<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1998
-------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transaction period from:
Commission File number: 0-24031
-------
Integrated Business Systems and Services, Inc.
----------------------------------------------
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0910139
-------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
115 Atrium Way, Suite 128, Columbia, SC 29223
---------------------------------------------
(Address of principal executive offices)
(803) 736-5595
--------------
(Issuer's telephone number)
-------------------------------------------------------------------
(Former Name, address or fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. (X) YES ( ) NO
APPLICABLE ONLY TO ISSURERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. ( ) YES ( ) NO
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each the issuer's classes of common
equity, as of the latest practicable date:
8,202,563 shares of no par common shares outstanding at June 30, 1998
---------------------------------------------------------------------
Transitional Small Business Disclose Format (check one) ( ) YES (X) NO
Page 1
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INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets - June 30, 1998 and
December 31, 1997 3
Statements of Operations for the six months ended
June 30, 1998 and 1997 4
Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 10
PART II OTHER INFORMATION
Items 1 - 6 11
SIGNATURES 12
</TABLE>
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INTEGRATED BUSINESS SYSTEMS & SERVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED) (UNAUDITED)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60,210 $ 84,649
Accounts receivable 139,215 240,523
Inventory 3,962 3,962
Prepaid commissions 47,604 14,420
Other prepaid expenses 68,043 37,410
---------- ----------
Total current assets 319,034 380,964
Capitalized software costs, net 569,385 207,642
Property and equipment, net 163,753 115,559
Other assets 2,743 3,318
---------- ----------
Total assets $1,054,915 $ 707,483
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Notes payable $ 66,460 $ 92,295
Long-term debt, current portion 36,000 36,000
Accounts payable 134,434 174,667
Accrued liabilities
Accrued compensation and benefits 72,823 68,151
Accrued payroll taxes 204,652 13,700
Other 199,250 44,914
Deferred revenue 71,663 107,803
---------- ----------
Total current liabilities 785,282 537,530
Long-term debt, net of current portion 560,000 78,000
---------- ----------
Total liabilities 1,345,282 615,530
Commitments and contingencies - -
Stockholders' equity (deficiency):
Class A common shares, voting, no par value, 1000,000,000 shares
authorized, 8,202,563 and 7,987,763 shares outstanding at June 30, 1998
and December 31, 1997 respectively
1,849,813 1,700,959
Accumulated deficit -2,140,180 -1,609,006
---------- ----------
Total shareholders' equity (deficiency) -290,367 91,953
---------- ----------
Total liabilities and shareholders' equity (deficiency) $1,054,915 $ 707,483
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
STATEMENT OF OPERATIONS
(UNDAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES
Funded development and other services $ 325,476 $ 735,469
Hardware sales 50,703 235,073
Software licensing 36,590 0
Maintenance 153,622 85,564
----------- -----------
Total revenues 566,391 1,056,106
----------- -----------
OPERATING EXPENSES
Cost of revenues 258,146 527,161
Research and development costs 43,132 205,114
General and administrative 611,954 458,016
Sales and marketing 167,164 98,421
----------- -----------
Total operating expenses 1,080,396 1,288,712
----------- -----------
Loss from operations (514,005) (232,606)
Interest expense 17,168 31,065
----------- -----------
Net loss $ (531,173) $ (263,671)
=========== ===========
Earnings (loss) per share:
----------- -----------
Basic and diluted $ 0.07 $ 0.07
=========== ===========
Weighted average common shares outstanding 8,066,466 3,600,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4
<PAGE> 5
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-------------------------------
1998 1997
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (531,173) $ (263,671)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation 28,010 24,007
Amortization of software costs 10,201 10,201
Decrease (increase) in:
Accounts receivable 101,309 (176,035)
Inventory 0 8,842
Prepaid commissions (30,634) (27,694)
Prepaid expenses and other assets (33,183) (10,330)
Refundable deposits 575 0
Deferred costs 0 (238,325)
Increase (decrease) in:
Accounts payable 102,838 (111,552)
Accrued expenses 206,887 60,517
Deferred revenue (36,140) (277,126)
Payable to a related party 0 (36,055)
----------- -----------
Cash (used) provided by operating activities (181,310) (1,037,221)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment, net (76,204) (1,244)
Capitalized internal software development costs (371,944) (25,501)
----------- -----------
Cash used by investing activities (448,148) (26,745)
----------- -----------
FINANCING ACTIVITIES
Proceeds from (payments on) notes payable, net (25,835) 520,998
Proceeds from long-term debt 500,000 107,788
Payments on long-term debt (18,000) (18,000)
Sale of common shares 148,854 472,109
----------- -----------
Cash provided (used) by financing activities 605,019 1,082,895
----------- -----------
Net increase (decrease) in cash (24,439) 18,929
Cash and cash equivalents at beginning of period 84,649 15,625
----------- -----------
Cash and cash equivalents at end of period $ 60,210 $ 34,554
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5
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INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10- QSB and Article 10 of Regulation S-X of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of those of a normal recurring nature) considered
necessary for a fair presentation have been included. Operating results for the
six month periods ended June 30, 1998, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1998. For
further information, refer to the audited financial statements and footnotes
thereto included in the Company's registration statement on Form SB-1 (File no.
333-43437).
EARNINGS PER SHARE:
The computation of basic earnings (loss) per share and diluted earnings (loss)
per share is in conformity with the provisions of Statement of Financial
Accounting Standards No. 128.
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PART I
FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which the Company
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. This discussion should be read in
conjunction with the financial statements and notes thereto.
Results of Operations
For the six months ended June 30, 1998 as compared to the six months ended
June 30, 1997
Revenues. Total revenues decreased $489,715 to $566,691 in the first six months
of 1998 from $1,056,106 in the first six months of 1997. This decrease was
primarily attributable to a decrease of sales of integration services and data
collection equipment due to the increased emphasis in the development of FIS
2.0. This decrease was offset in part by an increase in software Licensing
revenue and in the hardware and software maintenance and support revenue.
Cost of Revenues. Total cost of revenues decreased $269,015 to $258,146 in the
first six months of 1998 from $527,161 in the first six months of 1997. This
decrease was primarily attributable to a decrease in data collection equipment
costs and integrated software costs as a result of lower sales levels. In
addition, a shift in research and development activities to development of FIS
2.0 resulted in a reduction of salary expense.
The cost of revenues as a percentage of total revenues was 46% and 50% in the
first six months of 1998 and 1997, respectively. Accordingly, the gross margin
was 54% and 50% in the first six months of 1998 and 1997, respectively.
Research and Development. Research and development costs decreased $161,982 to
$43,132 in the first six months of 1998 from $205,114 in the first six months of
1998. During the first six months of 1998, the Company continued to focus on
development activities related to the completion of Version 2.0 of the FIS
System. Research and development costs represented approximately 8% and 19% of
the total revenues for the first six months of 1998 and 1997, respectively. It
is expected that the Manufacturing Execution Management (MEM) module of Version
2.0 of the FIS System will be available for general release during the third
quarter of 1998. The MEM module is the fourth and final module scheduled to
complete the FIS 2.0 system.
General and Administrative. General and administrative expenses, including
interest expense, increased $140,040 to $629,122 in the first six months of 1998
from $489,082 in the first six months of 1997. This increase was partially
attributable to the addition of an administrative assistant to the President, a
Vice President of Operations and a systems engineer. The elimination of the
in-house counsel and the reduction of salaries of the principals as well as a
reduction in rent expense as the Raleigh, North Carolina office was closed in
the fourth quarter of 1997, helped offset these increases. An increase in the
professional fees accounted for the major increase in general and administrative
expenses. General and administrative expenses, including interest expense,
represented approximately 111% and 46% of total revenues in the first six months
of 1998 and 1997, respectively.
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Sales and Marketing. Sales and marketing expenses increase $68,743 to $167,164
in the first six months of 1998 from $98,421 in the first six months of 1997.
This increase was primarily attributable to an increase in the development of
marketing materials, the attendance of the International Hosiery Exposition and
Conference as an exhibitor and the development of a Web Site as well as an
increase in travel expenses. This increase was partially offset by a decrease in
marketing commission due to a decrease in sales. Sales and marketing expenses
represented approximately 30% and 9% of total revenues for 1998 and 1997,
respectively.
Financial Condition at June 30, 1998
Cash and cash equivalents decreased by $24,439 during the six months ended June
30, 1998, and were utilized mainly for working capital needs and to fund
software development as previously discussed.
Accounts receivable decreased by $101,309 during the period, reflecting
decreased sales of integration services and data collection equipment.
The $261,743 increase in capitalized software is mainly attributable to the
continued focus on completion of Version 2.0 of the FIS System.
The $247,752 increase in current liabilities during the period is due to the
continued research and development focus and cash availability. Management
believes that it will be able to service these payables out of cash generated
through operations and planned financing transactions.
Overall, the Company's current liabilities exceeded its current assets at June
30, 1998 by $466,249.
Liquidity and Capital Resources
Since its inception the Company has primarily financed 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 share-holders' equity. Accordingly, the Company has had liquidity
problems from time to time. As of June 30, 1998 the shareholders' deficit was
$290,367. As of June 30, 1998 the Company's working capital deficit was
$466,249.
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 $320,000.00
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In the fourth quarter of 1996, the Company made a strategic decision to
concentrate on completing the FIS System Version 2.0, and initiating the sales
and marketing efforts relating thereto. Accordingly, during the period this
development continues, the Company expects a reduction in revenues and an
increase in sales and marketing expenses.
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 approximately $1,587,000.
After deducting offering costs of approximately $368,000, the net proceeds to
the Company from that offering were approximately $1,219,000. 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 were approximately $69,000.
On May 12, 1998, the Company issued 50,000 shares of Common Stock at a price of
$1.00 (Cdn.) per share pursuant to the exercise of 50,000 of the Warrants. The
Gross proceeds to the company from the exercise of such Warrants were $35,000.
On May 19, 1998, the Company issued 50,000 shares of Common Stock at a price of
$1.00 (Cdn.) per share pursuant to the exercise of 50,000 of the Warrants. The
Gross proceeds to the company from the exercise of such Warrants were $34,000.
On June 12, 1998, the Company completed a private placement of five-year
convertible notes in the amount of $500,000 (or C$715,000, using an exchange
rate of US$1.00 - C$1.43) and non-transferable share purchase warrants entitling
the holders to purchase an aggregate of 541,000 common shares of the Company.
The notes, which bear interest at the rate of 12% per year, may be converted
into common shares of the Company at a conversion price of US$0.923 (or C$1.32)
during the first year and, during each of the remaining four years of the term
of the notes, a conversion price that is higher than the conversion price in the
previous year by US$0.175 (or C$0.25) per share.
The Company expects that the proceeds from its capital raising activities 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 6
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
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.
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<PAGE> 10
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 know 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 not 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 problems that are discovered. The expenses of the
Company's efforts to identify and address such problem, 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.
This Form 1O-QSB contains forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. The Company
cautions readers of this Form 10-QSB that such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially
different from those expressed or implied by 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 risks associated with start-up companies, including start-up losses,
liquidity problems, uncertainty of revenues, markets, profitability and the need
for additional funding; the risks that the Company may be unable to raise
additional capital through private financings, debt or equity offerings or
collaborative arrangements with others on acceptable terms; intense competition
from a variety of competitors with greater resources and market acceptance; the
Company's limited experience in assembling a sales and marketing team and
strategy; the potential need to make continuing significant investments in
software development in response to rapidly evolving technologies and
technological shifts; the risks associated with the potential loss of one or
more key customers of the Company; the Company's dependence upon key personnel;
the challenges and uncertainties in the implementation of the Company's
expansion and development strategies; and other factors described in other
reports filed by the Company with the Securities and Exchange Commission.
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PART II
OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
The Company is not party to any pending litigation.
Item 2 CHANGES IN SECURITIES
During the three months ended June 30, 1998, the securities
identified below were issued by the Company without
registration under the Securities Act of 1933, as amended (the
"1933 Act"). In each case, all of the shares were issued
pursuant to the exemption from registration contained in
Section 4(2) and Rule 506 of Regulation D of the 1933 Act as a
transaction, not involving a general solicitation, in which
the purchaser was purchasing for investment. The Company
believes that each purchaser was given or had access to
detailed financial and other information with respect to the
Company and possessed requisite financial sophistication. On
June 12, 1998, the Company, through a private placement,
issued an aggregate of US$500,000 (or C$715,000) aggregate
principal amount of 5-year convertible notes and 2-year
nontransferable share purchase warrants for the purchase of up
to 541,000 shares of the Company's common stock to four U.S.
investors and one limited partnership. The convertible notes,
which bear interest at the rate of 12% per year, are
convertible into common stock of the Company at a conversion
price of US$0.923 (or C$1.32) during the first year (for an
aggregate purchase of up to 541,711 shares of common stock)
and, during each of the remaining four years of the term of
the notes, at a conversion price that is higher in each
succeeding year than the conversion price in the previous year
by an amount of US$0.175 (or C$0.25) per share. The exercise
price of the warrants is US$0.923 (or C$1.32) per share in the
first year and US$1.061 (or C$1.57) in the second year.
Item 3 DEFAULTS UPON SENIOR SECURITIES
This item is not applicable.
Item 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The Company's annual meeting of shareholders was held
on June 26, 1998.
(b) The three directors listed in subsection (c) below were
elected at the meeting. The Company had no other director
whose term of office continued after the meeting.
(c) Matters approved at the meeting:
(i) Election of directors:
Number of Shares
----------------------------
Nominees For Withhold Authority
-------- --- ------------------
Harry P. Langley 4,451,629 2,500
George E. Mendenhall 4,451,629 2,500
Stuart E. Massey 4,451,629 2,500
(ii) Proposal to ratify grants and amendments of
stock options of affiliates:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
3,842,850 5,500 2,200 603,579
(iii) Proposal to approve future private placement
financings:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
3,842,850 7,500 200 603,579
(iv) Proposal to ratify the appointment of Scott,
Holloway & McElveen, LLP as the Company's
independent auditors for the fiscal year ending
December 31, 1998:
For Against Abstain
--- ------- -------
4,449,629 2,500 2,000
Item 5 OTHER INFORMATION
This item is not applicable.
Item 6 EXHIBITS AND REPORTS
There were no Form 8-K filings during the period.
The Financial Data Schedule is included herein as Exhibit 27.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the undersigned
hereunto duly authorized.
Integrated Business Systems and Services, Inc.
(Registrant)
/s/Harry P. Langley
- --------------------------------------
Harry P. Langley
President, Treasurer, Chief Executive
Officer, Chief Financial Officer and
Chairman of the Board
Date: August 13 1998
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC. FOR THE
SIX MONTHS ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 60,210
<SECURITIES> 0
<RECEIVABLES> 139,215
<ALLOWANCES> 0
<INVENTORY> 3,962
<CURRENT-ASSETS> 319,033
<PP&E> 350,287
<DEPRECIATION> (186,534)
<TOTAL-ASSETS> 1,054,914
<CURRENT-LIABILITIES> 785,282
<BONDS> 560,000
0
0
<COMMON> 1,849,813
<OTHER-SE> (2,140,180)
<TOTAL-LIABILITY-AND-EQUITY> 1,054,915
<SALES> 50,703
<TOTAL-REVENUES> 566,391
<CGS> 0
<TOTAL-COSTS> 258,146
<OTHER-EXPENSES> 822,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,168
<INCOME-PRETAX> (531,173)
<INCOME-TAX> 0
<INCOME-CONTINUING> (531,173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (531,173)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
