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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-43437
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
400,000 SHARES
COMMON STOCK
This Offering Circular relates to up to 400,000 shares of common stock,
no par value (the "Common Stock") which will be issued by Integrated Business
Systems and Services, Inc. (the "Company") in connection with the exercise of
non-transferable share purchase warrants (the "Warrants") previously issued by
the Company.
The Common Stock is traded on the Vancouver Stock Exchange (the "VSE")
under the Symbol "IBS." On May 11, 1998, the last sale price of the Common Stock
as reported on the VSE was $4.15 (Cdn.)
per share.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
OFFERING INFORMATION (1)
<TABLE>
<CAPTION>
Proceeds to
Price Company(2)
- ------------------------------------------------------------------------- ------------------ ------------------------
<S> <C> <C>
Per Share................................................................ $ .69 $ .69
Total.................................................................... $ 276,000 $ 276,000
- ------------------------------------------------------------------------- ------------------ ------------------------
</TABLE>
(1) The purchase price per share of Common Stock under the Warrants is
$1.00 (Cdn.) until November 28, 1998, and $1.15 (Cdn.) until November
28, 1999. The amount stated in the table assumes the Warrants are
exercised before November 28, 1998, and is based on the May 5, 1998
exchange rate between the Canadian dollar and the US dollar of C$1.44 =
US$1.00.
(2) Before deducting estimated expenses of approximately $75,000 payable by
the Company.
The date of this Prospectus is May 14, 1998.
<PAGE> 2
PART I
NARRATIVE INFORMATION REQUIRED IN PROSPECTUS
ITEM 1. INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF PROSPECTUS
See front and back cover pages of this Prospectus.
ITEM 2. SIGNIFICANT PARTIES
(a) The Company's directors:
<TABLE>
<CAPTION>
Name Business Address Home Address
------------------ ------------------------ -------------------
<S> <C> <C>
Harry P. Langley Suite 128, 115 Atrium Way 6628 Christie Road
President, Treasurer, Chief Executive Columbia, SC 29223 Columbia, SC 29209
Officer, Chief Financial Officer and
Chairman of the Board
George E. Mendenhall Suite 128, 115 Atrium Way Rt. 1, Box 300E
Executive Vice President, Vice President Columbia, SC 29223 Ridgeway, SC 29130
of Application Development and director
Stuart E. Massey Suite 128, 115 Atrium Way 515-C Maple Street
Vice President, Secretary and director Columbia, SC 29223 Columbia, SC 29205
</TABLE>
(b) The Company's officers: See response to Item 2(a) above.
(c) The Company's general partners: None.
(d) Record owners of 5 percent or more of any class of the
Company's equity securities (common stock): See response to
Item 2(a) above.
(e) Beneficial owners of 5 percent or more of any class of the
Company's equity securities (common stock):
<TABLE>
<CAPTION>
Name Business Address Home Address
---------- ------------------------- ------------------
<S> <C> <C>
Harry P. Langley Suite 128, 115 Atrium Way 6628 Christie Road
Columbia, SC 29223 Columbia, SC 29209
George E. Mendenhall Suite 128, 115 Atrium Way Rt. 1, Box 300E
Columbia, SC 29223 Ridgeway, SC 29130
Stuart E. Massey Suite 128, 115 Atrium Way 515-C Maple Street
Columbia, SC 29223 Columbia, SC 29205
Wolverton Securities Ltd.* 17th Floor, 777 Dunsmuir Street N/A
Vancouver, British Columbia
V7Y1J5
</TABLE>
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* - The following individuals are the principals of Wolverton
Securities Ltd.:
Brent N. Wolverton, President and director
Ellen Paterson, Secretary, Treasurer, Chief Financial Officer
and director
Mark F. Wolverton, Senior Vice President of Trading and director
Larry McFadden, Senior Vice President of Sales and director
See also the information set forth under the heading "Principal
Shareholders" and the discussion of certain agreements between the
Company and Wolverton Securities Ltd. under the heading "Agreements
With Wolverton" appearing elsewhere in this Prospectus.
(f) Promoters of the Company: See response to Item 2(a) above.
(g) Affiliates of the Company: See Items 2(a), (b), (d) and (f)
above.
(h) Counsel to the Company with respect to the proposed offering:
Nexsen Pruet Jacobs & Pollard, LLP, 1441 Main Street, Suite
1500, P. O. Drawer 2426, Columbia, South Carolina 29201
(i) Each underwriter with respect to the proposed offering:
Not applicable.
(j) The underwriter's directors: Not applicable.
(k) The underwriter's officers: Not applicable.
(l) The underwriter's general partners: Not applicable.
(m) Counsel to the underwriter: Not applicable.
ITEM 3. RELATIONSHIP WITH ISSUER OF EXPERTS NAMED IN REGISTRATION STATEMENT
No expert named in this prospectus was paid on a contingent basis or had
a material interest in the Company or any of its subsidiaries or was
connected with the Company or any of its subsidiaries as a promoter,
underwriter, voting trustee, director, officer or employee.
ITEM 4. LEGAL PROCEEDINGS
Not applicable.
ITEM 5. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 6. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
The Company's Articles of Incorporation provide that a director of the
Company shall not be personally liable to the Company or any of its
shareholders for monetary damages for breach of fiduciary duty as a
director, except liability for the following:
(a) any breach of the director's duty of loyalty to the Company or
its shareholders;
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(b) acts or omissions not in good faith or which involve gross
negligence intentional misconduct or a knowing violation of
law;
(c) any unlawful distribution as set forth in the Code of Laws of
South Carolina; or
(d) any transaction from which the director derived an improper
personal benefit.
These provisions may have the effect in certain circumstances of
reducing the likelihood of derivative litigation against directors.
While these provisions may eliminate the right to recover monetary
damages from directors in various circumstances, rights to seek
injunctive or other non-monetary relief are not eliminated.
The Company's By-laws provide for indemnification of the Company's
directors to the fullest extent permitted by law. The Company's Bylaws
also permit the Company, through action of the Board of Directors, to
indemnify the Company's officers or employees to the fullest extent
permitted by law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "1933 Act") may be permitted to directors, officers
and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission (the "Commission")
such indemnification is against public policy as expressed in the 1933
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, all information in this Prospectus
assumes that the maximum number of shares being offered is sold at a price of
$1.00 (Cdn.) per share.
THE COMPANY
The Company is in the business of providing computer technology
products and services to industrial manufacturers and on-line transaction
processing businesses 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's FIS System is still under
development. In addition, the Company continues to develop user and
administrative manuals for Synapse.
The Company was incorporated in South Carolina in 1990, and its
principal office is located at Suite 128, 115 Atrium Way, Columbia, South
Carolina 29223, and its telephone number is (803) 736-5595.
THE OFFERING
The offering to which this Prospectus relates (the "Offering") consists
of 400,000 shares of Common Stock to be issued upon the exercise of the
Warrants. The Company intends to use any proceeds from the Offering for general
working capital.
RISK FACTORS
The securities offered hereby are speculative, involve a high degree of
risk and immediate and substantial dilution, and should not be purchased by
investors who cannot afford the loss of their entire investment. See "Risk
Factors."
RISK FACTORS
The securities offered hereby are speculative and involve a high and
substantial degree of risk, including, but not necessarily limited to, the risk
factors described below. Prior to making an investment decision, a prospective
investor should carefully consider the risk factors listed below, together with
the other factors and financial data included herein, in relation to his or her
financial circumstances and the possible loss of his or her entire investment.
DEVELOPMENT RISKS. Investment in the shares may be considered to be
speculative due to the nature of the business in which the Company is engaged,
the limited extent of the Company's assets and the Company's stage of
development. The Company has only a limited operating history and is subject to
the risks associated with start-up companies, including start-up losses,
liquidity problems, uncertainty of revenues, markets, profitability and the need
for additional funding. The Company incurred net losses of approximately
US$745,700 and US$253,000 for the years ended December 31, 1997 and 1996,
respectively, and has incurred losses in previous years that have adversely
affected the Company's liquidity. The Company's financial viability depends on
the Company achieving a significant increase in sales revenue and the
development of the FIS System Version 2.0 which is not yet complete. The
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Company's shareholders' equity as of December 31, 1997 was US$91,953 and its
working capital deficit was US$156,566.
FUTURE FINANCINGS. To the extent the Company's expectations regarding
its second quarter 1998 sales cycles are not realized, the Company will require
additional financing to implement its strategies and achieve its objectives. The
Company may seek such additional financing through private financings, debt or
equity offerings or collaborative arrangements with others.
On April 22, 1998, the Company executed a letter of intent with
Crescent Capital Advisors, Inc. in contemplation of a proposed private placement
of five-year convertible notes in the aggregate principal amount of up to
US$500,000 and two-year stock purchase warrants entitling the holders to
purchase approximately 1.08 shares of Common Stock for each $1.00 outstanding
principal amount (up to an aggregate of 541,667 shares of common stock). The
closing of the proposed private placement is subject to a number of conditions,
and there can be no assurance that such conditions will be satisfied or that
such private placement will otherwise take place. For a more detailed
description of this proposed transaction, see "Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Proposed Private
Placement."
One of the Company's debt agreements restricts the Company from raising
additional capital through either debt or equity arrangements without the prior
written consent of the lender, which consent may be withheld in the sole
discretion of the lender. See Note 7 to the Company's audited financial
statements appearing elsewhere in this Prospectus. The Company has sought the
consent of such lender to the proposed private placement discussed above, but
there can be no assurance that the Company will be able to obtain such lender's
consent for such private placement, or at any other time or times deemed
necessary by the Company. If adequate funds are not available when required or
on acceptable terms, the Company may be required to delay, scale back or
eliminate its product development activities and sales and marketing efforts. If
this becomes necessary, it could materially adversely affect the Company's
business, results of operations and prospects. Any equity offering will result
in dilution to the ownership interests of shareholders and may result in
dilution to the value of such interests.
COMPETITION. The Company operates in the competitive computer
technology environment. Many of the Company's competitors are more established,
benefit from greater market recognition and have substantially greater
technical, financial and marketing resources. There can be no assurance that
existing or future competitors will not develop products that are superior to
the Company's or that will achieve greater market acceptance. The Company's
future success will depend in large part upon its ability to attract new
clients, license additional products and deliver product enhancements and
services to existing clients. There can be no assurance that the Company will be
able to develop and maintain the financial, technical, distribution and support
capabilities to do this.
The Company and its products are not well known in the marketplace and
the Company faces intense competition from a variety of competitors, most of
which have significantly greater resources and market acceptance. Because the
Company has from inception primarily focused on product development, it has
little experience in marketing and selling its products. It recently began
assembling a sales and marketing team, establishing a sales and marketing
strategy and implementing that strategy. There can be no assurance that the
Company will be successful in marketing and selling its products nor that is
products will achieve market acceptance. Even if they do achieve market
acceptance, there can be no assurance that the Company's products can be sold at
prices that are sufficient to enable the Company to sustain and expand its
operations.
TECHNOLOGY RISK. The Company's ability to compete effectively and meet
its clients' needs are dependent upon its continuing significant investment in
software development. The Company has invested significantly in technology and
anticipates that it will be necessary to continue to do so. Moreover, the
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technologies upon which the Company depends are evolving rapidly and require the
Company to anticipate and adapt to technological shifts. There can be no
assurance that the Company will be successful in anticipating or adapting to
technological changes or in selecting and developing new and enhanced technology
on a timely basis.
Future technological advances in the continually changing computer
technology industry may result in the availability of new products and services
that could compete with the products and services currently provided by the
Company. Moreover, decreases in the cost of existing products or services could
enable the Company's current or potential clients to fulfill their own needs for
process management systems and services or integrated on-line data collection
products and services in a more cost efficient manner than through the purchase
of the Company's products and services. There can be no assurance that the
Company will not be adversely affected in the event of such technological
change, or that changes in technology will not enable additional companies to
offer services that could replace some or all of the products and services
presently offered by the Company.
DEPENDENCE ON KEY CLIENTS. In 1997 and 1996, one client accounted for
approximately 29% and 22%, respectively, of the Company's total revenues. It is
expected that revenues from this client will substantially decrease following
the completion of its project, which is expected to occur by the end of the
third quarter of 1998. In 1996, three other clients together accounted for
approximately 31% of the Company's revenues. In 1997, these four existing
clients and a new client for 1997 accounted for a total of approximately 28%,
13%, 11%, 4%, and 11% respectively, of the Company's total revenues.
The loss of any one of these clients or the diminution in work from
these clients (which is likely due to certain projects nearing completion) could
have a material adverse effect on the Company to the extent that this business
cannot be replaced with new business.
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend to a
significant extent upon the skills of certain key personnel. The Company has a
small core management and development team and the unexpected loss of any of
these individuals would have a serious impact on the business. While the Company
maintains "key man" insurance in the amount of $2 million on the lives of each
of Harry P. Langley, President and Chief Executive Officer, George E.
Mendenhall, Executive Vice President, and Stuart E. Massey, Vice President,
recovery under such insurance may not be adequate to compensate the Company for
the full impact on the Company resulting from the death of any one or more such
officers. In addition, the Company's failure to attract additional qualified
employees or to retain the services of key personnel could adversely affect the
Company's business.
DEPENDENCE ON RESELLER AGREEMENTS. The Company is a party to reseller
agreements with Oracle Corporation ("Oracle"), Intermec Corporation ("Intermec")
and Connectware Solutions Inc. ("Connectware"). These reseller agreements
primarily impact the Company's systems integration business, a substantial
amount of which involves integrating Intermec data collection equipment with
Oracle manufacturing software using a suite of data collection connectivity
software tools developed by Connectware. In delivering a comprehensive systems
integration package for its clients, the Company finds it beneficial to be able
to aggregate and serve as a reseller of the products of these three vendors.
Revenues from the resale of products under these reseller agreements aggregated
approximately $518,300 in 1997 (approximately 28% of the Company's gross
revenues). The Intermec and Oracle agreements have indefinite terms, and the
Connectware agreement automatically renews for successive one-year periods,
absent notice to terminate by either party three months in advance of the
expiration of the current term. Intermec can terminate its agreement upon 30
days' advance notice, and each of Oracle and Connectware can terminate its
agreement upon failure of the Company to cure any breach of the agreement. The
termination of any of these agreements could have a material adverse effect on
the Company. For a further discussion of the terms and termination provisions of
these agreements, refer to "Business - Products and Services - Integration
Business Unit - Products and Services".
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BUSINESS EXPANSION -- DEMANDS ON MANAGEMENT. The Company's success will
depend in part upon a number of managerial personnel, technical employees and
sales personnel, some of which are not yet hired or known. The Company's
operations to date have been somewhat limited due to extensive product
development. The Company's management team, accordingly, has not had substantial
experience in managing broader operations. Increased marketing activities will
place additional demands upon management, and it is expected that these demands
will intensify as the Company grows. The effective management of growth will
require the hiring of additional management personnel skilled in sales,
operations and cost control. The competition for such personnel is intense. The
inability to attract, integrate and retain additional management personnel, to
address additional management needs or to manage growth effectively could have a
material adverse effect on the Company's business, results of operations and
prospects.
INTELLECTUAL PROPERTY RIGHTS. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures, contractual provisions and the complex nature of the technologies to
protect its intellectual property. While the Company believes that its products
and technologies are adequately protected against infringement, there can be no
assurance of effective protection. The Company's clients, for example, may
disclose confidential information relating to the Company's technology, which
may have a material adverse effect on the Company's financial position.
Monitoring and identifying unauthorized use of the Company's technology may
prove difficult, and the prohibitive cost of litigation may impair the Company's
ability to prosecute any infringement. In addition, the Company may become
liable to its clients for any breach of a third party's intellectual property
rights.
The commercial success of the Company may also depend upon its products
not infringing any intellectual property rights of others and upon no claims for
infringement being made against the Company. The Company is currently in the
process of conducting various patent searches to determine whether or not it may
be infringing the patent or trademark rights of a third party. The Company
believes that it is not infringing any intellectual property rights of third
parties, but there can be no assurance that such infringement will not occur. An
infringement claim against the Company by a third party, even if it were
eventually found to be invalid, could have a material adverse effect on the
Company because of the cost of defending such a claim.
Further, insofar as the Company relies on trade secrets and unpatented
know-how to establish and maintain its competitive technological position, there
can be no assurance that others may not independently develop the same or
similar technologies. Presently, the Company does not have any patent protection
for its technology in Canada or the US nor has it registered any copyrights.
LENGTH OF SALES CYCLE. Certain of the Company's products and services
are often used as part of a client's larger business process re-engineering
initiative. As a result, the purchase and implementation of the Company's
products generally involves a significant commitment of management attention and
resources by prospective clients. Accordingly, the Company's sales process is
often subject to delays associated with a long approval process.
For these and other reasons, the sales cycle for the Company's products
is often lengthy and subject to a number of significant delays over which the
Company has little or no control. Such delays may result in significant
fluctuations on the Company's quarterly financial results. Certain of the
Company's products and services are capable of having a pervasive effect on the
information systems of an enterprise. Products that are capable of having such
an effect are typically purchased from large organizations that have a lengthy
track record in the marketplace. Purchasers of such products are typically
reluctant to purchase from a small firm such as the Company out of concern for
the long-term viability of the firm.
RELIANCE ON MANAGEMENT. While shareholders of the Company have voting
rights, they will not be able to take a direct role in the management of the
Company. The success of the Company is contingent
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on the judgment and expertise of the directors and officers of the Company.
Persons who are not willing to rely on the expertise of the directors and
officers of the Company should not purchase shares.
FINANCIAL STATEMENTS. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Amounts affected by these estimates
include, but are not limited to, the estimated useful lives, related
amortization expense and carrying values of the Company's intangible assets and
capitalized software development costs. Changes in the status of certain matters
or facts or circumstances underlying these estimates could result in material
changes to these estimates, and actual results could differ from these
estimates.
ENFORCEMENT OF CIVIL CLAIMS. The Company was incorporated under the
laws of South Carolina in the US. All of the Company's directors and officers
reside, and all of its assets are located, outside of Canada. It may not be
possible for investors to effect service of process within Canada upon the
directors and officers of the Company. It may also not be possible to enforce
judgments obtained in Canadian courts predicated upon the civil liability
provisions of the securities laws of British Columbia against the Company or its
directors and officers.
PRODUCT LIABILITY RISKS. The Company's license agreements with its
clients typically contain provisions designed to limit the Company's exposure to
potential product liability claims. There can be no assurance that such
provisions will protect the Company from such claims in the markets in which it
sells its products. The Company does not maintain product liability insurance. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, results of operations and
prospects.
PREFERRED SHARES AND CHANGE OF CONTROL. The Company currently has no
issued and outstanding preferred shares and has no plans to issue any preferred
shares. The issuance of preferred shares could materially adversely affect the
rights of holders of common shares and, therefore, could reduce the value of the
common shares. In addition, specific rights granted to future holders of
preferred shares could be used to restrict the Company's ability to merge with,
or sell its assets to, a third party. In addition, certain other provisions of
the Company's Articles, By-laws and the South Carolina Business Corporation Act
will likely have the effect of deterring or preventing a change in control of
the Company.
ESCROWED SHARES. Local Policy Statement 3-07 of the British Columbia
Securities Commission requires that 3,600,000 of the Company's outstanding
common shares that are owned by the Company's three principals be held in escrow
as performance shares pursuant to the terms of an Escrow Agreement. The
performance shares may be released from escrow on a pro-rata basis, based upon
the Company's cumulative cash flow, as evidenced by the Company's annual audited
financial statements. "Cash flow" is defined to mean net income or loss before
tax, adjusted for certain add-backs. For each $0.91 of cumulative cash flow
generated from the Company's operations, one performance share may be released
from escrow.
The Company expects that the release of these escrowed shares will be
deemed compensatory and, accordingly, will result in a substantial non-cash
charge to reportable earnings equal to the fair market value of the shares on
the date of release. Such charge could substantially increase the Company's loss
or reduce or eliminate net income, if any, for financial reporting purposes for
the periods during which such shares are, or likely will be, released from
escrow. Accordingly, such charge may reduce the market price of the Company's
shares.
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GOVERNMENT REGULATION/MARKET ENVIRONMENT. Changes in government
regulation could materially adversely affect the Company's ability to carry on
business. In addition, due to the current focus of the Company's business within
the manufacturing and hosiery industries, changes in the regulatory or market
environments in these industries could have a material adverse impact on demand
for the Company's products and services.
TAXES. Until April 18, 1997, the Company's shareholders had elected for
the Company to have the income tax treatment provided by Subchapter S of the
United States Internal Revenue Code. Pursuant to Subchapter S, the Company's
income passed through to the individual shareholders and the Company itself was
not required to pay any federal or state income taxes. Accordingly, the
Company's financial statements do not reflect the effect that the payment of
federal and state income taxes would have had on the Company. The Company is now
subject to federal and state income taxation.
ARBITRARY OFFERING PRICE. The price for which the Company's shares are
being offered in the Offering was determined arbitrarily and may not be
indicative of fair market value. The Offering price may bear no relationship to
the Company's assets, book value, operating results, net worth or other
recognized criteria of value.
DILUTION. The net tangible book value of the Company's shares
immediately after the completion of the Offering will be less than the Offering
price. As a result, purchasers will experience an immediate and substantial
dilution in the net tangible book value per share of the shares purchased.
DISCLOSURE RELATING TO LOW-PRICED STOCKS. As long as the trading price
of the Common Stock is less than US$5.00 per share, trading in the Common Stock
in the US secondary market is subject to certain rules promulgated under the
Securities Exchange Act of 1934, which rules require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
"penny stock" (generally, any non-Nasdaq equity security that has a market price
of less than US$5.00 per share, subject to certain exceptions). Such rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors. For
these types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transactions prior to sale. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from effecting
transactions in the Common Stock, which could severely limit the market
liquidity of the Common Stock and the ability of stockholders to sell the Common
Stock in the US secondary market.
POTENTIAL "YEAR 2000" PROBLEMS. 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 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.
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USE OF PROCEEDS
Assuming the maximum number of shares being offered hereby are sold at
$1.00 (Cdn.), the gross proceeds to the Company would be approximately
US$276,000. After deducting the estimated expenses of the Offering in the amount
of US$75,000, the net proceeds to the Company from the sale of the 500,000
shares of Common Stock in this Offering are estimated to be approximately
US$201,000.
None of the proceeds from this Offering have been allocated for
particular purposes, but rather the Company intends to use the proceeds for
general working capital purposes. While the Board of Directors of the Company
will have complete discretion with respect to the application of the proceeds,
the Company anticipates that in applying the proceeds toward working capital
purposes, the proceeds will first be applied to the payment of marketing and
sales expenses with the balance applied to the payment of trade payables.
DILUTION
The net tangible book deficiency of the Company as of December 31, 1997
was US$115,689 or US$0.014 per share of Common Stock. "Net tangible book value
(deficiency) per share" represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities, divided by the number of
outstanding shares of Common Stock.
Without taking into account any changes in such net book value
(deficiency) after December 31, 1997, other than to give effect to the Company's
receipt of US$276,000 pursuant to the issuance of 400,000 shares of Common Stock
at $1.00 (Cdn.) per share in the Offering, the pro forma net tangible book value
of the Company as of December 31,1997 would have been US$160,311 or US$0.019 per
share. This represents an immediate increase in the net tangible book value of
US$0.033 per share to existing shareholders and an immediate dilution of
US$0.671 per share to the new investors. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Offering price per share................................................................................ US$ 0.69
Net tangible book value (deficiency) per share at December 31, 1997 ..................(0.014)
Increase in net tangible book value per share attributable to the Offering.............0.033
Pro forma net tangible book value per share after the Offering ..............................................0.019
Dilution to new investors per share........................................................................$ 0.671
Percentage of dilution relative to the Offering price........................................................ 97.3%
</TABLE>
DIVIDEND POLICY
The Company expects to retain its earnings to finance further growth
and, when appropriate, retire existing debt. As a result, the Directors of the
Company expect that, for the foreseeable future, the Company will not declare or
pay any dividends on any of its shares. In addition, the Company's loan
agreement dated February 7, 1996 with Carolina Capital Investment Corporation
("CCIC") restricts the payment of dividends by the Company without the prior
written consent of CCIC, which consent may be withheld in the sole discretion of
CCIC. The final payment under the CCIC loan is schedule to occur in February
2001.
11
<PAGE> 12
BUSINESS
GENERAL
The Company is in the business of providing computer technology
products and services to industrial manufacturers and on-line transaction
processing businesses in the US. The Company's principal business areas include:
- 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 tool known as Synapse, which manages
on-line computer transactions
- providing systems integration products and services to
manufacturing companies
- developing and marketing Synapse as part of the Company's FIS
System applications
The FIS System provides on-line process management for manufacturing
shop floors. The FIS System is designed to shorten the process time on order,
manufacturing and shipping functions (in some cases from days to hours) and to
provide management with the ability to forecast production needs minutes after
receiving an order. The Company's systems integration projects include the
provision of products and services to help integrate clients' on-line shop floor
data collection equipment (e.g., bar coding equipment) with the clients'
manufacturing software (e.g., inventory tracking software), which typically do
not communicate without integration. Synapse is a software tool that is used to
develop on-line transaction processing applications.
The Company was incorporated in 1990 to develop and license shop floor
computer systems solutions for manufacturing clients. The Company's integration
business complimented this objective and has served as a source of revenue for
the Company while it has developed the FIS System and Synapse. During the fiscal
years ended December 31, 1995, 1996 and 1997, the Company had research and
development costs of US$292,850, US$362,983, and US$ 332,139, respectively.
During the next twelve months, the Company intends to pursue the following
business objectives: (i) to complete the research and development of Version 2.0
of the FIS System; (ii) to expand marketing of the FIS System; and (iii) to
expand marketing of systems integration products and services.
PRODUCTS AND SERVICES
INTRODUCTION
The Company has three business units: (1) the FIS System; (2)
Integration; and (3) Synapse. The following table lists the approximate
percentage of total revenue derived from product and service sales within each
of these business units for fiscal years 1994 through 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
BUSINESS UNIT (US Dollars)
1994 1995 1996 1997
($1,212,754) ($2,202,869) ($2,357,939) ($1,821,816)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FIS System 53% 23% 54% 49%
Integration 39% 56% 45% 51%
Synapse 8% 21% 1% -0-%
</TABLE>
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<PAGE> 13
The Company's products and services and the nature of the market and
competition within each business unit are described below.
FIS SYSTEM BUSINESS UNIT
PRODUCTS AND SERVICES
The FIS System business unit includes the design, development,
installation and servicing of the FIS System. The FIS System provides on-line
process management for manufacturing shop floors. The FIS System utilizes
Synapse, the Company's on-line transaction processing configuration software
tool which runs on the Unix operating system (refer to "Synapse Business Unit"
below), to provide maximum configurability, maintainability and efficiency for
clients' systems.
The FIS System is designed to shorten the process time on order,
manufacturing and shipping functions (in some cases from days to hours) and to
provide management with the ability to forecast production needs minutes after
receiving an order.
The FIS System is based on a "bill of operations" concept and can be
configured specifically to provide shop floor management for a particular
manufacturing facility, in many cases without requiring the client to modify its
manufacturing shop floor methodologies or procedures. As a result, most clients
are likely to achieve a return on their computer technology investment more
quickly than by using other manufacturing scheduling systems. Many other
manufacturing scheduling software applications are based on a less adaptable
"bill of materials" concept. A bill of materials consists of a list of materials
and assembly instructions to manufacture a given product. A bill of operations,
in contrast, includes the operations (or procedures) to be performed, their
sequence, the various work centers involved, the standards for setup and run as
well as information on other manufacturing matters such as tooling, operator
skill levels, inspection operations and testing requirements.
As part of its FIS System projects, the Company provides clients with
system customization and integration services as well as necessary computer
hardware and software. The Company has installed Version 1.0 of the FIS System,
which tracks inventory, work in process and finished goods, for two
manufacturers in the knitted hosiery industry and one manufacturer in the
plastic injection molding industry.
Version 2.0 of the FIS System, which is currently under development, is
designed to enable users to perform the following tasks on-line:
- enter and track client orders
- manage work-in-process and finished goods inventory
- schedule and report production of orders
- manage shipping and all labor and materials associated with
particular orders
Version 2.0 will be comprised of the following core groups of modules:
- ORDER MANAGEMENT - includes, for example, electronic data
interchange ("EDI"), manual order processing and invoicing,
managing credit and debit memos, royalty and commission
tracking and interfacing to various client modules (e.g.,
shipping, scheduling and other vendor accounting systems)
- INVENTORY MANAGEMENT - facilitates detailed inventory control
from receiving through finished goods (including work in
process, intermediate holding inventories, etc.)
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<PAGE> 14
- MANUFACTURING EXECUTION MANAGEMENT ("MEM") - controls, for
example, the process management schedulers and bills of
operations data structure
- SHIPPING MANAGEMENT - manages all aspects of shipping
(including cartonizing, weighing, labeling, etc.) and
interfacing with various EDI products
Version 2.0 of the FIS System will also provide interfaces into various
data collection device networks and system networks; shop floor machinery and
equipment; general ledger and other accounting modules; time and attendance
systems; purchasing systems; and EDI systems for receiving vendor ship notice
manifests, generating vendor orders, receiving orders and sending ship notice
manifests.
Version 2.0 will require additional research and development
expenditures of approximately US$100,000, which will be partially funded by
Americal, an FIS System development sponsor. Version 2.0 is scheduled to be
completed during the third quarter of 1998.
The Order Management Module, the EDI interface and the FIS System base
Product Process Structure (the foundation of the MEM Module) applications were
completed and installed at Americal in the first quarter of 1997. During the
second and third quarters of 1997, the FIS System unit focused on completing the
Finished Goods Inventory Management Module and Shipping Management Modules. The
Finished Goods Inventory Management Module was installed at Americal during July
1997, and the Shipping Management Module was installed in early December 1997.
Once the Shipping Management Module has been installed, the FIS System will
include all EDI processing of orders in and shipments out. The Company
anticipates completing the development of the MEM module during the third
quarter of 1998.
If the Company is able to obtain a development sponsor, the Company
further intends to modify the FIS System so that it will run on an Oracle
platform. The Company currently has no such sponsor, and there are no assurances
that the Company will be able to obtain such a development sponsor in the
future.
In 1997 and 1996, one client accounted for approximately 58% and 43%,
respectively, of the FIS System business unit's revenues, and another client
accounted for approximately 26% and 24%, respectively, of such revenues.
MARKET
The Company will continue to market the FIS System to manufacturing
companies with annual sales between US$20 million and US$350 million and between
100 and 2,500 employees. The Company intends to focus on smaller strategic
market segments within the manufacturing business. Each strategic market segment
must conform to the following criteria:
- the segment must have no dominant providers of computer
systems and services OR must traditionally require computer
systems that are custom designed and built for individual
manufacturers
- the companies operating in the segment must conduct business
in a manner that provides a good fit with the Company's
products and services
- the companies operating in the segment must possess common
technologies, operational processes, clients and suppliers
The Company has identified the US apparel manufacturing industry as a
market segment that satisfies the above criteria and accordingly intends to
focus its initial marketing efforts within this industry.
14
<PAGE> 15
In recent years, there has been a fundamental shift in market power
from apparel manufacturers to retailers and consumers. Historically, apparel
manufacturers dictated the terms of trade with retailers and consumers and,
consequently, organized their businesses and utilized their information systems
primarily to increase manufacturing efficiency and output. Today, customers
increasingly are choosing suppliers based on their ability to match product flow
to actual customer demand. As a result, apparel manufacturers are finding it
necessary to re-engineer their businesses and re-direct their information
systems to focus on satisfying customer demand through effective order
fulfillment.
The FIS System has been designed specifically for the sophisticated
order fulfillment requirements of apparel manufacturers, enabling them to better
match product flow to actual customer demand, thereby enhancing revenue
opportunities and reducing administrative and logistics costs. Based on industry
data obtained by the Company, the Company estimates that there are approximately
3,200 plants in the US apparel manufacturing industry operated by companies
meeting the Company's market criteria.
Within the US apparel manufacturing industry, the Company intends
initially to market the FIS System to US hosiery manufacturers. In 1996, there
were 334 companies in the hosiery business operating 440 plants in the US.
Hosiery manufacturing facilities are concentrated mainly in the southeastern
region of the US. A majority of US hosiery items are produced in North Carolina;
other top producing states include Alabama, Tennessee, Georgia, Kentucky and
South Carolina (source: National Association of Hosiery Manufacturers 1995-96
Annual Industry Report). Since 1994, the Company has provided FIS System
hardware and software products and related integration and consulting services
to five clients, two of which are hosiery manufacturers.
MARKETING STRATEGY
The Company's objective is to be a leading provider of a cost effective
and flexible on-line process management system to the apparel manufacturing
industry. Version 2.0 of the FIS System is still under development and marketing
efforts have just recently begun (third quarter of 1997). The Company has
developed a marketing strategy with several key components, including the
following:
- - Finalizing Version 2.0 of the FIS System. The Company is completing the
final product development of Version 2.0 of the FIS System. The last
module under development, the MEM module of Version 2.0 of the FIS
System, is expected to be installed at Americal by the end of the third
quarter 1998. Americal is one of the largest private label
manufacturers of women's knitted hosiery in the US. The management of
Americal has been, and is expected to continue to be, willing to
showcase the Company's products and services. The Company intends to
utilize the installation at Americal to showcase the capabilities of
the FIS System.
- - Developing and enhancing sales and marketing materials. The Company
intends to update and develop new sales and marketing literature that
publicizes the new features, functions and benefits of the FIS System.
The Company intends to design and develop new industry specific
material to support the marketing effort in the US hosiery and apparel
industries.
- - Implementing and continuing marketing support activities. To support
the FIS System and promote it to the apparel manufacturing industry,
the Company intends to use direct mail, telemarketing and direct
selling activities along with the development of indirect marketing
channels comprised of system integrators. The Company has completed a
limited mailing to approximately 61 potential customers. The goal of
marketing support is to accelerate sales potential by presenting the
FIS System to prospective customers prior to completing the System's
development in an effort to establish a "pipe line" of qualified
prospects and/or development partners.
15
<PAGE> 16
- - Attending trade shows. In April 1998, the Company attended the 1998
International Hosiery Exposition at which it displayed and promoted the
FIS System.
The sales and marketing efforts relating to the FIS System are
currently being conducted, and are expected to continue to be conducted,
primarily by Harry P. Langley, President; George Mendenhall, Executive Vice
President; Donald R. Futch, Vice President of Operations; Steve Sacko, Vice
President; and one sales representative devoted exclusively to the FIS System.
The Company intends to license the FIS System rather than sell it. The
license will be comprised of two components: (1) a software initiation fee and
(2) a monthly license charge. The initiation fee provides the initial license
for the availability of the then current licensed system and is paid one time at
the execution of the contract. The monthly fee funds a continuing license to use
the system and provides the client with the ability to receive the advantages of
future education and developments.
COMPETITION
There are many suppliers of manufacturing software in the US. Certain
of these suppliers are very large and supply comprehensive solutions to
multinational and other large manufacturing companies. Examples of these
suppliers are Baan Company N.V., J.D. Edwards & Company, Oracle Corporation, SAP
AG and PeopleSoft, Inc. Many of the companies in the US hosiery industry,
however, are privately owned companies that cannot afford to purchase integrated
solutions from such major software suppliers.
There are a myriad of other smaller providers of manufacturing
solutions as well. Certain of these suppliers focus at least partially on the US
apparel manufacturing industry. These competitors include Manhattan Associates,
LLC (based in Atlanta, Georgia); i-Tech Systems, Inc. (based in Greensboro,
North Carolina); Byte Systems, Inc. (based in Mauldin, South Carolina), Network
Systems International, Inc. (based in Greensboro, North Carolina); The PRO;MAN
Group, Inc. (based in Springbrook, New York); Signature Software Systems, Inc.
(based in Sebastopol, California) and Apparel Data Systems (based in New York,
New York). All of these companies have designed software solutions specifically
for the apparel business. In addition to the above, the Company will also
compete against other providers of manufacturing solutions as well as in-house
information systems management personnel.
Since the Company only recently began actively marketing the FIS
System, the level and extent to which the Company will compete with other
manufacturing software providers is unknown. The competition in this market is
intense, and the FIS System may not be accepted by the market to the degree that
is hoped by the Company's management. Many of the Company's competitors have
greater name recognition, more extensive engineering, management and marketing
capabilities and significantly greater financial, technological and personnel
resources than the Company. Further, to the extent that the Company competes in
other strategic industry market segments in the future, the Company will face
competition from many other competitors.
The Company competes in the manufacturing software market primarily on
the basis of product and price. The FIS System addresses a variety of needs
specific to apparel manufacturers. Other software solutions, by contrast,
address primarily either the financial and material requirements or the
warehouse management and order fulfillment needs of apparel manufacturers. The
FIS System, which generally costs less than manufacturing systems developed by
larger companies, is priced competitively in the targeted mid-tier manufacturer
market.
16
<PAGE> 17
INTEGRATION BUSINESS UNIT
PRODUCTS AND SERVICES
The Integration business unit provides products and services to help
integrate clients' on-line shop floor data collection equipment (e.g., bar
coding equipment) with the clients' manufacturing software (e.g., inventory
tracking software), which typically do not communicate without integration. The
Company supplies clients with the necessary hardware and integration services or
with integration services only. The Company's revenues from integration projects
have ranged from US$1,000 to approximately US$200,000 per project.
A substantial amount of the Company's business in this area involves
integrating Intermec Corporation ("Intermec") bar coding equipment with Oracle
Corporation ("Oracle") manufacturing software. Oracle Corporation is a large
supplier of software for information management. Under a Business Alliance
Program Agreement dated May 22, 1996 between the Company and Oracle, the Company
became a member of Oracle's Business Alliance Program ("BAP"). As a BAP member,
the Company may resell certain Oracle products in exchange for varying
percentages of the sales revenues generated. The BAP Agreement has an indefinite
term but can be terminated by Oracle if the Company breaches the Agreement and
fails to correct the breach within 30 days following written notice specifying
the breach.
The Company also has an agreement with Intermec dated April 10, 1997,
pursuant to which the Company is a non-exclusive Premier Value Added Reseller of
Intermec's bar coding equipment. Intermec is a large provider of data collection
equipment. Under this Agreement, the Company receives a discount on the Intermec
equipment that the Company resells in connection with its integration services
projects. The Company also provides software that runs on hardware products
provided by IBM, Hewlett-Packard Company and NCR Corporation. The Intermec
agreement has an indefinite term; however, Intermec can terminate the Agreement
for any reason, with or without cause, upon 30 days prior written notice.
To facilitate the integration process, the Company often uses a suite
of data collection connectivity software tools and utilities developed by
Connectware Solutions Inc. (the "Connectware Tools"). By Reseller Agreement
dated as of July 26, 1994 between the Company and Connectware Solutions Inc.,
the Company agreed to market the Connectware Tools on a non-exclusive basis in
exchange for a discount on the purchase price of the Connectware Tools. This
Agreement automatically renews for successive periods of one year unless
terminated by one of the parties by written notice at least three months prior
to the expiration of the current term. Either party can terminate this Agreement
if the other fails to abide by any of the Agreement's terms and conditions,
which failure continues for a period of 10 days after written notice to remedy
such failure.
In 1997 and 1996, one client accounted for approximately 26% and 28%,
respectively, of the Integration business unit's revenues and another client
accounted for approximately 21% and 23%, respectively, of such revenues.
MARKET
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.
17
<PAGE> 18
The Company intends to focus its marketing efforts on those
manufacturing clients that use Intermec bar coding equipment. The market for
Intermec's products is extensive because automated data collection equipment can
be utilized by a variety of companies. Intermec is one of the larger
participants in this industry.
MARKETING STRATEGY
The Company has historically focused on integrating Intermec bar coding
data collection equipment with Oracle manufacturing solutions applications. The
Company has generally obtained most of this business through referrals from
Intermec. Recently, the Company has also begun receiving referrals from Oracle.
As a result, the Company has in the past, and intends to continue, to primarily
market its services and expertise to the proper personnel at Oracle and
Intermec. In particular, the Company intends to focus on developing and
strengthening its relationship with Oracle. In this connection, the Company has
joined the Oracle Applications Users Group Organization which allows it to
participate in Oracle related trade shows and events.
The Company markets its product directly to potential customers and
will continue to develop its relationships with Oracle and Intermec for
referrals. Once the Company receives a referral, it is still required to
negotiate a contract with the potential customer to use its services.
Accordingly, the Company intends to update and develop new marketing and sales
materials to support its integration business. In addition, the Company plans to
attend a selected trade show in 1998 and implement a web page to publicize its
products and services.
The sales and marketing efforts relating to the Integration business
are currently being conducted, and are expected to continue to be conducted,
primarily by Steve Sacko, Vice President of Sales, Steve Ehlman, Account
Representative for Integration Services, and the Company's project manager for
integration projects.
The Company prices its integration work primarily on a time and
materials basis and obtains contracts on the basis of the Company's expertise
and reputation. The Company's prices are competitive, but there can be no
assurance that they will continue to be so in the future.
COMPETITION
Most of the companies that the Company targets for bar coding
integration work have the ability to have their in-house management information
systems personnel perform these services, and many of these companies use their
own personnel to provide integration services. For a variety of reasons,
including time constraints and prioritizing work loads, however, companies may
choose to outsource their bar coding systems integration work. Companies of
varying sizes, including hardware and software manufacturers as well as service
vendors, provide a wide range of systems integration services. While some of
these companies are large, many of them are quite small as providing these
integration services on a limited basis does not require a great deal of
resources. Accordingly, competition for the bar coding integration business is
intense.
The Company receives most of its integration opportunities through
referrals from Intermec. The Company is aware of only three other vendors that
Intermec considers to be solutions providers for Oracle integration products.
The other three vendors are Radley Corporation (which is partially owned by
Oracle), located in the Midwestern US and specializing in providing services to
the automotive industry, Brouwer Palmer, based in the southwestern US
specializing in providing software products and services to programmers who are
developing applications for data collection within the Oracle programming
environment, and Connectware Solutions Inc., the Company's vendor for most of
the software tools and
18
<PAGE> 19
utilities used by the Company in its integration business. These three companies
typically compete with the Company for integration business referrals from
Intermec.
SYNAPSE BUSINESS UNIT
PRODUCTS AND SERVICES
The Synapse business unit focuses on developing, marketing, licensing
and servicing Synapse to those organizations that need on-line transaction
processing services software, including organizations in the financial
transaction processing industry. Synapse is a software tool that is used to
develop on-line transaction processing ("OLTP") applications. During 1997 and
1996, this business unit provided minimal revenue to the Company while it
focused on completing the research and development of FIS Version 2.0 and
initiating the marketing of Synapse.
Synapse-based OLTP applications are distinguishable from many other
OLTP applications used today. Most other OLTP applications are rigidly
structured with fixed file or database formats and hard-coded routing and
processing techniques, making these software packages expensive to customize and
maintain. Other current tools do offer some application development
configuration capabilities but are still basic and make the configuration of
complex transaction processing difficult.
Synapse, by contrast, is intended to be adaptable and to provide
facilities for the configuration of all aspects of complex OLTP applications.
With Synapse, new applications or updates to existing applications, for example,
can be installed and distributed on-line without the need to restart operating
OLTP systems or interrupt transaction traffic. This capability is particularly
important to providers of critical, around-the-clock OLTP services, such as
on-line financial transaction (e.g., automated teller machine) providers.
The development of Version 2.3, which finishes the Synapse product as
originally designed, is complete. The manuals currently being used by the
Company and clients were developed for "in-house" use where programmers have
access to the developers of the base Synapse product. Therefore, the
documentation was not required to be as extensive and non-technical as it should
be for clients and non-Company developers. If funds become available, the
Company plans to continue research and development efforts to create a more
detailed version of user and administrative manuals.
MARKET, STRATEGY AND COMPETITION
The Company is not currently marketing Synapse as a stand-alone
product; rather, the Company markets Synapse as part of its FIS System
applications that are licensed to clients as a package (the Company does not
separately license Synapse). As a result, the Synapse business unit does not
currently face direct competition.
PROPRIETARY PROTECTION
The Company relies on unpatented proprietary know-how and trade
secrets. The Company does not have any patent protection for its technology in
Canada or the US and has not registered any copyrights. The Company is currently
undertaking the analysis and administrative actions as may be necessary to
obtain a patent on certain of its software technology. As with many software
developers, the Company relies primarily on a combination of copyright,
trademark and trade secret laws, confidentiality procedures, contractual
provisions and the complex nature of the technologies to protect its
intellectual property.
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<PAGE> 20
The Company's license agreements with clients contain provisions
whereby the clients agree not to copy or reproduce any of the software or
documentation provided by the Company (including copyright notices) except for
back-up or recovery purposes and not to reverse engineer the Company's software.
The Company's FIS System license agreements provide for the ownership rights of
FIS System applications to remain exclusively with the Company. The FIS System
applications are written in the Synapse fourth generation language developed by
the Company which is made available only to clients that purchase a development
version of the Synapse software. Further, the Company does not provide the
source code for Synapse to clients.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings and is not aware of
any threatened litigation that could have a material adverse effect on the
Company's business, financial condition and results of operations.
EMPLOYEES
At May 6, 1998, the Company employed 26 persons, all of whom were
full-time employees. The Company is not subject to any collective bargaining
agreements and believes that its relationship with its employees is good.
FACILITIES
The Company does not own any real estate and operates principally from
leased premises in Columbia, South Carolina where the Company leases
approximately 7,000 square feet of office space pursuant to a Lease Agreement
dated November 8, 1995 between the Company and Atrium Northeast Limited
Partnership. The base rent amount is approximately US$120,000 per year. The
lease expires on October 1, 1999 and may be renewed for a five-year term at
market rates.
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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 Prospectus.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
FINANCIAL OPERATIONS SUMMARY
The following table summarizes the 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
<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 7,987,763 3,600,000 3,600,000 (1)
</TABLE>
(1) 4,530,000 Class A common shares (retroactively adjusted for the stock
split of the Company's shares discussed in note (2) below) and 250
Class B common shares.
(2) As of 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. All
share numbers in the table retroactively reflect the Company's stock
split, which occurred on March 5, 1997.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues decreased US$536,123 (approximately 23%) from
US$2,357,939 in 1996 to US$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 US$80,500 in 1996. In addition, in
1996, the Company received payment of US$ 123,844 for services rendered during
1994 and 1995, the collection of which the Company did not view to be realizable
until 1996. This decrease was partially offset due to a 7% increase in revenues
in the Integration business due to increased sales.
Cost of Sales. Cost of Sales decreased US$152,103 (approximately 15%)
from US$1,045,500 in 1996 to US$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 US$30,844 (approximately 8%) from US$362,983 in 1996 to US$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 US$15,392 (approximately 2%) from
US$995,261 in 1996 to US$1,010,653 in 1997. This increase was primarily
attributable to the cost of the Company's new in-house counsel and a US$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 US$123,868
(approximately 60%) from US$207,460 in 1996 to US$331,328 in 1997. This increase
was primarily attributable to a write-off of prepaid commissions in the amount
of US$74,312 in September and US$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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenues increased by US$155,070 (approximately 7%) from
US$2,202,869 in 1995 to US$2,357,939 in 1996. This increase was primarily
attributable to an approximately 139% increase in revenue in the Company's FIS
System business unit. As previously discussed, included in this
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<PAGE> 23
increase in revenue for the FIS System business unit was a payment of US$123,844
for services previously rendered. This increase was offset partially by an
approximately 18% decrease in revenues in the Company's integration business and
an approximately 86% decrease in the Company's Synapse business unit, which was
due to the winding down of the large project relating to the financial
transaction processing industry. As a result of the decrease in the integration
business, revenues from hardware sales decreased approximately 40% in 1996 from
1995.
Cost of Sales. Cost of sales decreased US$115,139 from US$1,160,639 in
1995 to US$1,045,500 in 1996 or approximately 10%. This decrease was primarily
attributable to a decrease in hardware costs as a result of the purchase of less
hardware in the integration business. This decrease was partially offset by an
increase in 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 US$70,133 (approximately 24%) from US$292,850 in 1995 to US$362,983 in
1996. This increase was primarily attributable to a substantial increase in the
research and development activities relating to the FIS System, which was
partially offset by the winding down of the large project relating to the
financial transaction processing industry. Research and development costs
represented approximately 13% and 15% of total revenues for 1995 and 1996,
respectively.
General and Administrative. General and administrative expenses,
including interest expense, increased US$304,026 (approximately 44%) from
US$691,235 in 1995 to US$995,261 in 1996. This increase was primarily
attributable to moving the owners' compensation almost entirely from corporate
draws to salary as permitted by Subchapter S of the US Internal Revenue Code
which resulted in an increase to salary expense of US$236,605; an increase of
US$42,627 or approximately 64% in the rent expense due to the full year effect
of the Company leasing additional space in its building beginning in 1995; and
the payment of US$16,453 in interest relating to a loan in the principal amount
of US$180,000 obtained by the Company in February 1996. General and
administrative expenses represented approximately 31% and 42% of total revenues
for 1995 and 1996, respectively.
Sales and Marketing. Sales and marketing expenses increased US$33,692
(approximately 19%) from US$173,768 in 1995 to US$207,460 in 1996. This increase
was due primarily to an increase in sales commissions because of increased
commissioned sales and increased marketing travel. Sales and marketing expenses
represented approximately 8% and 9% of total revenues for 1995 and 1996,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception the Company has primarily attempted to finance its
operations through revenues from operations, including funded research and
development revenues, and occasional short term loans from the Company's
principals or their acquaintances. The Company, however, has had a net loss
every year of its existence except 1994, in which year it had net income of
US$31,373; therefore, the Company's operations have led to a growing working
capital deficit and a decrease in shareholders' equity. Accordingly, the Company
has had liquidity problems from time to time. As of December 31, 1994, 1995,
1996 and 1997, the shareholders' equity (deficit) of the Company was
US$(339,768), US$(569,277), US$(860,305) and US$91,953, respectively. As of
December 31, 1994, 1995, 1996 and 1997, the Company's working capital deficit
was US$534,185, US$792,232, US$956,920 and US$156,566, respectively.
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
23
<PAGE> 24
loan for US$180,000 collateralized by substantially all of the assets of the
Company. This loan is being repaid in sixty equal monthly installments.
The Company also issued two convertible promissory notes in March 1997
in the principal amount of approximately US$190,000 to two investors, and, in
March 1997, executed a promissory note to a significant vendor of the Company in
the amount of approximately US$320,000 in connection with various payments owed
to this vendor.
On June 3, 1997, the Company sold 1,300,000 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
US$420,000. After deducting offering costs of approximately US$100,000 the net
proceeds to the Company from that offering were approximately US$320,000.
In the fourth quarter of 1996, the Company made a strategic decision to
concentrate on completing its research and development relating to the FIS
System Version 2.0, and initiating the sales and marketing 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 US$350,000 per year as a result of the elimination of one
programmer position (effective August 12); the elimination of the in-house
counsel position (effective September 15); the departure of the Company's sales
and marketing director, whose duties will be performed by the President and
other personnel (effective September 19); and a reduction in the salaries of
several executives and administrative personnel (effective September 1). This
reduction, which primarily related to administrative overhead, should not
disrupt the current sales process, continuing revenue generation or research and
development. In addition, in October 1997, the Company's sales representative
who primarily focused on integration sales left the Company. As a result of this
departure, the Company wrote off in October 1997, US$67,261 in prepaid
commissions.
On November 26, 1997, the Company consummated an initial public
offering of its common stock. In this initial public offering, the Company sold
2,500,000 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
US$1,586,966. After deducting offering costs of US$367,692, the net proceeds to
the Company from that offering were US$1,219,274. The Company used a portion of
these proceeds to repay the promissory note to a significant vendor of the
Company in the amount of approximately US$320,000 discussed above.
In addition, in connection with the consummation of the initial public
offering, one of the convertible notes issued by the Company in March 1997 in
the principal amount of US$116,700 was converted into shares of Common Stock.
The other convertible note in the principal amount of US$70,532 plus
approximately US$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 US$69,411.
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
24
<PAGE> 25
US$120,000. Rent expense under this lease in 1997 and 1996 was approximately
US$134,000 and US$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 described under "Business -
General." Management intends, however, to closely follow the Company's progress
and to reduce expenses if the Company's strategies outlined herein do not result
in sufficient revenues within a reasonable period. Any such reduction will
involve scaling back, delaying or postponing those development activities that
are not essential to the Company achieving its stated objectives. In any event,
the working capital deficit will continue to grow unless and until revenues
increase sufficiently to meet expenditure levels.
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 US$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 US$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 US$0.923 during the first year of the
Notes up to US$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. See "Risk Factors."
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 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.
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<PAGE> 26
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
The following table sets forth certain information with respect to each
of the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
<S> <C> <C>
Harry P. Langley .............................. 41 President, Treasurer, Chief Executive Officer, Chief
Financial Officer and Chairman of the Board
George E. Mendenhall, Ph.D..................... 59 Executive Vice President, Vice President of
Application Development and director
Stuart E. Massey .............................. 38 Vice President of Engineering, Secretary and director
Donald R. Futch................................ 47 Vice President of Operations
Stephen A. Sacko............................... 43 Vice President of Sales
</TABLE>
Mr. Langley has served as the President, Treasurer, Chief Executive
Officer, Chief Financial Officer, Chairman of the Board and a director of the
Company since the Company's incorporation in 1990. As a full-time employee of
the Company, Mr. Langley's responsibilities include overseeing the day-to-day
management of the business, performing duties as treasurer and chairing Board
meetings. Mr. Langley attended Midlands Technical College in Columbia, SC and
received an Associates degree in Computer Sciences in 1987. Mr. Langley first
began working in the area of computer software integration as an on-site project
coordinator in South Carolina for Synergistic Business Infrastructures
Corporation ("SBI"). SBI was a computer systems integrator based in Fort Wayne,
Indiana that specialized in the conceptualization, design and implementation of
manufacturing shop floor systems, data collection systems and material tracking
systems (among other things).
Dr. Mendenhall became an employee of the Company in February 1994,
serving as the director of industrial consulting. In May 1995, Dr. Mendenhall
became the Executive Vice President and a director of the Company and has also
served as Vice President of Application Development since January 1998. As a
full-time Company employee, Dr. Mendenhall's responsibilities include overseeing
the day-to-day management of the FIS System business unit. Dr. Mendenhall
received a Bachelor of Science degree in Economics from Manchester College in
1960 and a masters degree and a Ph.D. in Economics from Indiana University in
1968 and 1978, respectively. Dr. Mendenhall has conducted academic research and
taught economics and other courses at Indiana University and Indiana Institute
of Technology. In addition, he has published articles concerning research and
evaluation techniques and has been quoted in such periodicals as Computer World
and Industry Week. Before joining the Company, Dr. Mendenhall provided
consulting services and/or computer systems to various large manufacturing
companies on an independent basis and, from 1990 through February 1994, provided
consulting services to the Company. From 1984 until 1989, Dr. Mendenhall was the
President of SBI.
Mr. Massey has served as a Vice President of Engineering and a director
of the Company since April of 1991. Mr. Massey is also the Company's Secretary.
As a full-time Company employee, his responsibilities include the day-to-day
management and coordination of large projects, including the continuing
maintenance of the Synapse software configuration tool. Mr. Massey received a
Bachelor of Science degree in Electrical and Computer Engineering from the
University of South Carolina in 1986. Before joining the Company, Mr. Massey
managed the implementation of an inter-bank financial transaction switch for
automated teller machine and point-of-sale systems and assisted in the design of
financial transaction processing software products for Applied Communications,
Inc. (among other things) Mr. Massey's experience in the industrial automation
industry includes the design of a variety of computer
26
<PAGE> 27
control systems, such as airport lighting, industrial machine tool control,
inventory control and shop floor control systems.
Mr. Futch has served as Vice President of Operations since joining the
Company in January 1998. Mr. Futch is responsible for customer related projects,
including project management, account management, programming, quality
assurance, training and documentation. Mr. Futch received a masters degree in
business administration with an emphasis in marketing research from the
University of South Carolina in 1974. From October 1994 until he joined the
Company, Mr. Futch served as Chief Information Officer for Telequest
Corporation. Mr. Futch was awarded a patent for the creation of a
telecommunications based home banking system in August 1997. From May 1992 until
joining Telequest in October 1994, Mr. Futch served as Vice President of
Association Membership Services, Inc. (d/b/a Electronic Merchant Services),
where he served primarily as an electronic payments system integrator to the
hotel industry. From January 1983 through April 1992, Mr. Futch was a Technical
Consultant for AT&T.
Mr. Sacko has served as Vice President of Sales of the Company since
January 1998. He is responsible for all sales activity of the Company, including
software, services and hardware. Prior to holding his current office, he had
served since joining the Company in April 1977 as Senior Sales Executive
responsible for the creation of an overall sales environment focusing on the
Company's FIS System Version 2.0 software product. Prior to joining the Company,
Mr. Sacko had served since January 1994 as the Manager of General Information
Services ("GIS") for Policy Management Systems Corporation, a worldwide provider
of software and related support services ("PMSC"). While under his sales
management, GIS improved its overall profit margins by 11%. GIS was a $96
million business at the time the GIS business unit was sold by PMSC after Mr.
Sacko's departure. Prior to his service with the GIS business unit, Mr. Sacko
had served since December 1991 as Assistant Vice President and Division Manager
of the Total Policy Management Unit ("TPM") of PMSC. While under his management,
recurring revenues of TPM grew from $600,000 to $31.2 million. While with PMSC,
Mr. Sacko was recognized on numerous occasions for his sales achievements and
corporate contributions. Mr. Sacko has been a member of the ISSC Society of
Super Software Sellers since 1988.
BOARD OF DIRECTORS
The Company's Articles of Incorporation provide that the number of
directors of the Company may not be less than three or more than eleven. If, at
any time, the Board is constituted of six or more directors, then the Board of
Directors must be divided by the Board into three classes as nearly equal in
number as possible with the terms of office for the classes staggered over a
three-year period. Directors chosen to succeed those whose terms expire will be
elected for three year terms. Currently, the Board only has one committee - the
Option Committee. See "Stock Option Plan" below.
The Board has nominated Bartow Gilbert, the President of MidSouth
Capital, Inc., a company located in Columbia, SC, to serve on the Board of
Directors contingent upon a fifth director being nominated and elected.
On April 22, 1998, the Company and Crescent executed a letter of intent
in contemplation of a possible private placement by the Company of five-year
convertible notes and two-year stock purchase warrants. For additional
information regarding this proposed private placement, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Proposed Private Placement." One of the proposed terms of the private placement
contemplated by the letter of intent is the right of Crescent to nominate one
member to the Company's Board of Directors, with two additional nominees to be
selected by agreement between the Company and Crescent. To the extent a
definitive agreement incorporating this provision is executed between the
parties and the proposed private placement is completed as contemplated, it is
expected that promptly following the closing of the proposed private
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<PAGE> 28
placement the Board of Directors will expand the size of the existing Board from
three to seven members and will fill the four vacancies created through such
expansion by the appointment of Bartow Gilbert (pursuant to the nomination
described in the preceding paragraph), the nominee of Crescent and the two
nominees agreed upon between the Company and Crescent.
Pursuant to the Company's Bylaws provisions relating to the size of the
Board of Directors increasing to six or more members, as a seven-member Board of
Directors, the Board will be divided into two classes of two directors each and
one class of three directors. The three classes will each serve a three-year
term, with the terms staggered so that the term of only one class of directors
expires at each year's annual meeting of shareholders.
DIRECTOR COMPENSATION
The directors of the Company, who are all executive officers of the
Company as well, are not compensated for serving as directors of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation provide that a director of the
Company shall not be personally liable to the Company or any of its shareholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its shareholders, (ii) for acts or omissions not in good faith or which involve
gross negligence, intentional misconduct or a knowing violation of law, (iii)
for any unlawful distribution as set forth in the Code of Laws of South Carolina
(the "South Carolina Code") or (iv) for any transaction from which the director
derived an improper personal benefit. These provisions may have the effect in
certain circumstances of reducing the likelihood of derivative litigation
against directors. While these provisions may eliminate the right to recover
monetary damages from directors in various circumstances, rights to seek
injunctive or other non-monetary relief is not eliminated.
28
<PAGE> 29
EXECUTIVE COMPENSATION
The following table is a summary of the compensation paid to each of
the executive officers of the Company whose compensation for services rendered
to the Company exceeded $100,000 in any of the three most recently completed
fiscal years.
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
------------ ----------------
NAME AND PRINCIPAL SALARY(1) SECURITIES UNDER ALL OTHER
POSITION YEAR (US$) OPTION (#) COMPENSATION (US$)(2)
- ----------------------------------------- ---- ------------ ---------------- ---------------------
<S> <C> <C> <C> <C>
Harry P. Langley 1995 38,750 -0- 37,443
President, Treasurer, Chief Executive 1996 100,957 -0- 12,558
Officer, Chief Financial Officer and 1997 72,497 50,000(3) 17,703
Chairman of the Board
George E. Mendenhall 1995 41,875 -0- 34,500
Executive Vice-President 1996 100,957 -0- 12,558
1997 72,497 50,000(3) 17,703
Stuart E. Massey 1995 38,750 -0- 37,443
Vice-President and Secretary 1996 100,957 -0- 12,558
1997 72,497 50,000(3) 17,703
</TABLE>
(1) The Company entered into employment agreements with each of Messrs.
Langley, Mendenhall and Massey dated on or about January 1, 1997.
These employment agreements were amended as of September 1, 1997 to
provide for a reduction of salary paid to each executive officer from
US$100,000 to US$70,000. The Company's Board of Directors may review
these salaries and, in light of the Company's performance as it
relates to the Company's budget approved by the Board of Directors,
consider an increase. For 1998, these salaries cannot exceed
US$100,000. In addition, Messrs. Mendenhall and Massey may receive
bonuses at the discretion of the Company's President, and Mr. Langley
may receive a bonus at the discretion of the Company's Board of
Directors.
(2) These amounts represent funds withdrawn by the Company's principals as
permitted by Subchapter S of the United States Internal Revenue Code
("Subchapter S"). The Company's shareholders had elected to have the
income tax treatment provided by Subchapter S until April 18, 1997.
Effective April 18, 1997, the Company's Subchapter S corporation
status was terminated.
(3) At an exercise price of $1.00 (Cdn.) per share. All of the options
granted to Messrs. Langley, Mendenhall and Massey vested and became
exercisable on April 7, 1998.
STOCK OPTION PLAN
The Issuer's Board of Directors on April 29, 1997, adopted a stock
option plan (the "Option Plan") pursuant to which directors, officers, and
employees, as well as consultants to the Company may be granted stock options.
The effective date of the Option Plan is April 29, 1997. The Option Plan will
terminate ten years from the effective date. The maximum number of common shares
of the Company reserved for issuance under the Option Plan, including options
currently outstanding, will not exceed 960,000. The number of common shares
reserved for issuance to any one person cannot exceed 5% of the number of issued
and outstanding common shares, and no person is entitled to receive in any one
year grants regarding more than 50,000 shares. The Option Plan is administered
by a committee (the "Option Committee") of the Issuer's Board of Directors
currently comprised of Messrs. Langley, Mendenhall and Massey. As of April 30,
1998, 390,360 options were outstanding under the Option Plan, including 50,000
29
<PAGE> 30
options each to Messrs. Langley, Mendenhall and Massey; 45,000 options to Mr.
Futch; and 25,000 options to Mr. Sacko.
EMPLOYMENT CONTRACTS
Messrs. Langley, Mendenhall and Massey have each entered into a
two-year employment contract with the Company effective on or about January 1,
1997, which was amended effective September 1, 1997. Under the terms of their
employment contracts, Messrs. Langley, Mendenhall and Massey agree to act as the
Company's President and Treasurer, Executive Vice President and Vice President,
respectively, in exchange for annual compensation each of US$70,000. If the
contract is terminated by the Company without cause, the Company will be
required to pay the affected executive officer an amount equal to the greater of
(1) the total salary and benefits due to the executive officer for the remainder
of the term of the employment contract or (2) one year's total salary and
benefits.
Messrs. Futch and Sacko have each entered into a one-year employment
contract with the Company effective on January 1, 1998. Under the terms of their
employment contracts, Messrs. Futch and Sacko agree to act as the Company's Vice
President of Operations and Vice President of Sales, respectively, in exchange
for annual compensation of US$75,000 and US$55,000, respectively. In addition,
the contract with Mr. Sacko provides for the payment of commissions in
accordance with the commission schedule approved by the Board of Directors. Mr.
Sacko's contract guarantees him a minimum of US$100,000 in salary and
commissions for the fiscal year ended December 31, 1998. The contract with Mr.
Futch provides for a signing bonus in the form of the grant of a stock option
under the Company's Option Plan for the purchase of 20,000 shares of Common
Stock. Each of the contracts of Mr. Futch and Mr. Sacko also provide for the
grants in each of 1998 and 1999 of stock options under the Company's Option Plan
for the purchase of 25,000 shares of Common Stock. The exercise price on all of
the options contemplated by the contracts of Messrs. Futch and Sacko is the fair
market value of the Common Stock on the date of grant. One-half of the stock
options vests six months from the date of grant with the balance vesting one
year from the date of grant.
Messrs. Mendenhall and Massey may receive a bonus at the discretion of
the Company's President. Messrs. Langley, Futch and Sacko may receive a bonus at
the discretion of the Company's Board of Directors. In addition to the
foregoing, the Company has also agreed to provide each executive officer with
life insurance, medical insurance, vacation leave, sick leave and other
benefits, such as stock options, as may be approved by the Board of Directors.
Each executive officer is also eligible to participate in the Company's employee
benefit plans, including any established retirement, profit sharing or deferred
compensation plan.
Each of the Company's employment contracts contains a non-competition
clause restricting the employee's ability to compete with the business of the
Company during the term of the contract and for a period of one to two years
thereafter in those states where the Company had clients when the employment
contract was terminated. Each contract also contains a provision limiting the
disclosure of confidential or trade secret information of the Company.
Each of the Company's employment contracts renews automatically for
one-year terms unless the Company or the executive officer provides written
notice of termination at least 90 days before the end of the current term.
CERTAIN TRANSACTIONS
Other than their employment agreements with the Company (refer to
"Management-Employment Contracts" above), no material transactions involving the
directors, senior officers or principal holders of the Company's securities have
occurred since the Company was incorporated except for several loans
30
<PAGE> 31
previously made to the Company by the Company's principals. As at March 31,
1997, the Company owed Messrs. Langley, Mendenhall and Massey and Mr. Langley's
father an aggregate outstanding principal amount of US$33,554 under various
notes. The loan from Mr. Massey bore interest at the rate of 10% per annum; the
loans from Mr. Langley and his father bore interest at the rate of 18% per annum
to mirror the cost to them of the money loaned to the Company; and the loan from
Dr. Mendenhall bore no interest. In 1997, the Company repaid these notes (and
accrued interest thereon) in full.
In July 1997, Messrs. Langley, Mendenhall and Massey loaned US$30,000,
US$10,000 and US$10,000, respectively, to the Company under demand notes bearing
interest at the rate of 18% per annum, which interest rate mirrors the cost to
Messrs. Langley, Mendenhall and Massey of the money loaned to the Company.
Effective as of August 29, 1997, Messrs. Langley, Mendenhall and Massey agreed
to convert outstanding amounts of US$11,000, US$9,000 and US$9,000 under these
notes into a further capital contribution to the Company. As of August 31, 1997,
the only remaining note was a demand note to Mr. Langley in the principal amount
of US$18,000. This note was repaid by the Company using a portion of the
proceeds from the initial public offering.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of April 30, 1998 of (a) each
director of the Company, (b) each executive officer of the Company, and (c) each
shareholder known by the Company to own five percent or more of the Common
Stock, and (d) all directors and executive officers of the Company, as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage
Name of Beneficial Owner (1) Beneficially Owned(2) Ownership
- ----------------------------------------- --------------------- ---------
<S> <C> <C>
Harry P. Langley..................................................... 1,251,000 (3)(4) 15.4%
George E. Mendenhall................................................. 1,250,000 (3) 15.4
Stuart E. Massey..................................................... 1,250,000 (3) 15.4
Donald R. Futch...................................................... 22,500 (5) *
Stephen R. Sacko..................................................... 14,900 (5) *
Wolverton Securities Ltd............................................. 456,300 (6) 5.4
All executive officers and directors as a group (5 persons) 3,787,401 45.8
</TABLE>
- ----------
* Less than 1.0 percent
(1) The address of Messrs. Langley, Mendenhall and Massey is Suite 128, 115
Atrium Way, Columbia, South Carolina 29223. Wolverton's address is 17th
Floor, 777 Dunsmuir Street, Vancouver, British Columbia, V7Y1J5.
(2) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission (the "Commission"). Shares of Common
Stock subject to options or warrants currently exercisable or
exercisable within 60 days of the date of this Prospectus are deemed
outstanding for computing the percentage beneficially owned by such
holder but are not deemed outstanding for purposes of computing the
percentage beneficially owned by any other person. As of April 30,
1998, 8,088,563 shares of Common Stock of the Company were issued and
outstanding. All of the shares owned by Messrs. Langley, Mendenhall and
Massey are performance shares. See "Description of Capital Stock
Performance Shares."
(3) Includes 50,000 shares issuable upon exercise of stock options.
(4) Includes 1,000 shares held by a family member.
(5) All shares issuable upon exercise of stock options.
(6) Includes 386,000 shares issuable upon exercise of the Warrants.
31
<PAGE> 32
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000
shares of Common Stock, no par value, and 10,000,000 shares of preferred stock
(the "Preferred Stock"). On April 30, 1998, there were 8,088,563 shares of
Common Stock issued and outstanding. No shares of Preferred Stock are currently
outstanding.
COMMON STOCK
Subject to the rights of the holders of any outstanding shares of
Preferred Stock and any restrictions that may be imposed by applicable laws or
regulations or by any lender to the Company, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of legally available funds. See "Dividend Policy." In the
event of the liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share ratably, based on the number of shares held,
in the assets, if any, remaining after payment of all of the Company's debts and
liabilities and the liquidation preference of any outstanding series of
Preferred Stock having a liquidation preference over the Common Stock.
Holders of Common Stock are entitled to one vote per share for each
share held of record on any matter submitted to the holders of Common Stock for
a vote. Because holders of Common Stock do not have cumulative voting rights,
the holders of a majority of the shares of Common Stock represented at a meeting
can elect all of the directors. Holders of Common Stock do not have conversion,
redemption or preemptive rights.
PREFERRED STOCK
The Company's authorized shares of Preferred Stock may be issued in one
or more series, and the Board of Directors is authorized, without further action
by the shareholders, to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Board of Directors also may designate par
value, preferences in liquidation and the numbers of shares constituting any
series. The Company believes that the availability of Preferred Stock issuable
in series will provide increased flexibility in structuring possible future
financings and acquisitions, if any, and in meeting certain other corporate
needs. It is not possible to state the actual effect of the authorization and
issuance of any series of Preferred Stock upon the rights of holders of Common
Stock until the Board of Directors determines the specific terms, rights and
preferences of a series of Preferred Stock. However, such effects might include,
among other things, restricting dividends on the Common Stock, diluting the
voting power of the Common Stock, or impairing liquidation rights of such shares
without further action by holders of the Common Stock. In addition, the Board of
Directors is authorized at any time to issue Preferred Stock with voting,
conversion or other features that may have the effect of impeding or
discouraging a merger, tender offer, proxy contest, the assumption of control by
a holder of a large block of the Company's securities or the removal of
incumbent management. Issuance of Preferred Stock could also adversely affect
the price of the Common Stock. The Company has no present plan to issue any
shares of Preferred Stock.
CERTAIN PROTECTIVE PROVISIONS
General
The Articles and Bylaws of the Company and the South Carolina Code
contain certain provisions designed to enhance the ability of the Board of
Directors to deal with attempts to acquire control of the Company. These
provisions may be deemed to have an anti-takeover effect and may discourage
takeover attempts which have not been approved by the Board of Directors
(including potential takeovers which
32
<PAGE> 33
certain shareholders may deem to be in their best interest) and may adversely
effect the price that a potential purchaser would be willing to pay for the
Company's stock. These provisions also could discourage or make more difficult a
merger, tender offer or proxy contest, even though such transaction may be
favorable to the interests of shareholders, and could potentially adversely
effect the price of the Common Stock.
The following briefly summarizes protective provisions contained in the
Articles, the Bylaws and the South Carolina Code. This summary is necessarily
general and is not intended to be a complete description of all the features and
consequences of these provisions, and is qualified in its entirety by reference
to the Articles, the Bylaws and the provisions of the South Carolina Code.
Preferred Stock
The issuance of shares of Preferred Stock with special voting rights,
liquidation preferences, redemption privileges or conversion rights could delay,
defer or prevent a change in control of the Company. As stated above, the
Company has no present intention to issue any Preferred Stock.
Classification of Directors
Once the Board of Directors is constituted of six of more directors,
the Company's Board of Directors will be classified so that, as nearly as
possible, one-third of the Board of Directors will be elected each year to serve
a three-year term. This classification would delay an attempt by dissatisfied
shareholders or anyone who obtains a controlling interest in the Company to
elect a new Board of Directors, because, absent the removal, resignation or
death of the members of the Board, it would take three annual meetings of
shareholders to change fully the composition of the Board.
Removal of Directors
The Articles provide that a director of the Company may be removed only
for "Cause" as defined in the South Carolina Code. Under the South Carolina
Code, "Cause" means fraudulent or dishonest acts, or gross abuse of authority in
the discharge of duties to the Company, and must be established after written
notice of specific charges and an opportunity to meet and refute such charges.
Evaluation of Offers
The Articles provide that, when evaluating any offer relating to a
tender offer, merger, consolidation, sale of assets or similar transaction, the
Board may, in its discretion, give due consideration to a variety of factors, in
addition to the offered price, including (a) the social, legal, and economic
effects on the employees, customers, suppliers, and other constituencies of the
Company, on the communities and geographical areas in which the Company operates
or is located, and on any of the business and properties of the Company, as well
as such other factors as the directors deem relevant; and (b) all features of
the consideration being offered, not only in relation to the then current market
price for the Company's outstanding shares of capital stock, but also in
relation to the then current value of the Company in a freely negotiated
transaction and in relation to the Board of Director's estimate of the future
value of the Company (including the unrealized value of its properties and
assets) as an independent ongoing concern.
Advance Notice Procedure
The Bylaws of the Company establish an advance notice procedure for (1)
shareholder proposals to be brought before a meeting of shareholders of the
Company and (2) nominations by shareholders of candidates for election as
directors at an annual meeting or a special meeting at which directors are to be
elected. Subject to any other applicable requirements, only such business may be
conducted at a meeting
33
<PAGE> 34
of shareholders as has been brought before the meeting by, or at the direction
of, the Board or by a shareholder who has given to the Secretary of the Company
timely written notice, in proper form, of the shareholder's intention to bring
that business before the meeting. Only the presiding officer at such meeting has
the authority to make such determinations. Only persons who are selected and
recommended by the Board or by a committee of the Board designated to make
nominations, or who are nominated by a shareholder who has given timely written
notice, in proper form, to the Secretary of the Company prior to a meeting at
which directors are to be elected, will be eligible for election as directors of
the Company.
To be timely, notice of business to be brought before any annual
meeting must be received by the Secretary of the Company not later than 90 days
in advance of the annual meeting. Notice of nominations must be received by the
Secretary 90 days in advance of an annual meeting, and, with respect to an
election to be held at a special meeting of shareholders for the election of
directors, the close of business on the seventh day following the date on which
notice of such meeting is first given to shareholders. The notice of any
shareholder proposal or nomination for election as a director must set forth the
various information required under the Bylaws. The person submitting the notice
of nomination must provide, among other things, the name and address under which
the shareholder appears on the Company's books (if he so appears) and the class
and number of shares of the Company's capital stock owned by such shareholder.
PERFORMANCE SHARES
Under Local Policy Statement 3-07 of the British Columbia Securities
Commission (the "Policy"), the 1,200,000 common shares owned by each of Messrs.
Langley, Mendenhall and Massey constitute performance shares. These performance
shares constitute approximately 45% of the total number of issued and
outstanding shares of the Company.
The performance shares are being held pursuant to the terms of an
escrow agreement among the Company, Pacific Corporate Trust Company, as Escrow
Agent, and the holders of the performance shares (the "Escrow Agreement"). The
Escrow Agreement is in the form required by the Policy and provides that the
performance shares must remain in escrow until the Exchange permits them to be
released from escrow or requires them to be canceled. The performance shares may
be released from escrow, on a pro-rata basis, based upon the cumulative cash
flow of the Company beginning January 1, 1998, as evidenced by the Company's
annual audited financial statements. "Cash flow" is defined in the Policy to
mean net income or loss before tax, adjusted for certain add-backs. For each
$0.91 of cumulative cash flow generated by the Company from its operations, one
performance share may be released from escrow. To date, no shares have been
released from escrow.
The holders of the performance shares may not transfer their
performance shares except in accordance with the Policy and only with the
consent of the Executive Director of the British Columbia Securities Commission
or the Exchange. A holder of performance shares has the right to vote the
shares, except on a resolution to cancel the shares, but has waived the right to
receive dividends and to participate in the assets and property of the Company
on a winding-up or dissolution of the Company. A holder of performance shares
who ceases to be a principal, as that term is defined in the Policy, dies or
becomes bankrupt, is entitled to retain any performance shares then held by him
and is not obligated to transfer or surrender the shares to the Company or to
any other person. The performance shares must be surrendered for cancellation if
the Company's shares are the subject of a cease trade order for two consecutive
years. Any performance shares that are not released from escrow 10 years from
the later of the date of the issue of the shares and the date of the receipt for
the Company's final prospectus (October 7, 1997) must be surrendered for
cancellation.
34
<PAGE> 35
WARRANTS
In consideration for Wolverton agreeing to purchase any shares not sold
at the conclusion of the Company's initial public offering (the "Guarantee"),
the Company granted to Wolverton and two of its designees Warrants entitling
Wolverton and two of its designees to purchase 486,000, 10,000 and 4,000 common
shares, respectively, of the Company at any time up to the close of business two
years from the date the shares are listed, posted and called for trading on the
Exchange (November 28, 1997) (the "Listing Date"), at a price of $1.00 (Cdn.)
per share if exercised in the first year and at a price of $1.15 (Cdn.) per
share if exercised thereafter and up to the close of business two years from the
Listing Date. On April 24, 1998, Wolverton exercised warrants for the purchase
of 100,000 common shares at a price of $1.00 (Cdn.) per share. The Warrants
contain, among other things, standard anti-dilution provisions and provisions
for the appropriate adjustment in the class, number and price of shares issuable
pursuant to any exercise thereof upon the occurrence of certain events,
including any subdivision, consolidation or reclassification of the shares of
the Company or payment of stock dividends. This prospectus relates to the offer
and sale of 400,000 shares of the Company's Common Stock pursuant to these
Warrants.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent of the Company is Pacific Corporate
Trust Company at its principal office in Vancouver, Suite 830, 625 Howe Street,
Vancouver, British Columbia, V6C 3B8.
PLAN OF DISTRIBUTION
The Warrant holders may exercise their Warrants in whole or in part by
providing notice and tendering the necessary funds. The shares of Common Stock
purchased under the Warrants could be sold, if desired, by the exercising
Warrant holder on the VSE.
AGREEMENTS WITH WOLVERTON
Pursuant to the terms of a Sponsorship Agreement dated as of May 28,
1997, Wolverton has agreed to provide the following sponsorship services to the
Company in exchange for an oversight fee of $18,000 and the payment of a $5,000
retainer to be applied against expenses incurred by Wolverton:
(a) prepare and deliver a sponsorship letter to the VSE in support of the
Company's application for listing on the VSE; and
(b) for the twelve months following the Company's listing on the VSE,
monitor the management, operations and performance of the Company, the
financial, corporate and other securities filings filed by the Company
with the VSE and the British Columbia Securities Commission (including,
without limitation, news releases, quarterly reports and financial
information) and the overall direction of the Company.
Wolverton may terminate the Sponsorship Agreement upon the occurrence
of certain events, such as a material change in the assets, liabilities,
business operations or capital of the Company; a breach of the terms of the
Sponsorship Agreement by the Company; the commencement (or threatened
commencement) of an inquiry or investigation against the Company by a regulatory
authority. The Company may terminate the Sponsorship Agreement upon 30 days'
notice.
Pursuant to the terms of an Agency Offering Agreement dated as of May
27, 1997, as amended on September 25, 1997, the Company granted to Wolverton a
right of first refusal to provide further public
35
<PAGE> 36
equity financing to the Company for a period of 12 months from the date the
British Columbia Securities Commission issued a receipt for the Company's final
prospectus (October 7, 1997).
INVESTOR RELATIONS ARRANGEMENTS
On January 15, 1998, the Company entered into an Investor Relations
Agreement with Harborside Communications Inc. ("Harborside"). Under the
agreement, Harborside is engaged to provide investor relations, corporate
communications and related support services to the Company, specifically
including, among other duties, the development of a comprehensive plan for the
dissemination of Company information to shareholders as well as brokers,
analysts and potential investors; advising the Company regarding trends and
changes in the Vancouver Stock Exchange brokerage and investment community, as
well as changes in share ownership of the Company's securities, all in the
context of providing appropriate investor relations communications; coordinating
investor and shareholder contacts with Company counsel to ensure compliance with
applicable securities laws and exchange listing requirements; and assisting the
Company with on-site investor relations meetings and with the design,
preparation and dissemination of investor relations materials. The initial term
of the agreement expires April 30, 1998 but will renew automatically for
successive one-month terms thereafter unless either party provides the other
with 30 days' advance written notice of termination. In exchange for its
services, Harborside is entitled to receive a monthly fee of US$5,500, plus
reimbursement of all reasonable out-of-pocket expenses and any reasonable
third-party professional advisory fees.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon
for the Company by Nelson Mullins Riley & Scarborough, L.L.P., Columbia, South
Carolina.
EXPERTS
The auditor for the Company is Scott, Holloway & McElveen, L.L.P., 1400
Pickens Street, Suite 400, Columbia, South Carolina 29202.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-1 (the "Registration Statement") under the Securities Act, with respect
to the shares of Common Stock offered hereby. This prospectus constitutes a part
of the Registration Statement and does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted from
this prospectus as permitted by the rules and regulations of the commission.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to herein are not necessarily complete and,
where such agreement or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions of
such exhibit, to which reference is hereby made for a full statement of the
provisions thereof. For further information with respect to the Company and the
Common Stock, reference is hereby made to the Registration Statement and to the
exhibits thereto.
The Registration Statement and the exhibits may be inspected, without
charge, and copies may be obtained, at prescribed rates, at the public reference
facilities of the Commission maintained at Judiciary Plaza, 450 Fifth Street,
N.W., room 1024, Washington, DC 20549, or on the Internet at http://www.sec.gov.
Copies of the Registration Statement and the exhibits may also be inspected,
without charge, at the Commission's regional offices at 7 World Trade Center,
Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. In addition, copies of the
36
<PAGE> 37
Registration Statement and the exhibits may be obtained by mail, at prescribed
rates, from the Public Reference Branch of the Commission at 450 Fifth Street,
N.W., Washington, DC 20549.
In connection with this offering, the Company will become subject to
the information and periodic reporting requirements of the Exchange Act, and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the public
reference facilities and regional offices referred to above. The Company intends
to furnish its shareholders with annual reports containing audited financial
statements certified by independent public accountants and with quarterly
reports containing unaudited financial statements for the first three quarters
of each fiscal year.
37
<PAGE> 38
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
<S> <C>
Report of Independent Accountants..............................................................................F-2
Financial Statements:
Balance Sheets.............................................................................................F-3
Statements of Operations...................................................................................F-4
Statements of Changes in Shareholders' Equity (Deficiency).................................................F-5
Statements of Cash Flows...................................................................................F-6
Notes to Financial Statements......................................................................F-7 to F-19
</TABLE>
F-1
<PAGE> 39
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
F-2
<PAGE> 40
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 11) -- 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.
F-3
<PAGE> 41
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)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-4
<PAGE> 42
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
Shareholder' 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.
F-5
<PAGE> 43
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.
F-6
<PAGE> 44
Integrated Business Systems and Services, Inc.
Notes To Financial Statements
NOTE 1. COMPANY BACKGROUND AND SIGNIFICANT RISKS:
Integrated Business Systems and Services, Inc. ("IBSS") is in the business of
providing computer technology products and services to industrial manufacturers
and on-line transaction businesses primarily in the United States. IBSS'
principal business areas are: (1) installing, licensing and servicing a system
developed by IBSS that helps manage the shop floor transactions of manufacturing
facilities (the "FIS System") using IBSS' software Synapse, which manages
on-line computer transactions; (2) providing systems integration services to
manufacturing companies; and (3) developing and marketing Synapse to on-line
financial transaction processing businesses.
IBSS has incurred net losses of approximately $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, the customer continues to partially fund
development of FIS 2.0.
IBSS' primary efforts are now directed to the development of a market for its
FIS 2.0 software and integration services. Like other companies at this stage of
development, it is subject to numerous risks, including the uncertainty of its
chosen market, its ability to develop its markets and its ability to finance
operations and other risks.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS - IBSS considers all highly liquid investments with a
maturity of three months or less at date of acquisition to be cash equivalents.
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.
F-7
<PAGE> 45
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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."
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.
F-8
<PAGE> 46
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION (CONTINUED) - 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 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.
F-9
<PAGE> 47
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SOFTWARE DEVELOPMENT COSTS (CONTINUED) - 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's 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 10.)
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Accordingly, actual results could differ from those
estimates.
F-10
<PAGE> 48
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
NEW PRONOUNCEMENTS - In March 1995, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which IBSS adopted as of January 1, 1996. The statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Because IBSS' accounting policies provide for similar accounting treatment, the
effect of the adoption had no material impact on IBSS' financial position or
results of operations.
In October 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-2 on software revenue recognition that supersedes SOP
91-1. 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.
F-11
<PAGE> 49
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
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.
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.
F-12
<PAGE> 50
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
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>
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.
F-13
<PAGE> 51
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 8. SHAREHOLDERS' EQUITY (CONTINUED):
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.
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.
(Small Cap A Agent); 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 (Cdn.) per share if exercised in the first year and at a price of $1.15
(Cdn.) 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.
F-14
<PAGE> 52
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 8. SHAREHOLDERS' EQUITY (CONTINUED):
Initial Public Offering (continued) - 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.
NOTE 9. 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>
F-15
<PAGE> 53
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 10. 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 165,541
Change in valuation allowance (165,541)
---------
Change in deferred income taxes $ --
=========
</TABLE>
F-16
<PAGE> 54
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 10. INCOME TAXES (CONTINUED):
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 11. 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.
NOTE 12. 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 11)
$ 33,000 $ -- $ --
=============== =============== ===========
Conversion of convertible notes into capital (See Note 8)
$ 119,700 $ -- $ --
=============== =============== ===========
</TABLE>
NOTE 13. 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>
F-17
<PAGE> 55
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Operating Lease Commitments (continued) - 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.
NOTE 14. SIGNIFICANT RISKS AND UNCERTAINTIES:
IBSS' operating results and financial condition can be impacted by a number of
factors, including but not limited to the following, any of which could cause
actual results to vary materially from current and historical results or IBSS'
anticipated future results.
Currently, IBSS' business is focused principally within the manufacturing and
hosiery industry. Significant changes in the regulatory or market environment of
these industries could impact demand for IBSS' software products and services.
Additionally, there is increasing competition for IBSS' products and services,
and there can be no assurance that IBSS' current products and services will
remain competitive, or that IBSS' development efforts will produce products with
the cost and performance characteristics necessary to remain competitive.
Furthermore, the market for IBSS' products and services is characterized by
rapid changes in technology. IBSS' success will depend on the level of market
acceptance of IBSS' products, technologies and enhancements, and its ability to
introduce such products, technologies and enhancements to the market on a timely
and cost effective basis, and maintain a labor force sufficiently skilled to
compete in the current environment.
The timing and amount of IBSS' revenues are subject to a number of factors,
including, but not limited to, the timing of customers' decisions to enter into
large license agreements with IBSS, which make estimation of operating results
prior to the end of a year extremely uncertain. Additionally, while management
believes that IBSS' financing needs for the foreseeable future will be satisfied
from cash flows from operations and IBSS' currently existing credit facilities
and 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.
F-18
<PAGE> 56
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 14. SIGNIFICANT RISKS AND UNCERTAINTIES (CONTINUED):
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.
F-19
<PAGE> 57
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OF ANY SECURITIES OTHER THAN THE COMMON STOCK TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary ...............................................................................................5
Risk Factors......................................................................................................5
Use of Proceeds..................................................................................................11
Dilution ........................................................................................................11
Dividend Policy .................................................................................................11
Business ........................................................................................................12
Management's Discussion and Analysis of Financial Condition and Results of Operations ...........................21
Management ......................................................................................................27
Certain Transactions ............................................................................................31
Principal Shareholders ..........................................................................................32
Description of Capital Stock ....................................................................................33
Plan of Distribution ............................................................................................36
Agreements with Wolverton .......................................................................................36
Investor Relations Arrangements .................................................................................37
Legal Matters ...................................................................................................37
Experts .........................................................................................................37
Additional Information ..........................................................................................37
Financial Statements ...........................................................................................F-1
</TABLE>
------------------------
UNTIL JUNE 29, 1998 (45 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK OFFERED HEREUNDER
MAY BE REQUIRED TO DELIVER A PROSPECTUS.
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<PAGE> 58
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INTEGRATED BUSINESS
SYSTEMS AND SERVICES, INC.
400,000 SHARES
COMMON STOCK
-------------
PROSPECTUS
-------------
May 14, 1998
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