufacturing operations.
IBSS develops leading edge computer solutions. Our company has rapidly gained a
reputation for solving technology problems that other firms have given up on. We
have succeeded by combining unique software tools with cutting edge data
collection hardware to bring the power of knowledge to the manufacturing shop
floor. Our success is reflected in our company's rapid growth.
Our growth has been encouraged by our productive relationships win our
customers, which include Americal Corporation, Bridgestone/Firestone, Computer
Science Corporation, Consolidated Diesel Company (Cummins), Coty Cosmetics,
Georgia Pacific, MCI Corporation, Motorola, NCR, and Westinghouse Nuclear Fuel
Division.
Computer solutions designed by IBSS bring the power of knowledge to
manufacturing operations. As we approach the new millennium, companies that know
the most will be able to compete the best. IBSS will grow and prosper as
companies learn about our unique products and services that bring innovation to
the shop floor and beyond.
Thanks again for your interest and consideration.
Harry P. Langley
President and Chief Executive Officer
May 20, 1998
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MANAGEMENT'S 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 Annual
Report.
FINANCIAL OPERATIONS SUMMARY
The following table summarizes the financial statements of the Company
for each of the four years ended December 31, 1997, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Sales 1,821,816 2,357,939 2,202,869 1,212,754
Cost of Sales 893,397 1,045,500 1,160,639 562,899
Gross Profit 928,419 1,312,439 1,042,230 649,855
Research and Development Expenses 332,139 362,983 292,850 160,253
Sales and Marketing Expenses 331,328 207,460 173,768 101,512
General and Administrative Expenses 1,010,653 995,261 691,235 356,717
(including interest expense)
Total Expenses 1,674,120 1,565,704 1,157,853 618,482
Operating Income (Loss) (745,701) (253,265) (115,623) 31,373
Income (Loss) Before Income Taxes (745,701) (253,265) (115,623) 31,373
Income Taxes 0 0 0 0
Net Income (Loss) (745,701) (253,265) (115,623) 31,373
Basic and Diluted Earnings (Loss) Per Share (0.16) (0.07) (0.03) 0.01
</TABLE>
<TABLE>
<CAPTION>
AS AT DEC 31, AS AT DEC. 31, AS AT DEC. 31, AS AT DEC. 31,
1997 1996 1995 1994
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED)
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Working Capital (156,566) (956,920) (792,332) (534,185)
Property, Plant and Equipment 115,559 156,447 149,548 100,607
Capitalized Software Costs 207,642 50,950 71,353 91,756
Other Assets 3,318 3,218 2,154 2,054
Total Assets 707,483 528,928 620,220 412,771
Long Term Liabilities 78,000 114,000 0 0
Shareholders' Equity (Deficiency)
Dollar amount 91,953 (860,305) (569,277) (339,768)
Number of shares issued
and outstanding (1) 7,987,763 3,600,000 3,600,000 (2)
</TABLE>
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(1) All share numbers in the table retroactively reflect the Company's
stock split, which occurred on March 5, 1997. As of April 30, 1998, the
Company had 8,088,563 shares issued and outstanding, of which 3,600,000
constituted 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.
(2) 4,530,000 Class A common shares (retroactively adjusted for the stock
split of the Company's shares discussed in note (1) above) and 250
Class B common shares.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues decreased $536,123 (approximately 23%) from
$2,357,939 in 1996 to $1,821,816 in 1997. This decrease was primarily
attributable to a 22% 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 1997, as compared to $80,500 in 1996. In addition, in 1996,
the Company received payment of $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 $152,103 (approximately 15%)
from $1,045,500 in 1996 to $893,397 in 1997. This decrease was primarily
attributable to the Company having one less designer employee in 1997 than in
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 49%
for 1996 and 1997, respectively.
Accordingly, the gross margin for 1996 and 1997 was 56% and 51%,
respectively.
Research and Development Costs. Research and development costs
decreased $30,844 (approximately 8%) from $362,983 in 1996 to $332,139 in 1997.
During 1997, the Company shifted from research and development efforts to
completion of Version 2.0 of the FIS System. Research and development costs
represented approximately 15% and 18% of total revenues for 1996 and 1997,
respectively. It is expected that Version 2.0 of the FIS System will be
available for general release during the third quarter of 1998.
General and Administrative. General and administrative expenses,
including interest expense, increased $15,392 (approximately 2%) from $995,261
in 1996 to $1,010,653 in 1997. This increase was primarily attributable to the
cost of the Company's new in-house counsel and a $37,361 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 42% and 55% of total
revenues for 1996 and 1997, respectively.
Sales and Marketing. Sales and marketing expenses increased $123,868
(approximately 60%) from $207,460 in 1996 to $331,328 in 1997. This increase was
primarily attributable to a write-off of prepaid commissions in the amount of
$74,312 in September and $67,261 in October as a result of the departure of the
Company's sales and marketing director, the departure of a sales representative,
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 18% of total revenues for 1996 and
1997, respectively.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenues increased by $155,070 (approximately 7%) from
$2,202,869 in 1995 to $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 $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.
Cost of Sales. Cost of sales decreased $115,139 from $1,160,639 in 1995
to $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 labor 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 $70,133 (approximately 24%) from $292,850 in 1995 to $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 $304,026 (approximately 44%) from $691,235
in 1995 to $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 $236,605; an increase of $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 $16,453
in interest relating to a loan in the principal amount of $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 $33,692
(approximately 19%) from $173,768 in 1995 to $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.
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
$31,373; therefore, the Company's operations have led to a growing working
capital deficit and a decrease in shareholders' equity. Accordingly, the Company
has had liquidity problems from time to time. As of December 31, 1994, 1995,
1996 and 1997, the shareholders' equity (deficit) of the Company was $(339,768),
$(569,277), $(860,305) and $91,953, respectively. As of December 31, 1994, 1995,
1996 and 1997, the Company's working capital deficit was $534,185, $792,232,
$956,920 and $156,566, respectively.
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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 $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 $190,000 to two investors, and, in
March 1997, executed a promissory note to a significant vendor of the Company in
the amount of approximately $320,000 in connection with various payments owed to
this vendor.
On June 3, 1997, the Company sold 1,300,000 shares of Common Stock 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
$420,000. After deducting offering costs of approximately $100,000 the net
proceeds to the Company from that offering were approximately $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 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 1996, the Company capitalized $177,095 principally relating to
the development of Version 2.0 of the FIS System.
During August and September 1997, the Company reduced its expenses by
approximately $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, $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 shares of Common Stock at a price of $1.00 (Cdn.) per share for gross
proceeds to the Company, after payment of Wolverton's commission, of $1,586,966.
After deducting offering costs of $367,692, the net proceeds to the Company from
that offering were $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 $320,000 discussed above.
In addition, in connection with the consummation of the initial public
offering, one of the convertible notes issued by the Company in March 1997 in
the principal amount of $116,700 was converted into shares of Common Stock. The
other convertible note in the principal amount of $70,532 plus approximately
$5,100 in interest was repaid by the Company with a portion of the proceeds from
the initial public offering.
On April 24, 1998, the Company issued 100,000 shares of Common Stock at
a price of $1.00 (Cdn.) per share pursuant to the exercise by Wolverton of
100,000 of the Warrants. The gross proceeds to the Company from the exercise of
such Warrants was $69,411.
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The Company leases its principal facilities under a noncancellable
operating lease expiring in October 1999. The lease is subject to annual
adjustments for facility operating costs in excess of an established base year.
The minimum annual commitment for rent under this lease is approximately
$120,000. Rent expense under this lease in 1997 and 1996 was approximately
$134,000 and $123,000, respectively.
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 the
next 12 months, which is the period the Company believes will be required to
implement and achieve its business objectives. 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.
PROPOSED PRIVATE PLACEMENT
As it is likely that the Company will require additional financing in
the future, the Company continues to evaluate additional means of financing,
including additional debt or equity financing. In this connection, on April 22,
1998, the Company executed a letter of intent with Crescent Capital Advisors,
Inc. ("Crescent") in contemplation of a proposed private placement (the "Private
Placement") of five-year convertible notes (the "Notes") in the aggregate
principal amount of up to $500,000 and two-year stock purchase warrants (the
"Crescent Warrants") entitling the holders to purchase approximately 1.08 shares
of Common Stock for each $1.00 outstanding principal amount under the Notes (up
to an aggregate of 541,667 shares of Common Stock.) The Notes, the Crescent
Warrants and the Common Stock issuable upon conversion of the Notes and the
exercise of the Crescent Warrants are expected to be issued pursuant to
exemptions from the registration requirements of federal and state securities
laws. Consequently, the transfer of such securities will be substantially
limited during the first two years following their issuance. As proposed, the
Notes will carry an annual interest rate of 12% and will be convertible at the
option of the holder at any time after their issuance into shares of Common
Stock at conversion rates ranging from $0.923 during the first year of the Notes
up to $1.623 during the fifth year of the Notes. The closing of the proposed
Private Placement is subject to various conditions, including negotiation of
definitive offering and purchase documentation, favorable completion of due
diligence by Crescent, receipt by the Company and Crescent of applicable
third-party consents and satisfaction of applicable regulatory requirements.
There can be no assurance that the conditions for the Private Placement will be
met or that the Private Placement will otherwise be completed as currently
contemplated by the Company and Crescent. If the Company is not successful in
increasing its revenues or in securing additional financing, such as that
proposed pursuant to the Private Placement, the Company 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.
THE YEAR 2000
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's vendors,
working either alone or in conjunction with other software or systems, will not
accept input of, store, manipulate or output dates in the years 1999, 2000 or
thereafter without error or interruption (commonly known as the "Year 2000"
problem). The Company has conducted a review of its business systems, including
its computer systems, and is querying its vendors as to their progress in
identifying and addressing problems that their computer systems may face in
correctly processing date information as the year 2000 approaches and is
reached. However, there can be no assurance that the Company will identify all
such Year 2000 problems in its computer systems or those of its vendors or
resellers in advance of their occurrence or that the Company will be able to
successfully remedy any
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problems that are discovered. The expenses of the Company's efforts to identify
and address such problems, or the expenses or liabilities to which the Company
may become subject as a result of such problems, could have a material adverse
effect on the Company's business, financial condition and results of operations.
Maintenance or modification costs will be expensed as incurred, while the costs
of any new software will be capitalized over the software's useful life.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Annual Report to
Shareholders that are not historical facts are forward-looking statements that
are subject to the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. The reader of this report
should understand that the important factors set forth below, in addition to
those discussed elsewhere in this document, could affect the future results of
the Company and could cause those results to differ materially from those
expressed or implied in such forward-looking statements. Although the Company's
management believes that their expectations of future performance are based on
reasonable assumptions within the bounds of their knowledge of their business
and operations, there can be no assurance that actual results will not differ
materially from their expectations. Factors which could cause actual results to
differ from expectations include, among other things, the Company's limited
operating history; the risks associated with start-up companies, including
start-up losses, liquidity problems, uncertainty of revenues, markets and
profitability; the Company's need for additional financing to implement its
strategies and achieve its objectives; increased competition from competitors
that are more established, and have greater market recognition and substantially
greater technical, financial and marketing resources than those of the Company;
the Company's ability to attract new clients, license additional products and
deliver product enhancements and services to existing clients; the Company's
lack of substantial experience in marketing and selling its products; the risks
associated with rapidly changing technologies upon which the Company depends
which require the Company to anticipate and adapt to technological shifts; the
risks of the possible loss of any one of the Company's largest clients or the
diminution in work from these clients; the Company's dependence on on key
personnel and the challenges of attracting additional qualified employees; the
risks associated with the possible termination of one or more of the Company's
various reseller agreements; the Company's exposure to the potential loss of
certain of the protections of its intellectual property rights; the possible
delays associated with the long sales approval process of the Company's clients;
the Company's exposure to product liability risks; the possible negative effects
of changes in government regulation and changes in the regulatory or market
environments in the apparel industries; the possible negative effects of the
failure of the Company and/or the third parties with which it does business to
adequately address computer systems operational problems resulting from the
advent of the year 2000; and other factors described in this report and in other
reports filed by the Company with the SEC.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Integrated Business Systems and Services, Inc.
We have audited the accompanying balance sheets of Integrated Business Systems
and Services, Inc. as of December 31, 1997 and 1996, and the related statements
of operations, changes in shareholders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
SCOTT, HOLLOWAY AND MCELVEEN, L. L. P.
Columbia, South Carolina
March 16, 1998, except footnote 17, which
is dated as of April 24, 1998
12
<PAGE> 13
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 84,649 $ 15,625
Accounts receivable 240,523 158,374
Inventory 3,962 12,804
Prepaid commissions 37,410 124,362
Other prepaid expenses 14,420 7,148
----------- ----------
Total current assets 380,964 318,313
Capitalized software costs, net (Note 3) 207,642 50,950
Property and equipment, net (Note 4) 115,559 156,447
Other assets 3,318 3,218
----------- ----------
Total assets $ 707,483 $ 528,928
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Note payable (Note 5) $ 92,295 $ --
Related party payable (Note 12) -- 36,055
Long-term debt, current portion (Note 7) 36,000 42,000
Accounts payable 174,667 429,936
Accrued liabilities:
Accrued compensation and benefits 68,151 148,566
Accrued payroll taxes 13,700 198,563
Other 44,914 99,313
Deferred revenue (Note 6) 107,803 320,800
----------- ----------
Total current liabilities 537,530 1,275,233
Long-term debt, net of current portion (Note 7) 78,000 114,000
----------- ----------
Total liabilities 615,530 1,389,233
----------- ----------
Commitments and contingencies -- --
Shareholders' equity (deficiency) (Note 8):
Class A common shares, voting, no par value, 100,000,000 shares
authorized, 7,987,763 and 3,600,000 shares outstanding at
December 31, 1997 and 1996, respectively 1,700,959 3,000
Class B common shares, nonvoting, par value $1 per share, 500
shares authorized, 0 shares outstanding in 1997 and 1996 -- --
Accumulated deficit (1,609,006) (863,305)
----------- ----------
Total shareholders' equity (deficiency) 91,953 (860,305)
----------- ----------
Total liabilities and shareholders' equity (deficiency) $ 707,483 $ 528,928
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 14
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Funded development and other services $1,216,559 $1,639,680 $1,323,105
Hardware sales 351,646 479,297 791,479
Software licensing 51,660 122,400 --
Maintenance 201,951 116,562 88,285
---------- ---------- ----------
Total revenues 1,821,816 2,357,939 2,202,869
---------- ---------- ----------
OPERATING EXPENSES
Cost of revenues 893,397 1,045,500 1,160,639
Research and development costs 332,139 362,983 292,850
General and administrative 917,237 939,206 662,306
Sales and marketing 331,328 207,460 173,768
---------- ---------- ----------
Total operating expenses 2,474,101 2,555,149 2,289,563
---------- ---------- ----------
Loss from operations (652,285) (197,210) (86,694)
Interest expense 93,416 56,055 28,929
---------- ---------- ----------
Net Loss $ (745,701) $ (253,265) $ (115,623)
========== ========== ==========
Earnings (loss) per share:
Basic and diluted $ (0.16) $ (0.07) $ (0.03)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 15
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
Number of Class A Number of Class B
Class A Share Class B Share Additional
Shares Carrying Shares Carrying Paid-in
Outstanding Value Outstanding Value Capital
----------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 4,530,000 $ 3,775 250 $ 250 $ 3,475
Shareholders' distributions -- -- -- -- --
Cancellation of common shares, net (Note 8) (930,000) (775) (250) (250) (3,475)
Net loss -- -- -- -- --
--------- ---------- ---- ----- -------
Balance, December 31, 1995 3,600,000 3,000 -- -- --
Shareholders' distributions -- -- -- -- --
Net loss -- -- -- -- --
--------- ---------- ---- ----- -------
Balance, December 31, 1996 3,600,000 3,000 -- -- --
Sale of common shares (Note 8) 4,387,763 1,664,959 -- -- --
Shareholder' contribution (Note 8) -- 33,000 -- -- --
Net loss -- -- -- -- --
--------- ---------- ---- ----- -------
Balance, December 31, 1997 7,987,763 $1,700,959 -- $ -- $ --
========= ========== ==== ===== =======
<CAPTION>
Total
Accumulated Shareholders'
Deficit Deficiency
----------- -------------
<S> <C> <C>
Balance, December 31, 1994 $ (347,268) $ (339,768)
Shareholders' distributions (109,386) (109,386)
Cancellation of common shares, net (Note 8) -- (4,500)
Net loss (115,623) (115,623)
----------- ----------
Balance, December 31, 1995 (572,277) (569,277)
Shareholders' distributions (37,763) (37,763)
Net loss (253,265) (253,265)
----------- ----------
Balance, December 31, 1996 (863,305) (860,305)
Sale of common shares (Note 8) -- 1,664,959
Shareholders' contribution (Note 8) -- 33,000
Net loss (745,701) (745,701)
----------- ----------
Balance, December 31, 1997 $(1,609,006) $ 91,953
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 16
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (745,701) $(253,265) $(115,623)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation 48,335 43,137 34,856
Amortization of software costs 20,403 20,403 20,403
Loss on sale of equipment -- 828 --
Write off of prepaid commissions 141,573 -- --
Decrease (increase) in:
Accounts receivable (82,149) 78,366 (123,838)
Inventory 8,842 (10,101) 26,816
Prepaid commissions (54,621) (19,650) (39,905)
Prepaid expenses and other assets (7,372) (5,589) (2,723)
Increase (decrease) in:
Book overdraft -- -- (3,440)
Accounts payable (255,269) 148,344 (45,333)
Accrued expenses (319,677) (124,807) 306,638
Deferred revenue (212,997) 40,476 171,637
Payable to a related party (3,055) 12,251 (14,772)
----------- --------- ---------
Cash (used) provided by operating activities (1,461,688) (69,607) 214,716
----------- --------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment, net (7,447) (50,864) (72,669)
Capitalized internal software development costs (177,095) -- --
----------- --------- ---------
Cash used by investing activities (184,542) (50,864) (72,669)
----------- --------- ---------
FINANCING ACTIVITIES
Proceeds from (payments on) notes payable, net 92,295 (32,528) (10,878)
Proceeds from long-term debt -- 180,000 50,979
Payments on long-term debt (42,000) (24,000) (17,876)
Sale of common shares 1,545,259 -- --
Proceeds from issuance of convertible promissory notes 190,232 -- --
Repayment on convertible promissory notes (70,532) -- --
Payments to reacquire stock -- -- (4,500)
Shareholder distributions -- (37,763) (109,385)
----------- --------- ---------
Cash provided (used) by financing activities 1,715,254 85,709 (91,660)
----------- --------- ---------
Net increase (decrease) in cash 69,024 (34,762) 50,387
Cash and cash equivalents at beginning of period 15,625 50,387 --
----------- --------- ---------
Cash and cash equivalents at end of period $ 84,649 $ 15,625 $ 50,387
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. COMPANY BACKGROUND AND SIGNIFICANT RISKS:
All financial information presented in these financial statements is
expressed in U.S. dollars. The Canadian exchange rates to one U.S. dollar at
December 31, 1997 and 1996, are $1.4313 and $1.3705, respectively.
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 $745,000 and $253,000 for
the years ended December 31, 1997 and 1996, respectively. The continuing losses
have adversely affected the liquidity of IBSS. At December 31, 1997, IBSS has an
accumulated deficit of approximately $1,600,000 and negative working capital of
approximately $157,000, which includes deferred revenue of approximately
$108,000.
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 December 31, 1997, this 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
RECONCILIATION OF UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) TO CANADIAN GAAP - The accompanying financial statements are
expressed in United States dollars and stated in accordance with United States
GAAP (U.S. GAAP). Differences between U.S. GAAP and Canadian GAAP that have a
significant effect on the accompanying financial statements are as follows:
(1) Under Canadian GAAP, all financing and investing activities
should be presented in the statement of cash flows, including
those not involving cash. Under U.S. GAAP, only cash
transactions are permitted to be reported in the statement of
cash flows and noncash transactions are required to be
separately disclosed. The effect of noncash differences is
described in Note 13.
17
<PAGE> 18
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Reconciliation of United States Generally Accepted Accounting
Principles (GAAP) to Canadian GAAP (Continued)
(2) Under Canadian GAAP, research costs generally must be expensed
when incurred. Development costs are required to be
capitalized, to the extent that recovery can reasonably be
regarded as assured, if they meet all of the following
criteria:
- The product or process is clearly defined and costs
related thereto can be identified.
- Technical feasibility of the product or process has
been established.
- Management has the intention to produce and market or
use the product or process.
- The market for the product or process is clearly
defined or its usefulness to the entity has been
established.
Under U. S. GAAP, all costs of research and development (R&D)
activities are expensed when incurred, including the costs of
physical assets. Any costs incurred to establish technological
feasibility of a computer software product are considered R&D
and are charged to operations as incurred. In general, once
technological feasibility has been achieved, costs of
producing the product master are capitalized. Capitalization
stops when the product is available for general release.
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.
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.
In October 1997, two sales representatives, who primarily focused on
integration sales, left employment of IBSS. As a result of this departure, IBSS
wrote off approximately $142,000 of prepaid commissions in October 1997.
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."
18
<PAGE> 19
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Software systems are licensed under the terms of substantially standard
nonexclusive and nontransferable license agreements, which generally provide for
an initial license charge and a monthly license charge. The initial 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 monthly license
charge provides access to Services Availability, Maintenance, and Enhancements
("SAME"). Services availability allows customers access to professional
services, other than maintenance and enhancements, which are provided under
separate arrangements during the SAME term. Under the maintenance provisions of
SAME, IBSS provides telephone support and error correction to current versions
of licensed systems. Under the enhancement provisions of SAME, IBSS will provide
any addition or modifications to the licensed systems, which IBSS may deliver
from time to time to licensees of those systems if and when they become
generally available. The monthly license charge is recognized as revenue on a
monthly basis throughout the term of the SAME provision of the license
agreement.
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.
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
19
<PAGE> 20
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
STOCK-BASED COMPENSATION - Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. IBSS has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market prices of
IBSS stock at the date of the grant over the amount an employee must pay to
acquire the stock.
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. (See Note 11.)
20
<PAGE> 21
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
MAJOR CUSTOMERS - Customers comprising 10% or greater of IBSS' total
revenues are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------- ------------------------- ------------------------
<S> <C> <C>
Americal - 29% Americal - 22% EMS - 18%
Coty, Inc. - 13% Coty, Inc. - 10%
Motorola - 11% NCR - 12%
Healthdyne - 11%
</TABLE>
FOREIGN CURRENCY TRANSACTION - Transaction gains and losses 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 year ended December 31, 1997 were not material.
EARNINGS PER SHARE - Effective December 31, 1997, IBSS adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and establishes new standards for computing earnings per share. SFAS
No. 128 requires the presentation of basic and diluted earnings per share in
place of primary and fully diluted earnings per share. At December 31, 1997, all
prior periods were restated to reflect the new basic and diluted earnings per
share amounts required by SFAS No. 128.
ASSET IMPAIRMENT - In March 1995, the Financial Accounting Standards Board
("FASB") issued SFAS 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
21
<PAGE> 22
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
NEW PRONOUNCEMENTS - In October 1997, the Accounting Standards
Executive Committee issued Statement of Position ("SOP") 97-2 on software
revenue recognition that supersedes SOP 91-1. Significant portions of SOP 97-2
will be effective in 1998 for IBSS. Management does not believe that the
adoption of SOP 97-2 will have a material impact on IBSS' financial position or
results of operations.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which will require adoption no later than 1998. This new statement
defines comprehensive income as "all changes in equity during a period, with the
exception of stock issuances and dividends." The new pronouncement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements.
In June 1997, FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which will require adoption
no later than 1998. SFAS No. 131 requires companies to define and report
financial and descriptive information about their operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
IBSS is presently evaluating the applicability of SFAS Nos. 130 and 131
to its operations.
NOTE 3. CAPITALIZED SOFTWARE COSTS:
Capitalized software costs consist of the following at December 31,:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Internally developed software $279,109 $102,014
Less accumulated amortization (71,467) (51,064)
-------- --------
Capitalized software costs, net $207,642 $ 50,950
======== ========
</TABLE>
IBSS has determined that no write-down of capitalized software costs is
necessary for the reporting periods included in these financial statements.
22
<PAGE> 23
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31,:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Furniture and fixtures $ 25,096 $ 24,249
Office and other equipment 31,292 30,498
Computer software 8,024 6,821
Computer equipment 209,671 205,202
-------- --------
274,083 266,770
Less accumulated depreciation 158,524 110,323
-------- --------
Property and equipment, net $115,559 $156,447
======== ========
</TABLE>
NOTE 5. 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 December 31, 1997 and 1996, the
outstanding balance under this agreement was approximately $92,000 and $0,
respectively. Administrative fees paid under this agreement for the years ended
December 31, 1997, 1996 and 1995, were approximately $17,000, $12,000 and $0,
respectively, and are included in interest expense.
NOTE 6. DEFERRED REVENUE:
Revenues from several major customers for funded development are
recognized using the percentage of completion method as work is performed. IBSS
had negative working capital, which includes deferred revenue as follows, at
December 31,:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Negative working capital $156,566 $956,920
======== ========
Deferred revenue $107,803 $320,800
======== ========
</TABLE>
23
<PAGE> 24
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31,:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Note payable to Carolina Capital Investment Corporation ("CCIC")
bearing interest at 11.25%, maturing February 2001,
for working capital $114,000 $156,000
Less current portion (36,000) (42,000)
-------- --------
$ 78,000 $114,000
======== ========
</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 maturities of long-term debt as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ended December 31, 1998 $ 36,000
Year ended December 31, 1999 36,000
Year ended December 31, 2000 36,000
Year ended December 31, 2001 6,000
--------
$114,000
========
</TABLE>
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 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.
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.
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.
24
<PAGE> 25
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. SHAREHOLDERS' EQUITY (CONTINUED):
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.
Warrants - In consideration for Wolverton agreeing to purchase any
shares not sold at the conclusion of IBSS's initial public offering, IBSS
granted Wolverton and two of its designees warrants to purchase 486,000, 10,000
and 4,000 commons shares, respectively, of IBSS at any time up to November 27,
1999, at a price of $1.00 (Canadian) per share if exercised in the first year
and at a price of $1.15 (Canadian) per share if exercised thereafter.
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 $117,000, 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.
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.
25
<PAGE> 26
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. EARNINGS PER SHARE:
The following table shows a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings (loss) per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings (loss)
per share: income (loss) from continuing
operations $ (745,701) $ (253,265) $ (115,623)
---------- ---------- ----------
DENOMINATOR:
Weighted average common shares - basic and
diluted calculation 4,615,647 3,600,000 3,948,844
---------- ---------- ----------
Basic and diluted earnings (loss) per share $ (0.16) $ (0.07) $ (0.03)
========== ========== ==========
</TABLE>
Warrants to purchase 500,000 shares of common stock at $1 (Canadian)
per share and employee stock options to purchase 251,160 shares of common stock
at $1 (Canadian) per share were outstanding during 1997. The warrants and
options were not included in the computation of diluted earnings per share
because the warrants and options are antidilutive when included in the
computation due to IBSS's net loss.
NOTE 10. EMPLOYEE BENEFITS:
Retirement Plan - IBSS maintains a 401(k) retirement 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 was April 29,
1997. Options normally extend for 5 years and under committee policy become
exercisable in installments of 25 percent per year commencing six months from
the date of grant or over a period determined by the committee. Management
considers all granted options as of December 31, 1997 to be noncompensatory.
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.
Information with respect to options granted under the Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
Price per share
Stock Options (Canadian Dollars)
------------- ------------------
<S> <C> <C>
Outstanding at January 1, 1997 -- --
Granted during the year 289,160 $ 1
Exercised during the year -- --
Expired or cancelled during the year 38,000 1
------- -----
Outstanding at December 31, 1997 251,160 $ 1
------- -----
Exercisable at end of year -- --
======= =====
</TABLE>
26
<PAGE> 27
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. INCOME TAXES:
The components of the provision for income taxes for the year ended December 31,
1997 is summarized as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Currently payable:
Federal $ --
State --
-----------
--
-----------
Change in deferred income taxes:
Federal --
State --
-----------
--
-----------
Income tax benefit $ --
===========
</TABLE>
A summary of IBSS's deferred income tax accounts as of December 31, 1997
follows:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Deferred tax assets $ 252,249
Deferred tax liabilities (86,708)
Valuation allowance (165,541)
---------
Total $ --
=========
</TABLE>
The principal sources of temporary differences and the related tax effects are
as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Decrease in deferred revenue $ 40,965
Increase in net operating loss carryforward 205,849
Increase in capitalized software (78,904)
Other (2,369)
---------
Temporary differences attributable to continuing operations 165,541
Change in valuation allowance (165,541)
---------
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 December 31, 1997 the Company
had a net operating loss of approximately $542,000. This loss will be available
to offset future taxable income and will expire in 2012.
NOTE 12. RELATED PARTY TRANSACTIONS:
Included in related party payable at December 31, 1996, are demand
notes payable to the three principal holders of IBSS' securities. The notes bear
interest of 18% with interest payable monthly. Effective as of August 29, 1997,
three principal holders of IBSS' securities agreed to convert $33,000 of demand
notes into contributed capital.
27
<PAGE> 28
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION:
During the years presented below, interest paid amounted to:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Interest paid $104,716 $ 57,584 $11,187
======== ======== =======
</TABLE>
The following table summarizes non-cash investing and financing activities:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ---- -------
<S> <C> <C> <C>
Transfer of inventory to property and equipment $ -- $ -- $11,126
======== ==== =======
Conversion of note into contributed capital (See Note 12) $ 33,000 $ -- $ --
======== ==== =======
Conversion of convertible notes into capital (See Note 8) $119,700 $ -- $ --
======== ==== =======
</TABLE>
NOTE 14. COMMITMENTS AND CONTINGENCIES:
Operating Lease Commitments - IBSS leases its principal facilities
under a noncancellable 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 was approximately as follows at December 31,:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Rent expense $142,000 $140,000 $90,000
======== ======== =======
</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 December 31, 1997:
<TABLE>
<S> <C>
Year ended December 31, 1998 $117,286
Year ended December 31, 1999 97,738
--------
$215,024
========
</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 December 31, 1997, excluding bonuses, is approximately $185,000.
28
<PAGE> 29
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. 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 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.
NOTE 16. SEGMENTED INFORMATION:
Management has determined that IBSS operates in one dominant industry
segment which involves the supply of computer technology products and services.
All of IBSS's operations, assets, and employees are located in the United States
and their revenues are generated in the United States.
NOTE 17. SUBSEQUENT EVENTS:
Proposed Private Placement - On April 22, 1998, IBSS executed a letter
of intent in contemplation of a proposed private placement of up to $500,000
principal amount of five-year convertible notes and two-year stock purchase
warrants for the purchase of up to 541,667 shares of common stock.
Stock Warrants Exercised - On April 24, 1998, Wolverton Securities Ltd.
Exercised 100,000 of the 486,000 stock purchase warrants.
29
<PAGE> 30
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CORPORATE INFORMATION
DIRECTORS
Harry P. Langley
President, Treasurer,Chief Executive Officer,
Chief Financial Officer and Chairman of the Board
Integrated Business Systems and Services, Inc.
George E. Mendenhall
Executive Vice President and Vice President
of Application Development
Integrated Business Systems and Services, Inc.
Stuart E. Massey
Vice President of Engineering and Secretary
Integrated Business Systems and Services, Inc.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock, which was first sold to the public on
November 26, 1997, is traded on the Vancouver Stock Exchange under the symbol
"IBS." The following table presents the high and low sales prices per share (in
Canadian dollars) for the Common Stock as reported on the Vancouver Stock
Exchange.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
<S> <C> <C>
December 31, 1997 (from 11/26/97) $1.15 $1.00
March 31, 1998 1.20 1.05
</TABLE>
As of May 12, 1998, the Company had approximately 19 shareholders of record of
Common Stock. Certain of these shareholders of record hold shares in nominee or
street name for other beneficial owners.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and it is
currently the intention of the Company not to pay cash dividends on its Common
Stock in the foreseeable future. Management intends to retain its earnings to
finance further growth and, when appropriate, retire existing debt. In addition,
the Company's loan agreement with a lender retricts the payment of dividends by
the Company without the prior written consent of the lender, which consent may
be withheld in the sole discretion of the lender.
EXECUTIVE OFFICERS
Harry P. Langley
President, Treasurer,Chief Executive Officer,
Chief Financial Officer and Chairman of the
Board
George E. Mendenhall
Executive Vice President and Vice President
of Application Development
Stuart E. Massey
Vice President of Engineering and Secretary
Donald R. Futch
Vice President of Operations
Stephen A. Sacko
Vice President of Sales
EXECUTIVE OFFICES
Suite 128, 115 Atrium Way
Columbia, South Carolina 29223
(803) 736-5595
(803) 736-5639 (Fax)
TRANSFER AGENT
Pacific Corporate Trust Company
Suite 830, 625 Howe Street
Vancouver, British Columbia
V6C 3B8
INDEPENDENT ACCOUNTANTS
Scott, Holloway & McElveen, LLP
Columbia, South Carolina
LEGAL COUNSEL
Nexsen Pruet Jacobs & Pollard, LLP
Columbia, South Carolina
Catalyst Corporate Finance Lawyers
Vancouver, British Columbia
30
