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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 0-24031
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
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(Name of Small Business Issuer in Its Charter)
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South Carolina 57-0910139
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(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification Number)
115 Atrium Way, Suite 128, Columbia, SC 29223
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(Address of Principal Executive Offices) (Zip Code)
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(803) 736-5595
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
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Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the year ended December 31, 1998, the issuer's most
recent fiscal year end, were $1,021,023.
The aggregate market value of voting stock held by nonaffiliates of the issuer
on March 31, 1999 was approximately $3,180,635.*
The number of shares outstanding of the registrant's common stock, no par
value, was 9,256,463 at March 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Proxy Statement in connection with its 1999 Annual
Meeting of Shareholders (Part III).
Transitional Small Business Disclosure Format (check one): Yes No X
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* Calculated by excluding all shares held by officers, directors and
controlling shareholders of issuer without conceding that all such persons are
"affiliates" of issuer for purposes of the federal securities laws.
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INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
INDEX TO FORM 10-KSB
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PART I PAGE
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Item 1. Description of Business.................................................................................. 3
Item 2. Description of Property.................................................................................. 7
Item 3. Legal Proceedings........................................................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters................................................. 7
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 8
Item 7. Financial Statements.....................................................................................13
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................13
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act........................................................................13
Item 10. Executive Compensation...................................................................................13
Item 11. Security Ownership of Certain Beneficial Owners and Management...........................................13
Item 12. Certain Relationships and Related Transactions...........................................................13
Item 13. Exhibits and Reports on Form 8-K.........................................................................13
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Integrated Business Systems and Services, Inc. (the "Company") is in
the business of licensing, installing, and servicing its proprietary software,
the FIS System (Flexible Industrial Solutions), to manufacturers that have
already installed or are planning to install ERP (Enterprise Resource Planning)
systems. ERP systems use database technology to control all the information
relating to a manufacturing company's customers, products, employees and
financial data.
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. Its telephone number is (803) 736-5595.
PRODUCTS AND SERVICES
The FIS System business unit includes the design, development,
installation and servicing of the FIS System. The System provides on-line
process management for manufacturing shop floor environments. The FIS System
utilizes Synapse, the Company's on-line transaction processing configuration
software tool which runs on the UNIX operating system, to provide maximum
configurability, maintainability and efficiency for client's systems.
The FIS System is a Manufacturing Execution System (MES) designed to
shorten the cycle time involved with the 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 can provide the necessary information real-time so that major reductions
in work-in-process inventory, product defects, labor, production bottlenecks,
and paperwork can be achieved. The system is designed so that a manufacturing
industrial analyst can configure the unique processes and process requirements
of a manufacturing facility without the typical costs and development time
associated with the application programming required of other MES applications.
The FIS System is based on a "bill of operations" concept and can be
configured to provide detailed shop floor management for any specific
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 MES systems. Most other MES applications are
based on current application development tools (such as object oriented
programming) to achieve "configurable" shop floor applications specific to
individual manufacturing industries such as electronics, food processing or
pharmaceuticals. The FIS System is designed to be a platform to configure MES
applications for any manufacturing industry by a manufacturing industrial
analyst without the involvement of computer programmers for custom software
development.
As part of its FIS System projects, the Company typically provides
clients with system configuration and integration services as well as necessary
computer hardware and software. The Company is currently seeking integrators
who will provide system configuration and integration services in conjunction
with the FIS product for the Company's clients as well as resale the product to
the integrator's clients. The Company has installed Version 1.0 of the FIS
System, which tracks inventory, work in process and finished goods for two
manufacturers of knitted hosiery and one manufacturer of plastic injection
molding. It has installed the first implementation of FIS Version 2.0 for a
manufacturer of knitted hosiery and expects to complete the configuration of
the application during the first quarter of 1999.
Version 2.0 of the FIS System was completed during the fourth quarter
of 1998 and has been designed to enable users of the system to perform the
following tasks on-line:
- enter and track client orders
- manage work-in-process and finished goods inventory
- schedule and report production orders
- manage shipping and all labor and materials associated with
particular orders
- measure actual production costs
- collect data real-time
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- monitor, manage and report all transactions associated with
the execution of orders on the shop floor from order receipt
through order shipment
- provide Enterprise Resource Planning (ERP) systems and other
enterprise systems with the information they need in the
format they expect it
FIS Version 2.0 is comprised of the following core groups of modules:
- ORDER MANAGEMENT - includes, for example, electronic
data interchange ("EDI"), manual order processing and
invoicing, managing credit and debit memos, royalty and
commission tracking and interfacing to various client modules
(e.g. shipping, scheduling and other vendor accounting
systems)
- INVENTORY MANAGEMENT - facilitates detailed inventory
control from receiving through finished goods (including
work-in-process, intermediate holding inventories, etc.)
Manufacturing Execution Management ("MEM") - configuration
tools and application templates to configure applications to
schedule and track production orders and the resources
(including inventory, labor, machinery and information) that
are required for production. Controls the process management
schedulers and bills of operations data structures. Measures
actual costs of production and manages and schedules the
transactions to produce a product in a given time frame.
Provides information to plant managers about orders that can
not be produced given actual production constraints and
"bottlenecks".
- SHIPPING MANAGEMENT - manages all aspects of shipping
(including cartonizing, weighing, shipment labeling, bills of
lading, manifest, etc.) and interfacing with various EDI
products (advanced shipment notices and electronic invoicing)
and accounting or ERP systems
Version 2.0 of the FIS System also provides interfaces into various
data collection device networks, system networks and engineering control
networks for shop floor machinery and equipment; general ledger and other
accounting systems; EDI systems; and ERP systems and supply chain management
systems such as SAP R/3 and I2.
The Order Management Module, the EDI interface and the FIS System's
base Product Process Structure (the foundation of the MEM Module) applications
were completed and installed at Americal Corporation in the first quarter of
1997. During the second and third quarters of 1997, the FIS System business
unit focused on completing the Inventory Management Module and Shipping
Management Modules. The Inventory Management Module was installed at Americal
during July 1997, and the Company began the installation of the Shipping
Management Module in March 1998. The MEM module was installed at Americal in
November 1998 and is being configured to Americal's production requirements.
Management expects to complete the configuration of the MEM module at Americal
during the first quarter of 1999.
RESEARCH AND DEVELOPMENT
Further Research and Development of Version 2.0 of the FIS product is
scheduled for 1999. The MEM product is currently "Internet enabled" in that it
can be distributed to connect multiple plant locations via an Extranet,
Intranet, or the Internet. However, the Company plans to "Web enable" FIS 2.0
so that retailers and remote sales people can check the status of orders
through the use of Web browsers. Multiple Web applications can then be
configured to meet the specific requirements of the manufacturing client.
The Company also plans to develop a "Web enabled" MES configuration
tool so that system integrators and consultants can support and configure the
FIS applications remotely. The Company also plans to offer the FIS product on
additional platforms including those based upon Microsoft's NT operating
system. Management believes these value added additions will increase both the
need and demand for the FIS product.
MARKETING STRATEGY
The Company's objective is to become a leading provider of cost
effective and configurable on-line Manufacturing Execution Systems to
manufacturers of all industries. Version 2.0 of the FIS System was completed in
the fourth quarter of 1998 and marketing efforts to promote the product to
integrators as well as manufacturing end users have begun. The Company has
developed a marketing strategy with several key components, including the
following:
- - Target strategic alliances with integrators of ERP and shop
floor systems;
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- - Identify and target large manufacturers who have implemented
ERP systems or who are in the process of implementing ERP
systems as potential customers;
- - Establish/increase product awareness by effective advertising
and public relations related programs regionally and nationally;
- - Establish/increase name brand awareness regionally and
nationally in the manufacturing industry;
- - Establish awareness of product and name recognition to
manufacturing industry analysts and have analyst reports on
the FIS product completed;
- - Increase investor awareness locally, regionally and
nationally.
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 and Chief Executive Officer, George
Mendenhall, Executive Vice President; Donald R. Futch, Vice President of
Operations, and Steve Ehlman, Senior Sales Representative.
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
(SIF) and (2) a Monthly License Charge (MLC). The software 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
license fee funds the continued availability to use the system. There is also a
maintenance fee charged monthly to the customer which provides for on-going
support of software deficiencies, availability of product enhancements and
advantages for future education and development. The combination of the
maintenance and MLC is called SAME, and acronym for Services, Availability,
Maintenance and Enhancements. SAME charges are generally charged at a rate of
28% to 32% annually of the SIF charge and IBSS clients are contractually
obligated for a three to five year term. SIF charges are calculated according
to concurrent users of the system. Management expects the average SIF charge
per plant to be approximately US$150,000 to US$200,000 per manufacturing plant.
MARKETS AND COMPETITION
When the MES concept was first introduced by AMR Research Group, Inc.,
it was hoped that generic functionality could be defined and made applicable to
any plant floor. But time and experience have led the most successful vendors
to pursue a "narrow-and-deep" strategy, devoting their software development to
the industries they know best. For manufacturers, the availability of more
functionally robust systems leads to less software customization and quicker
implementations.
What became impossible for the MES vendors was the ability to provide
a "shrink-wrapped" version of MES to fit all industries on the shop floor
without huge modifications of software. The best they could do was provide MES
applications using the most advanced form of programming tools available at the
time of application development. Typically that has been in the form of object
oriented development tools. This approach has forced the Company's competition
to focus on specific industries. The IBSS approach was to develop an MES
application that could be configured horizontally across many industries and
align itself with integrators who are experts in specific markets.
All of the competitors known to the Company's management have adopted
a "narrow-and-deep" strategy to their marketing efforts resulting in their
products being tailored to specific market segments that are not easily adapted
to other market segments without application development. Many promote their
product as being configurable through the use of object oriented or
component-based programming techniques using Microsoft's standards. While these
methods maybe more efficient than traditional computer software development,
they still require programmers. The adherence to Microsoft standards limits the
ability to connect to the non-Microsoft applications and engineering control
systems, which are still in abundance.
The Synapse transaction configuration platform upon which the FIS
product is built, provides for the benefits of Microsoft compatibility in
addition to compatibility with the existing systems and engineering control
systems currently deployed within manufacturing facilities.
MES providers with more than US$5 million in revenue in their primary
niche markets of which the Company is aware are as follows:
- Base Ten - Food, chemicals, pharmaceuticals, medical devices;
- Camstar Systems - Food, textiles, electronics, chemicals;
- Cimlinc B Aerospace;
- Consilium - Semiconductors;
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- EMS/Intercim - Metals, medical devices, auto, aerospace,
metal products;
- Fastech - Semiconductors, electronics;
- GR Software - Electronics, aerospace, metals, medical
devices, auto, metal products;
- IBM - Electronics, medical devices, semi-conductors,
pulp/paper, aerospace, auto;
- POMS - Pharmaceuticals, food, chemicals;
- Promis - Semiconductors, electronics;
- RealWorld Tech - Metals, electronics, medical devices,
aerospace, metal products;
- Shopfloor 2000 - Aerospace
- Synquest - Metals, electronics, medical devices, auto,
aerospace, rubber, plastics, metal products;
- Wonderware - Electronics, food, medical devices, auto, metal
products.
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 it is hoped for 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 industrial market segments in the
future, the Company will face competition from many other competitors.
DEPENDENCE ON KEY CLIENTS
For the twelve month period ended December 31, 1998 and in 1997 and
1996, one client accounted for approximately 67%, 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 current project,
which is expected to occur by the end of the first quarter of 1999. In 1997,
four other clients accounted for approximately 39% of the Company's revenues.
For the twelve month period ended December 31, 1998, three existing clients and
one new client for 1998 accounted for a total of approximately 4%, 4%, 5%, and
7% 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.
EMPLOYEES
As of March 31, 1999, the Company had 21 full-time employees and no
part-time employees.
ADVISORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this PART I, Item 1
(Description of Business) and in PART II, Item 6 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. The Company
cautions readers of this Annual Report on Form 10-KSB that such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from those expressed or implied by such
forward-looking statements. Although the Company's management believes that
their expectations of future performance are based on reasonable assumptions
within the bounds of their knowledge of their business and operations, there
can be no assurance that actual results will not differ materially from their
expectations. Factors which could cause actual results to differ from
expectations include, among other things, the development risks associated with
start-up enterprises, such as liquidity problems, revenue uncertainty, and the
need for additional funding; restrictions on raising additional capital
contained in the Company's debt agreements; the effects of an intensively
competitive computer technology market; the constant need to anticipate and
adopt to technological changes and develop new or enhanced technology on a
timely basis; the dependence on key clients; the challenges and uncertainties
in the implementation of the Company's expansion and development strategy; the
dependence on key personnel, and other factors described in this report and in
other reports filed by the Company with the Securities and Exchange Commission.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own any real estate and operates principally from
leased premises in Columbia, South Carolina where the Company leases
approximately 4,367 square feet of office space. The lease expires in October
1999 and may be renewed for a five-year term at market rates.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of fiscal year 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company has traded on the Vancouver Stock
Exchange ("VSE") since October 1, 1997 under the symbol "IBS" and has traded in
the United States on the over-the-counter bulletin board ("OTCBB") established
by the National Association of Securities Dealers, Inc. since July 2, 1998
under the symbol "IBSS." The prices set forth below indicate the high and low
sale prices reported on the VSE (expressed in Canadian dollars) and the high and
low bid prices reported on the OTCBB (expressed in US dollars) for the indicated
periods.
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SALES PRICE (VSE) BID PRICE (OTCBB)
FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW HIGH LOW
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1st quarter (1/1/98 - 3/31/98)..................... Cdn.$1.20 Cdn.$1.05
2nd quarter (4/1/98 - 6/30/98)..................... $4.15 $1.00 US$2.75 US$0.50
3rd quarter (7/1/98 - 9/30/98)..................... $3.45 $0.95 1.25 0.38
4th quarter (10/1/98 - 12/31/98)................... $ $
FISCAL YEAR ENDED DECEMBER 31, 1997
4th quarter (10/1/97 - 12/31/97)................... 1.15 1.00
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The foregoing quotations from the OTCBB reflect inter-dealer prices
without retail markup, markdown or commission and may not necessarily reflect
actual transactions.
Shareholders of Record
As of March 31, 1999, there were 23 stockholders of record of the
Company's common stock. Certain of these shareholders of record hold shares in
nominee name for other beneficial owners.
Dividends
The Company has not paid cash dividends on its common stock since
inception and has no plans to declare cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
During the fourth quarter of the Company's fiscal year ended December
31, 1998, the Company did not sell any securities without registration under
the Securities Act of 1933.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which the
Company believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Form 10-KSB.
FINANCIAL OPERATIONS SUMMARY
The following table summarizes the audited financial statements of the
Company for each of the five years ended December 31, 1998, 1997, 1996, 1995
and 1994.
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YEAR ENDED DECEMBER 31,
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1998 1997 1996 1995 1994
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STATEMENT OF OPERATIONS DATA
Sales $1,021,023 $1,821,816 $2,357,939 $2,202,869 $1,212,754
Cost of Sales 527,147 893,397 1,045,500 1,160,639 562,899
Gross Profit 515,376 928,419 1,312,439 1,042,230 649,855
Research and Development Expenses 50,992 332,139 362,983 292,850 160,253
Sales and Marketing Expenses 342,609 331,328 207,460 173,768 101,512
General and Administrative Expenses 1,229,036 1,010,653 995,261 691,235 356,717
(including interest expense)
Total Expenses 1,644,137 1,674,120 1,565,704 1,157,853 618,482
Operating Income (Loss) (1,128,761) (745,701) (253,265) (115,623) 31,373
Income (Loss) Before Income Taxes (1,128,761) (745,701) (253,265) (115,623) 31,373
Income Taxes -0- -0- -0- -0- -0-
Net Income (Loss) (1,128,761) (745,701) (253,265) (115,623) 31,373
Basic and Diluted Earnings (Loss) Per Share (0.14) (0.16) (0.07) (0.03) 0.01
AS AT DECEMBER 31,
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1998 1997 1996 1995 1994
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BALANCE SHEET DATA
Working Capital $(1,184,459) $(156,566) $(956,920) $(792,332) $(534,185)
Property, Plant and Equipment 140,756 115,559 156,447 149,548 100,607
Capitalized Software Costs 852,996 207,642 50,950 71,353 91,756
Other Assets 2,743 3,318 3,218 2,154 2,054
Total Assets 1,203,116 707,483 528,928 620,220 412,771
Long Term Liabilities 542,000 78,000 114,000 -0- -0-
Shareholders' Equity (Deficiency)
Dollar Amount (729,964) 91,953 (860,305) (569,277) (339,768)
Number of shares issued and
outstanding(1) 8,438,663 7,987,763 3,600,000 3,600,000 Note (2)
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(1) All share numbers in the table retroactively reflect the Company's
stock split on March 5, 1997.
(2) 4,530,000 Class A common shares (retroactively adjusted for March 5,
1997 stock split) and 250 Class B common shares.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues decreased $800,793 (approximately 44%) from
$1,821,816 in 1997 to $1,021,023 in 1998. This decrease was primarily
attributable to a decrease of sales of integration services and data collection
equipment due to the increased emphasis in the completion of FIS 2.0. This
decrease was partially offset by an increase (approximately 126%) in the
hardware and software maintenance and support revenue in the FIS System
business unit.
Cost of Sales. Cost of sales decreased $366,250 (approximately 41%)
from $893,397 in 1997 to $527,147 in 1998. This decrease was primarily
attributable to a decrease of sales of integration services and data collection
equipment due to the increased emphasis in completion of FIS 2.0. The cost of
sales as a percentage of total revenues was 49% and 52% for 1997 and 1998,
respectively.
Research and Development. Research and development expenses decreased
$281,147 (approximately 85%) from $332,139 in 1997 to $50,992 in 1998. This
decrease was primarily due to increased software development costs associated
with the increased emphasis in the completion of Version 2.0 of the FIS System,
most of which was capitalized during 1998. Research and development expenses
represented approximately 18% and 5% of total revenues for 1997 and 1998,
respectively. The Manufacturing Execution Management (MEM) module of Version
2.0 of the FIS System was made available for general release during the fourth
quarter of 1998. The MEM module was the fourth and final module scheduled to
complete the FIS 2.0 system.
General and Administrative. General and administrative expenses,
including interest expense, increased $218,383 (approximately 22%) from
$1,010,653 in 1997 to $1,229,036 in 1998. This increase was partially
attributable to the addition of an administrative assistant to the President, a
Vice President of Operations and a systems engineer. The elimination of the
in-house counsel and the reduction of salaries of the principals in 1997, as
well as a decrease in interest expense and travel, helped offset these
increases. An increase in the professional fees accounted for the major
increase in general and administrative expenses. This increase in professional
services was primarily due to the Company's consummation of an initial public
offering in 1997. Investor relations, governmental reporting requirements,
public relations and legal and auditor fees associated with the Company being
public made up the majority of this increase. General and administrative
expenses, including interest expense, represented approximately 55% and 120% of
total revenues for 1997 and 1998, respectively.
Sales and Marketing. Sales and marketing expenses increased $11,281
(approximately 3%) from $331,328 in 1997 to $342,609 in 1998. This increase was
primarily attributable to an increase in the development of marketing
materials, attendance at the International Hosiery Exposition and Conference as
an exhibitor, and the development of a Web Site. This increase was partially
offset by a decrease in marketing commission due to a decrease in sales and the
write-off of prepaid commissions in 1998. Sales and marketing expenses
represented approximately 34% and 18% of total revenues for 1998 and 1997,
respectively. In July 1998, the Company's sales representative who primarily
focused on the FIS System business unit left the Company. As a result of this
departure, in July 1998 the Company wrote off $62,546 in prepaid commissions.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues decreased $536,123 (approximately 23%) from
$2,357,939 in 1996 to $1,821,816 in 1997. This decrease was primarily
attributable to a 22% decrease in revenues in the FIS System business unit due
to the increased emphasis in the FIS System business unit on research and
development activities, as well as no revenue being generated by the Synapse
business unit during 1997, as compared to $80,500 in 1996. In addition, in
1996, the Company received payment of $123,844 for services rendered during
1994 and 1995, the collection of which the Company did not view to be
realizable until 1996. This decrease was partially offset due to a 7% increase
in revenues in the Integration business due to increased sales.
Cost of Sales. Cost of Sales decreased $152,103 (approximately 15%)
from $1,045,500 in 1996 to $893,397 in 1997. This decrease was primarily
attributable to the Company having one less designer employee in 1997 than in
1996, the Company having less direct project expenses due to less travel to
client sites and a decrease in hardware costs
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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.
Research and Development Costs. Research and development costs
decreased $30,844 (approximately 8%) from $362,983 in 1996 to $332,139 in 1997.
During 1997, the Company shifted from research and development efforts to
completion of Version 2.0 of the FIS System. Research and development costs
represented approximately 15% and 18% of total revenues for 1996 and 1997,
respectively.
General and Administrative. General and administrative expenses,
including interest expense, increased $15,392 (approximately 2%) from $995,261
in 1996 to $1,010,653 in 1997. This increase was primarily attributable to the
cost of the Company's new in-house counsel and a $37,361 increase in interest
expense primarily due to the convertible notes issued by the Company in March
1997 and the note payable executed by the Company in favor of a significant
vendor in March 1997. During August and September 1997, the Company attempted
to reduce certain expenses. General and administrative expenses represented
approximately 42% and 55% of total revenues for 1996 and 1997, respectively.
Sales and Marketing. Sales and marketing expenses increased $123,868
(approximately 60%) from $207,460 in 1996 to $331,328 in 1997. This increase
was primarily attributable to a write-off of prepaid commissions in the amount
of $74,312 in September and $67,261 in October as a result of the departure of
the Company's sales and marketing director, the departure of a sales
representative, and an increase in marketing salaries as a result of the hiring
of a new sales representative in April 1997. This increase was slightly offset
by a decrease in commissions earned by the Company's sales representatives
because of a decrease in FIS System sales and a decrease in marketing travel.
Sales and marketing expenses represented approximately 9% and 18% of total
revenues for 1996 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has had a net loss every year of its existence except
1994, in which year it had net income of $31,373. Consequently, the Company's
operations have led to a growing working capital deficit and a decrease in
shareholders' equity. As a result, the Company has had liquidity problems from
time to time. As of December 31, 1995, 1996, 1997 and 1998, the shareholders'
equity (deficit) was $(569,277), $(860,305), $91,953 and $(729,964),
respectively. As of December 31, 1995, 1996, 1997 and 1998, the Company's
working capital deficit was $792,232, $956,920, $156,566, and $1,184,469,
respectively.
Prior to 1997 the Company primarily financed its operations through
revenues from operations, including funded research and development revenues,
and occasional short term loans from the Company's principals or their
acquaintances. Since the middle of 1997, the Company has financed its
operations primarily through private and public offerings of Common Stock and
convertible debt, and to a lesser extent through borrowings from third-party
lenders and from revenues from operations.
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 borrowing of up
to 75% of accounts receivable. In February 1996, the Company entered into a
loan for $180,000 collateralized by substantially all of the assets of the
Company. This loan is being repaid in sixty equal monthly installments.
During 1997, the Company received approximately $1,540,000 in net
proceeds (after deduction of commissions and offering costs) from the sale of
3,800,000 shares of its Common Stock, of which approximately $1,220,000 was
received in the Company's initial public offering in November of 1997. The
Company used a portion of these proceeds to repay debt of approximately
$320,000. In addition, in November of 1997, convertible debt issued by the
Company in March of 1997 in the principal amount of $116,700 was converted into
shares of Common Stock.
During 1998, the Company received approximately $288,400 in gross
proceeds from the exercise by Wolverton Securities Ltd. of warrants for the
purchase of 430,000 shares of the Company's Common Stock.
On June 12, 1998, the Company completed a private placement of
five-year convertible notes in the amount of $500,000 and non-transferable share
purchase warrants entitling the holders to purchase an aggregate of 541,000
common shares of the Company. The notes, which bear interest at the rate of 12%
per year, may be converted into common shares of the Company at a conversion
price
10
<PAGE> 11
of $0.923 during the first year and during each of the remaining four years of
the term of the notes, a conversion price that is higher than the conversion
price in the previous year by $0.175 per share.
In the first quarter of 1999, the Company completed a private placement
of 860,000 shares of Common Stock and two-year warrants for the purchase of
86,000 shares of Common Stock, pursuant to which the Company received gross
proceeds of $860,000. The warrants are exercisable at $1.00 per share during the
first year following their issuance and at $1.25 per share during the second
year following their issuance.
The Company expects that the proceeds from its capital raising
activities along with revenues generated from operations will be adequate to
meet the Company's projected working capital and other cash requirements for at
least the next 12 months. Management intends to closely follow the Company's
progress and to reduce expenses if the Company's strategies do not result in
sufficient revenues within a reasonable period. Any such reduction will involve
scaling back, delaying or postponing those development activities that are not
essential to the Company achieving its stated objectives. In any event, the
working capital deficit will continue to grow unless and until revenues increase
sufficiently to meet expenditure levels.
The Company leases its principal facilities under a noncancellable
operating lease expiring in October 1999 which can be renewed for a five-year
term at market rates. The lease is subject to annual adjustments for facility
operating costs in excess of an established base year. On December 31, 1998 the
company reduced the size of the facilities by approximately 38%. The minimum
annual commitment for rent under this lease is approximately $82,700. The rent
expense under this lease in 1998 and 1997 was approximately $133,200 and
$134,000, respectively.
Net cash used in operating activities was approximately $127,000
during the year ended December 31, 1998, as compared to net cash used in
operating activities of approximately $1.46 million in 1997. The decrease in
cash used in operating activities in 1998 was mainly due to the decreases in
accounts receivable, increases in unbilled revenue, and increased in accrued
expenses.
Net cash used in investing activities was approximately $748,000
during the year ended December 31, 1998, as compared to approximately $185,000
in 1997. The net cash used in investing activities was mainly due to the
purchase of computer equipment and the capitalization of internal software
development costs.
Net cash provided by financing activities was approximately $807,000
during the year ended December 31, 1998, as compared to approximately $1.71
million in 1997. The net cash provided by financing activities resulted
primarily from the sale of $500,000 in subordinated debt and $307,000 on the
exercise of common stock options and warrants, offset by payments on the
Company's long-term debt.
THE YEAR 2000
Issues. Some computers, software, and other equipment include
programming codes in which calendar year data is abbreviated to only two
digits. As a result of this design decision, some of these systems could fail
to operate or fail to produce results if "00" is interpreted to mean 1900,
rather than 2000. These problems are widely expected to increase in frequency
and severity as the year 2000 approaches and are commonly referred to as the
"Y2K Problem".
Assessment. The Y2K Problem could affect computers, software, and
other equipment that the Company uses. Accordingly, the Company has completed a
review of its internal computer programs and systems to determine whether they
will be Year 2000 compliant in a timely manner. However, while the Company does
not expect the cost of these efforts to be material to its financial position
or any year's operating results, there can be no assurance to this effect.
Readiness. As a software developer, the Company has had a longstanding
program of keeping pace with current technology as part of its commitment to
its customers and its development staff. As such, the Company's IT systems,
including its internal network servers and operational software, are current
generation, and are checked and upgraded frequently to ensure Y2K compliance.
In addition, the Company has evaluated its non-IT equipment and other
intelligent office machines, including print servers, fax machines and laser
printers for Y2K compliance. With the exception of one development server and
the Company's current accounting software and accompanying hardware, all of
which are scheduled to be replaced by fully compliant systems by the third
quarter of 1999, all of the systems and machinery evaluated by the Company were
found to be Y2K immune or compliant. The Company expects to expend
approximately $10,000 on replacement systems for its existing accounting
software and accompanying hardware.
Core Products. In accordance with industry guidelines, all of the
current software products of the Company are fully Y2K compliant, and a
fee-based program is in place to assist customers with older versions of
Company provided products, if they should require it.
11
<PAGE> 12
Internal Risks. The Company believes that its most significant
internal risk posed by the Y2K Problem is the possibility of a failure of its
accounting systems and hardware. If these systems were to fail, the Company
would have to implement manual processes, which may slow the timeliness of
information needed to manage the business. As discussed above, the Company
plans to avoid this risk by replacing its accounting software and hardware by
the third quarter of 1999; however, there can be no assurance that such actions
will avoid all problems that could arise.
Third Party Compliance:
Vendors. The Company's software has been developed for a variety of
hardware and operating system (OS) platforms, including IBM servers running
AIX, Hewlett Packard servers and HP/UX, Intel servers with Microsoft Windows/NT
or Linux and others. Consequently, the Company's software is not tied to any
one hardware or OS vendor. The Company is not primarily a hardware reseller,
and is not dependent on the fate of any particular hardware vendor or platform.
The Company has been gathering information from and has initiated
communications with its vendors to identify and, to the extent possible,
resolve issues involving the Y2K Problem. However, the Company has limited or
no control over the actions of its vendors and others. Therefore, while the
Company expects that it will be able to resolve any significant Y2K Problems
with its own system, it cannot guarantee that its vendors or others will
resolve any or all Y2K Problems with their systems before the occurrence of a
material disruption to their businesses. Any failure of these vendors or others
to resolve Y2K Problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition or
operating results.
Customers. The Company is querying its customer base as to its
progress in identifying and addressing potential Y2K Problems in their computer
systems. At present, the Company has little information on the Y2K readiness of
its customer base.
Utilities. A significant portion of the Company's business depends on
off-site customer service, via phone or remote connection, and thus the Company
is sensitive to some degree to interruptions of phone, wide area network, and
power service. At present, there is no available alternative to local phone and
data carriers, so the Company cannot insure that it will not be affected by
these third party Y2K Problems, should they arise. Office power, however, is
protected by an UPS system that can be augmented by external power generation,
although it is not so supplemented at this time.
Ongoing Analysis. The Company has not yet established a contingency
plan to address potential Y2K Problems, and it is currently considering the
extent to which it will develop a formal contingency plan. The Company will
continue to internally upgrade its systems according to its strategic plan,
replacing any remaining non-Y2K-compliant systems by the third quarter of
1999. Management believes that the Company's primary Y2K vulnerabilities are
external. With further dialog with third-party service providers, the Company
will continue to refine its risk assessments and possible contingency plans in
the coming months.
Summary Assessment. While the Company expects to identify and resolve
all Y2K Problems that could materially adversely affect its business, financial
condition or operating results, there can be no assurance that the Company has
identified or will identify all Y2K Problems in its computer systems or those
of third parties in advance of their occurrence or that the Company will be
able to successfully remedy any problems that are discovered. The Company
believes that it is not possible to determine with complete certainty that all
Y2K Problems affecting it have been identified or corrected. The number of
devices that could be affected and the interactions among these devices are
simply too numerous. In addition, the Company cannot accurately predict how
many failures related to the Y2K Problem will occur with its vendors, customers
or other third parties or the severity, duration, or financial consequences of
such failures. The expenses of the Company's efforts to identify and address
such problems in advance of their occurrence are not expected to be material,
but the potential 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.
12
<PAGE> 13
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Index to Financial Statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Information called for by PART III (Items 9, 10, 11 and 12) of this
Report on Form 10-KSB has been omitted as the Company intends to file with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year ended December 31, 1998 a definitive Proxy Statement pursuant
to Regulation 14A promulgated under the Securities Exchange Act of 1934. Such
information will be set forth in such Proxy Statement.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The accompanying Exhibit Index on page E-1 sets
forth the exhibits that are filed as part of this Report on
Form 10-KSB.
(b) Reports on Form 8-K:
None.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant, Integrated Business Systems and Services,
Inc., has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
Dated: April 13, 1999 By: /s/ HARRY P. LANGLEY
-------------------------------------------
Harry P. Langley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ HARRY P. LANGLEY President, Chairman of the Board, April 13, 1999
- -------------------------------------- Chief Executive Officer, and Chief
Harry P. Langley Financial Officer (Principal Executive
Officer and Principal Financial
and Accounting Officer) and
Director
/s/ GEORGE E. MENDENHALL Executive Vice President April 13, 1999
- -------------------------------------- and Director
George E. Mendenhall
/s/ STUART E. MASSEY Vice President of Engineering and April 13, 1999
- -------------------------------------- Director
Stuart E. Massey
/s/ CARL JOSEPH BERGER Director April 13, 1999
- --------------------------------------
Carl Joseph Berger, Jr.
- -------------------------------------- Director
Matt Iovanna
- -------------------------------------- Director
Russell C. King, Jr.
*By: /s/ HARRY P. LANGLEY April 13, 1999
---------------------------
(Harry P. Langley) (As
Attorney-in-Fact for each
of the persons indicated)
</TABLE>
14
<PAGE> 15
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' (Deficiency) Equity ................................................F-5
Statements of Cash Flows...................................................................................F-6
Notes to Financial Statements......................................................................F-7 to F-24
</TABLE>
F-1
<PAGE> 16
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, 1998 and 1997, and the related statements
of operations, changes in shareholders' (deficiency) equity and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Integrated Business Systems and Services, Inc. will continue as a going concern
at December 31, 1998. As discussed in Note 2 to the financial statements,
Integrated Business Systems and Services, Inc.'s significant operating losses,
accumulated deficit and negative working capital raise substantial doubt about
its ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
SCOTT, HOLLOWAY AND MCELVEEN, L. L. P.
Columbia, South Carolina
March 26, 1999
F-2
<PAGE> 17
Integrated Business Systems and Services, Inc.
Balance Sheets
December 31,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,593 $ 84,649
Accounts receivable 131,705 240,523
Unbilled revenue 27,417 --
Inventory -- 3,962
Prepaid commissions 17,353 37,410
Other prepaid expenses 13,553 14,420
----------- -----------
Total current assets 206,621 380,964
Capitalized software costs, net (Note 3) 852,996 207,642
Property and equipment, net (Note 4) 140,756 115,559
Other assets 2,743 3,318
----------- -----------
Total assets $ 1,203,116 $ 707,483
=========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Notes payable (Note 5) $ 89,828 $ 92,295
Related party payable (Note 13) 35,300 --
Long-term debt, current portion (Note 7) 39,000 36,000
Accounts payable 147,140 174,667
Accrued liabilities:
Accrued compensation and benefits 56,809 68,151
Accrued payroll taxes 407,312 13,700
Accrued professional fees 286,552 37,680
Accrued rent 66,618 --
Accrued interest 52,757 1,093
Other 89,581 6,141
Deferred revenue (Note 6) 120,183 107,803
----------- -----------
Total current liabilities 1,391,080 537,530
Long-term debt, net of current portion (Note 7) 42,000 78,000
Subordinated debt (Note 8) 500,000 --
----------- -----------
Total liabilities 1,933,080 615,530
----------- -----------
Commitments and contingencies (Note 15)
Shareholders' (deficiency) equity (Note 9):
Preferred stock, undesignated par value, authorized 10,000,000 shares,
issued none -- --
Class A common shares, voting, no par value, 100,000,000 shares
authorized, 8,438,663 and 7,987,763 shares outstanding at
December 31, 1998 and 1997, respectively 2,007,803 1,700,959
Accumulated deficit (2,737,767) (1,609,006)
----------- -----------
Total shareholders' (deficiency) equity (729,964) 91,953
----------- -----------
Total liabilities and shareholders' (deficiency) equity $ 1,203,116 $ 707,483
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 18
Integrated Business Systems and Services, Inc.
Statements of Operations
for the years ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Funded development and other services $ 676,013 $ 1,216,559 $ 1,639,680
Hardware sales 87,123 351,646 479,297
Software licensing -- 51,660 122,400
Maintenance 257,887 201,951 116,562
----------- ----------- -----------
Total revenues 1,021,023 1,821,816 2,357,939
----------- ----------- -----------
OPERATING EXPENSES
Cost of revenues 527,147 893,397 1,045,500
Research and development costs 50,992 332,139 362,983
General and administrative 1,157,585 917,237 939,206
Sales and marketing 342,609 331,328 207,460
----------- ----------- -----------
Total operating expenses 2,078,333 2,474,101 2,555,149
----------- ----------- -----------
Loss from operations (1,057,310) (652,285) (197,210)
Interest expense 71,451 93,416 56,055
----------- ----------- -----------
Net loss $(1,128,761) $ (745,701) $ (253,265)
=========== =========== ===========
Loss per share:
Net loss
Basic and diluted $ (0.14) $ (0.16) $ (0.07)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 19
Integrated Business Systems and Services, Inc.
Statements of Changes in Shareholders' (Deficiency) Equity
for the three years ended December 31, 1998
<TABLE>
<CAPTION>
Number of Class A Total
Class A Share Shareholders'
Shares Carrying Accumulated (Deficiency)
Outstanding Value Deficit Equity
----------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 3,600,000 $ 3,000 $ (572,277) $ (569,277)
Shareholders' distributions -- -- (37,763) (37,763)
--------- ----------
Net loss -- -- (253,265) (253,265)
--------- ---------- ------------
Balance, December 31, 1996 3,600,000 3,000 (863,305) (860,305)
Sale of common shares (Note 9) 4,387,763 1,664,959 -- 1,664,959
-----------
Shareholders' contribution (Note 13) -- 33,000 -- 33,000
--------- -----------
Net loss -- -- (745,701) (745,701)
--------- ---------- ----------- -----------
Balance, December 31, 1997 7,987,763 1,700,959 (1,609,006) 91,953
Sale of common shares (Note 9) 450,900 306,844 -- 306,844
Net loss -- -- (1,128,761) (1,128,761)
--------- ---------- ----------- -----------
Balance, December 31, 1998 8,438,663 $2,007,803 $(2,737,767) $ (729,964)
========= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 20
Integrated Business Systems and Services, Inc.
Statements of Cash Flows
for the years ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,128,761) $ (745,701) $(253,265)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 59,508 48,335 43,137
Amortization of software costs 21,500 20,403 20,403
Loss on sale of equipment -- -- 828
Write off of prepaid commissions 70,751 141,573 --
Changes in assets and liabilities:
Accounts receivable 108,818 (82,149) 78,366
Unbilled revenue (27,417) -- --
Inventory -- 8,842 (10,101)
Prepaid commissions (50,694) (54,621) (19,650)
Prepaid expenses and other assets 1,442 (7,372) (5,589)
Accounts payable (27,527) (255,269) 148,344
Accrued expenses 832,864 (319,677) (124,807)
----------- ----------- ---------
Deferred revenue 12,380 (212,997) 40,476
Cash used in operating activities (127,136) (1,458,633) (81,858)
----------- ----------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment, net (80,743) (7,447) (50,864)
Capitalized internal software development costs (666,854) (177,095) --
----------- ----------- ---------
Cash used in investing activities (747,597) (184,542) (50,864)
----------- ----------- ---------
FINANCING ACTIVITIES
Proceeds from (payments on) notes payable, net (2,467) 92,295 (32,528)
Proceeds from issuance of subordinated debt 500,000 -- --
Proceeds from long-term debt -- -- 180,000
Payments on long-term debt (33,000) (42,000) (24,000)
Sale of common shares -- 1,545,259 --
Proceeds from exercise of common stock options
and warrants 306,844 -- --
Proceeds from issuance of convertible promissory
notes -- 190,232 --
Repayment on convertible promissory notes -- (70,532) --
Payable to a related party 35,300 (3,055) 12,251
Shareholder distributions -- -- (37,763)
----------- ----------- ---------
Cash provided by financing activities 806,677 1,712,199 97,960
----------- ----------- ---------
Net (decrease) increase in cash (68,056) 69,024 (34,762)
Cash and cash equivalents at beginning of period 84,649 15,625 50,387
----------- ----------- ---------
Cash and cash equivalents at end of period $ 16,593 $ 84,649 $ 15,625
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 21
Integrated Business Systems and Services, Inc.
Notes To Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
All financial information presented in these financial statements is expressed
in U.S. dollars. The Canadian exchange rates to one U.S. dollar at December 31,
1998 and 1997, are $1.5368 and $1.4313, respectively.
Integrated Business Systems and Services, Inc. ("IBSS") is in the business of
providing computer technology products and services to industrial manufacturers
and on-line transaction businesses primarily in the United States. IBSS'
principal business areas are: (1) installing, licensing and servicing a system
developed by IBSS that helps manage the shop floor transactions of
manufacturing facilities (the "FIS System") using IBSS' software Synapse, which
manages on-line computer transactions; (2) providing systems integration
services to manufacturing companies; and (3) developing and marketing Synapse
to on-line financial transaction processing businesses.
IBSS' 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.
RECONCILIATION OF UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
("GAAP") TO CANADIAN GAAP - The accompanying financial statements are expressed
in United States dollars and stated in accordance with United States GAAP
("U.S. GAAP"). Differences between U.S. GAAP and Canadian GAAP that have a
significant effect on the accompanying financial statements are as follows:
(1) Under Canadian GAAP, all financing and investing activities
should be presented in the statement of cash flows, including
those not involving cash. Under U.S. GAAP, only cash
transactions are permitted to be reported in the statement of
cash flows and noncash transactions are required to be
separately disclosed. The effect of noncash differences is
described in Note 14.
(2) Under Canadian GAAP, research costs generally must be
expensed when incurred. Development costs are required to be
capitalized, to the extent that recovery can reasonably be
regarded as assured, if they meet all of the following
criteria:
- The product or process is clearly defined and costs
related thereto can be identified.
- Technical feasibility of the product or process has
been established.
- Management has the intention to produce and market
or use the product or process.
- The market for the product or process is clearly
defined or its usefulness to the entity has been
established.
F-7
<PAGE> 22
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECONCILIATION OF UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
("GAAP") TO CANADIAN GAAP (CONTINUED)
Under U. S. GAAP, all costs of research and development ("R&D")
activities are expensed when incurred, including the costs of physical
assets. Any costs incurred to establish technological feasibility of a
computer software product are considered R&D and are charged to
operations as incurred. In general, once technological feasibility has
been achieved, costs of producing the product master are capitalized.
Capitalization stops when the product is available for general
release.
CASH AND CASH EQUIVALENTS - IBSS considers all highly liquid investments with a
maturity of three months or less at date of acquisition to be cash
equivalents.
Inventories - Inventories, consisting primarily of computer parts, are stated
at the lower of cost (determined on first-in, first-out basis) or market. IBSS
periodically reviews its inventories for potential slow-moving or obsolete
items and reduces specific items to net realizable value as appropriate.
PREPAID COMMISSIONS - Included in prepaid expenses are commission advances to
several sales representatives. These commissions are advances against future
anticipated sales and are to be used to cover commissions owed against future
sales. Commissions for IBSS' sales representatives average approximately 8.75%.
Upon employee termination, IBSS may not have the ability to collect the
commission advances from the terminated employee, and therefore, charges such
unreimbursed advances to sales and marketing expenses.
During 1998 and 1997, several sales representatives, who focused primarily on
integration sales, left employment of IBSS. As a result of these departures,
IBSS wrote off approximately $71,000 and $142,000 of prepaid commissions in
1998 and 1997, respectively.
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. 97-2, "Software Revenue
Recognition."
F-8
<PAGE> 23
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION (CONTINUED) - Software systems are licensed under the terms
of substantially standard nonexclusive and nontransferable license agreements,
which generally provide for an initial license charge and a monthly license
charge. The initial license charge, which grants a right to use the software
system currently available at the time the license is signed, is recognized as
revenue upon delivery of the product and receipt of a signed contractual
obligation, if collectibility is probable and no significant vendor obligations
remain. The monthly license charge provides access to Services Availability,
Maintenance, and Enhancements ("SAME"). Services availability allows customers
access to professional services, other than maintenance and enhancements, which
are provided under separate arrangements during the SAME term. Under the
maintenance provisions of SAME, IBSS provides telephone support and error
correction to current versions of licensed systems. Under the enhancement
provisions of SAME, IBSS will provide any addition or modifications to the
licensed systems, which IBSS may deliver from time to time to licensees of
those systems if and when they become generally available. The monthly license
charge is recognized as revenue on a monthly basis throughout the term of the
SAME provision of the license agreement.
IBSS provides professional support services, including systems implementation
and integration assistance, consulting and educational services, which are
available under service agreements and charged for separately. These services
are generally provided under time and material contracts and revenue is
recognized as the services are provided. In some circumstances, services are
provided under fixed price arrangements in which revenue is recognized on the
basis of the estimated percentage of completion of service provided using the
cost-to-cost method.
Revisions in estimates of costs to complete and losses, if any, are reflected
in operations in the period in which facts requiring those revisions become
known.
From time to time IBSS enters into certain funded development arrangements.
Although these arrangements are varied, IBSS principally will undertake custom
development of a product or enhancement and typically retain all marketing
rights and title to such development. Funded development arrangements are
generally provided for under fixed price agreements and in some circumstances
on a time and material basis. If a separate licensing fee is included in the
customer funding, the licensing fee is unbundled from the funded development
funding and is recognized as described above. IBSS recognizes revenue on the
same basis as professional support services; however, where technological
feasibility has already been established, IBSS will capitalize the portion of
development costs which exceed customer funding provided under the funded
development arrangement.
F-9
<PAGE> 24
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," issued by the Financial
Accounting Standards Board, certain costs incurred in the internal development
of computer software which is to be licensed to customers are capitalized.
Amortization of capitalized software costs is provided upon commercial release
of the products at the greater of the amount using (i) the ratio that current
gross revenues for a product bear to the total of current and anticipated
future gross revenues of that product or (ii) the straight-line method over the
remaining estimated economic life of the product including the period being
reported on. IBSS generally amortizes capitalized software costs on a
straight-line basis over five years.
Costs that are capitalized as part of internally developed software primarily
include direct and indirect costs associated with payroll, computer time and
allocable depreciation and other direct allocable costs, among others. All
costs incurred prior to the establishment of technological feasibility, which
IBSS defines as establishment of a detail design, have been expensed as
research and development costs during the periods in which they were incurred.
Once technological feasibility has been achieved, costs of producing the
product master are capitalized. Capitalization stops when the product is
available for general release. The amount by which unamortized software costs
exceeds the estimated 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.
F-10
<PAGE> 25
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
STOCK-BASED COMPENSATION - SFAS 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 (Note 12).
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 materially differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash, accounts
receivable, accounts payable, and accrued liabilities approximate fair value
due to the short-term maturities of these assets and liabilities. The interest
rate on substantially all borrowings approximates current rates IBSS would pay
on similar borrowings. 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.
F-11
<PAGE> 26
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
MAJOR CUSTOMERS - Customers comprising 10% or greater of IBSS' total revenues
are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997 1996
AMERICAL - 67% AMERICAL - 29% AMERICAL - 22%
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 three
years ended December 31, 1998 were not material.
EARNINGS PER SHARE - Effective December 31, 1997, IBSS adopted SFAS No. 128,
"Earnings per Share," which supersedes Accounting Principles Board Opinion No.
15, "Earnings per Share," and establishes new standards for computing earnings
per share. SFAS No. 128 requires the presentation of basic and diluted earnings
per share in place of primary and fully diluted earnings per share. At December
31, 1997, all prior periods were restated to reflect the new basic and diluted
earnings per share amounts required by SFAS No. 128.
COMPREHENSIVE INCOME - In 1998, IBSS adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes rules for the reporting of
comprehensive income (net income plus all other changes in net assets from
non-owner sources) and its components in the financial statements. There were
no additional items which affected comprehensive income in 1998.
RECLASSIFICATION - Certain 1997 amounts have been reclassified to conform to
the 1998 presentation.
NOTE 2. LIQUIDITY
IBSS has incurred net losses of approximately $1,129,000, $745,000, and
$253,000 for the three years ended December 31, 1998. The continuing losses
have adversely affected the liquidity of IBSS. At December 31, 1998, IBSS has
an accumulated deficit of approximately $2,700,000 and negative working capital
of approximately $1,200,000, which includes deferred revenue of approximately
$120,000.
Management has devoted substantial resources towards the completion of FIS 2.0,
and as a result, a lessor effort was directed towards other services offered by
IBSS, such as integration and consulting services.
Despite IBSS' negative cash flows, IBSS has been able to secure financing or
equity to support its operations to date.
Going forward, significant amounts of additional capital will be needed to fund
losses until IBSS can operate profitably. While there is no assurance that
funding will be available, IBSS is continuing to seek financing to support its
efforts and is exploring a number of alternatives in this regard (Note 18). In
the absence of long-term financial support, there can be no assurance that
additional financing can be obtained from conventional sources.
F-12
<PAGE> 27
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. LIQUIDITY (CONTINUED):
IBSS' independent public accountants have included a "going concern"
explanatory paragraph in their audit report accompanying the 1998 financial
statements. The paragraph states that IBSS' significant operating losses,
accumulated deficit and negative working capital raise substantial doubt about
its ability to continue as a going concern and cautions that the financial
statements do not include adjustments that might result from the outcome of
this uncertainty.
Existing credit facilities are not expected to be sufficient to cover liquidity
requirements, and IBSS is currently facing the prospect of not having adequate
funds to operate its business. There can be no assurance that additional credit
facilities can be arranged or that any long-term restructuring alternative can
be successfully initiated or implemented, in which case IBSS may be compelled to
pursue a bankruptcy filing in the absence of a proposed or pre-approved
financial restructuring. In the first quarter of 1999, IBSS secured additional
funding of $860,000 through a private placement of common stock and common stock
purchase warrants (Note 18).
Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has under development a business and marketing
plan that, if successfully funded and executed as part of a financial
restructuring, can significantly improve operating results. The support of
IBSS' vendors, customers, lenders, shareholders and employees will continue to
be key to IBSS' future success.
NOTE 3. CAPITALIZED SOFTWARE COSTS:
Capitalized software costs consist of the following at December 31,:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Internally developed software $ 945,962 $ 279,109
Less accumulated amortization (92,966) (71,467)
--------- ---------
========= =========
</TABLE>
IBSS has determined that no write-down of capitalized software costs is
necessary for the reporting periods included in these financial statements.
F-13
<PAGE> 28
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31,:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Computer equipment $ 247,874 $ 209,671
Furniture and fixtures 49,208 25,096
Office and other equipment 44,306 31,292
Computer software 8,869 8,024
Leasehold improvements 7,826 --
--------- ---------
358,083 274,083
Less accumulated depreciation (217,327) (158,524)
--------- ---------
Property and equipment, net $ 140,756 $ 115,559
========= =========
</TABLE>
NOTE 5. NOTES 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 was able to 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, 1998 and 1997, the outstanding balance under this agreement was
approximately $20,000 and $92,000, respectively. Administrative fees paid under
this agreement for the years ended December 31, 1998, 1997 and 1996, were
approximately $7,000, $17,000, and $12,000, respectively, and are included in
interest expense. As of December 31, 1998, the factoring agreement was
terminated due to a substantial default of the terms of the agreement by IBSS.
Short-term Note - Short-term borrowings includes a $70,000 non-interest bearing
note payable maturing in February 1999. In order to induce the creditors to
advance the funds to IBSS, three principal shareholders of IBSS executed
options that allow the creditors to purchase up to 900,000 shares of common
stock, which are held in escrow (Note 9 and 13).
F-14
<PAGE> 29
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>
1998 1997
----------- ---------
<S> <C> <C>
Negative working capital $ 1,184,459 $ 156,566
=========== =========
Deferred revenue $ 120,183 $ 107,803
=========== =========
</TABLE>
NOTE 7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31,:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Note payable to Carolina Capital Investment Corporation
("CCIC") bearing interest at 11.25%, maturing February
2001, for working capital $ 81,000 $ 114,000
Less current portion (39,000) (36,000)
----------- ---------
$ 42,000 $ 78,000
=========== =========
</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, 1998 are as follows:
<TABLE>
<S> <C>
Year ended December 31, 1999 $ 39,000
Year ended December 31, 2000 36,000
Year ended December 31, 2001 6,000
$ 81,000
========
</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.
F-15
<PAGE> 30
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 8. SUBORDINATED DEBT:
During 1998, IBSS issued $500,000 principal amount of 12% convertible
subordinated notes (the "Convertible Notes") due June 5, 2003. Interest on the
Convertible Notes is payable monthly, commencing in June 1999. The Convertible
Notes are convertible into common shares at $.923, $1.098, $1.273, $1.448 and
$1.623 per share in years one through five, respectively, at the option of the
holder. The Convertible Notes are redeemable at IBSS' option, in whole or in
part, at any time after June 5, 2002. The Convertible Notes are subordinate to
all other indebtedness of IBSS.
As part of the Convertible Note financing, IBSS issued the debt holders
541,000, non-transferable, detachable warrants with a two year term, which
entitle the holder to purchase one common share for each warrant. The warrants
are exercisable at a price of $.923 in year one and $1.061 in year two (Note
9).
NOTE 9. SHAREHOLDERS' (DEFICIENCY) EQUITY:
Stock Split - On January 28, 1997, IBSS' Board of Directors approved a motion
to increase and modify IBSS' authorized shares of common stock from 1,000 at $1
par to 100,000,000 no par value and cancelled the Class B common shares. On
March 5, 1997, IBSS' Board of Directors and its shareholders authorized a split
of the IBSS outstanding shares by the issuance of 5,999 additional shares of
IBSS common stock for each one share presently outstanding. For comparative
purposes all common stock share information presented in these financial
statements have been restated to reflect the current share structure.
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. Costs of issuance 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.
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.
Warrants - In consideration for Wolverton agreeing to purchase any shares not
sold at the conclusion of IBSS's initial public offering, IBSS granted
Wolverton and two of its designees warrants to purchase 486,000, 10,000 and
4,000 commons shares, respectively, of IBSS at any time up to November 27,
1999, at a price of $1.00 (Canadian) per share if exercised in the first year
and at a price of $1.15 (Canadian) per share if exercised thereafter.
F-16
<PAGE> 31
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 9. SHAREHOLDERS' (DEFICIENCY) EQUITY (CONTINUED):
Warrants (continued)
During 1998 in consideration for receiving the Convertible Notes (Note 8), IBSS
granted the note holders warrants to purchase 541,000 common shares of IBSS at
any time up to June 5, 2000 at a price of $0.92 per share in the first year and
at a price of $1.06 per share if exercised thereafter.
Performance Shares - As a requirement of the British Columbia Securities
Commission, the total common shares of management (3,600,000) were held
pursuant to the terms of an escrow agreement, as performance shares ("Escrowed
Shares").
The performance shares may be released from escrow, on a pro-rata basis, based
upon the cumulative cash flow of IBSS, as evidenced by annual audited financial
statements. "Cash flow" is defined to mean net income or loss before tax,
adjusted for certain add-backs. For each $0.91 of cumulative cash flow
generated by IBSS from its operations, one performance share may be released
from escrow.
IBSS expects that the release of the Escrowed Shares to officers, directors,
employees and consultants of IBSS will be deemed compensatory and, accordingly,
will result in a substantial non-cash charge to reportable earnings, which
would equal the fair market value of such shares on the date of release. Such
charge could substantially increase IBSS' loss or reduce or eliminate IBSS' net
income, if any, for financial reporting purposes for the period(s) during which
such shares are, or become probable of being, released from escrow. Such charge
may have a depressive effect on the market price of IBSS securities.
Preferred Stock - IBSS' authorized shares of preferred stock may be issued in
one or more series, and the Board of Directors is authorized, without further
action by the shareholders, to designate the rights, preferences, limitations
and restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Board of Directors also may designate par
value, preferences in liquidation and the numbers of shares constituting any
series.
F-17
<PAGE> 32
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 10. LOSS PER SHARE:
The following table shows a reconciliation of the numerators and denominators
used in calculating basic and diluted loss per share:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted loss per share $(1,128,761) $ (745,701) $ (253,265)
----------- ----------- -----------
DENOMINATOR:
Weighted average common shares - basic and diluted
calculation 8,210,542 4,615,647 3,600,000
----------- ----------- -----------
BASIC AND DILUTED LOSS PER SHARE $ (0.14) $ (0.16) $ (0.07)
=========== =========== ===========
</TABLE>
Warrants to purchase approximately 598,000 shares of common stock at a weighted
average of $1 (Canadian) per share and employee stock options to purchase
776,360 shares of common stock at an average price of $1.19 (Canadian) per
share were outstanding during 1998. The warrants and options were not included
in the computation of diluted loss per share because the warrants and options
are antidilutive when included in the computation due to IBSS's net loss.
NOTE 11. 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 generally become
exercisable in installments of 50 percent per six months commencing six months
from the date of grant. 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.
F-18
<PAGE> 33
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 11. EMPLOYEE BENEFITS (CONTINUED):
Information with respect to options granted under the Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
Weighted average
exercise
Price per share
Stock Options (Canadian Dollars)
------------- ------------------
<S> <C> <C>
Outstanding at January 1, 1997 -- $ --
Granted during the year 289,160 $ 1.00
Exercised during the year -- $ --
Expired or cancelled during the year (38,000) $ 1.00
-------- --------
Outstanding at December 31, 1997 251,160 $ 1.00
Granted during the year 605,500 $ 1.24
Exercised during the year (6,900) $ 1.00
Expired or cancelled during the year (73,400) $ 1.00
-------- --------
OUTSTANDING AT DECEMBER 31, 1998 776,360 $ 1.19
======== ========
EXERCISABLE AT DECEMBER 31, 1998 269,590 $ 1.00
======== ========
</TABLE>
Had compensation expense for IBSS' Option Plan been determined based upon fair
values at the grant dates for awards under the Option Plan in accordance with
SFAS No. 123 "Accounting for Stock-Based Compensation," IBSS' net loss and net
loss per share would have increased to the pro forma amounts indicated below.
The 1997 grants are non-compensatory, as defined by SFAS No. 123 and therefore
have been excluded from the calculations that are summarized in the pro-forma
disclosure. Additional stock option awards are anticipated in future years.
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Net Loss
As reported $ (1,128,761)
Pro forma $ (1,386,387)
Net loss per share
As reported $ (0.14)
Pro forma $ (0.17)
</TABLE>
The pro forma disclosures required by SFAS 123 regarding net loss and net loss
per share are stated as if IBSS has accounted for stock options using fair
values. Using the Black-Scholes option pricing model the fair value at the date
of grant for these options was estimated using the following assumptions:
risk-free interest rates ranging from 4.42% to 5.65%, volatility factor of the
expected market price of IBSS' common stock of 1.678 for options issued during
1998; and an expected option life ranging from six months to one year. The
weighted average fair value for options granted under the Option Plan during
1998 was $0.09.
F-19
<PAGE> 34
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 11. EMPLOYEE BENEFITS (CONTINUED):
The Black-Scholes and other option pricing models were developed for use in
estimating fair value of traded options, which have no vesting restrictions and
are fully transferable. In addition, option-pricing models require the input
of highly subjective assumptions. IBSS' employee stock options have
characteristics significantly different than those of traded options, and
changes in the subjective assumptions can materially affect the fair value
estimate. Accordingly, in management's opinion, these existing models may not
necessarily provide a reliable single measure of the fair value of employee
stock options.
NOTE 12. INCOME TAXES:
Deferred income taxes reflect the net tax effect of temporary differences and
carryforwards between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of IBSS' deferred tax assets and liabilities consisted
of the following at December 31,:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 867,380 $ 205,849
Deferred revenue 45,670 40,965
Other, net 5,182 5,435
--------- ---------
Total deferred tax assets 918,232 252,249
--------- ---------
Deferred tax liabilities:
Capitalized software costs (324,138) (78,904)
Depreciation (2,552) (7,804)
--------- ---------
Total deferred tax liabilities (326,690) (86,708)
--------- ---------
Valuation allowance (591,542) (165,541)
--------- ---------
Total $ -- $ --
========= =========
</TABLE>
F-20
<PAGE> 35
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 12. INCOME TAXES (CONTINUED):
Temporary differences and carryforwards which gave rise to significant portions
of deferred tax assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Operating loss carryforwards $ 661,531 $ 205,849
Deferred revenue 4,705 40,965
Other, net 4,999 (2,369)
Capitalized software costs (245,234) (78,904)
Valuation allowance (426,001) (165,541)
--------- ---------
Net deferred income taxes $ -- $ --
========= =========
</TABLE>
The principal reasons for the differences between income tax expense and the
amount computed by applying the statutory federal income tax rate of 34% to
pre-tax loss were as follows for the two years ended December 31,:
<TABLE>
<CAPTION>
(April 18 - December 31)
1998 1997
<S> <C> <C>
Tax at federal statutory rate $(383,779) $(131,741)
Effect on rate of:
Life insurance premiums (7,368) (7,610)
Penalties (27,519) (23,864)
Non-deductible expenses (7,335) (2,326)
Change in valuation allowance 426,001 165,541
--------- ---------
Total $ -- $ --
========= =========
</TABLE>
Prior to April 18, 1997, IBSS was a Subchapter S corporation, and as such it
was not subject to federal or state income taxes. Effective April 18, 1997,
IBSS voluntarily revoked its Subchapter S status. Therefore, beginning April
18, 1997 IBSS is subject to the regular Subchapter C income tax rules. For the
period April 18, 1997 to December 31, 1997 IBSS had a net operating loss of
approximately $542,000. As of December 31, 1998, IBSS had federal and state net
operating loss carryforwards of approximately $2,280,000. The net operating
loss carryforwards will expire between 2017 and 2018 if not utilized.
F-21
<PAGE> 36
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 13. RELATED PARTY TRANSACTIONS:
Included in related party payable at December 31, 1998, are demand notes
payable to a related party. The notes bear interest of 18% with interest
payable upon demand. Effective as of August 29, 1997, three principal holders
of IBSS' securities agreed to convert $33,000 of demand notes into contributed
capital. Three principal shareholders of IBSS have issued options on 900,000
shares of common stock held in escrow as an inducement for creditors to advance
$70,000 to IBSS (Notes 5 and 9).
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION:
During the years presented below, interest paid amounted to:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Interest paid $ 19,787 $ 104,716 $ 57,584
======== ========= ========
</TABLE>
The following table summarizes non-cash investing and financing activities:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Transfer of inventory to property and equipment $ 3,962 $ $
======== ========= ========
Conversion of note into contributed capital
(Note 13) $ -- $ 33,000 $ --
======== ========= ========
Conversion of convertible notes into capital
(Note 9) $ -- $ 119,700 $ --
======== ========= ========
</TABLE>
NOTE 15. 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 for the years ended December 31,:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Rent expense $145,000 $ 142,000 $140,000
======== ========= ========
</TABLE>
F-22
<PAGE> 37
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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, 1998, excluding bonuses, is approximately $278,000.
NOTE 16. 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.
As discussed in Note 1, 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
significantly from these estimates.
A 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, 1998, the customer continues to partially fund development
of FIS 2.0.
F-23
<PAGE> 38
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 16. SIGNIFICANT RISKS AND UNCERTAINTIES (CONTINUED):
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, IBSS 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 17. SEGMENTED INFORMATION:
Management has determined that IBSS operates in one dominant industry segment
which involves the supply of computer technology products and services. All of
IBSS's operations, assets, and employees are located in the United States and
their revenues are generated in the United States.
NOTE 18. SUBSEQUENT EVENTS:
Private Placement - In the first quarter of 1999, IBSS completed a private
placement of 860,000 shares of common stock and two-year warrants for the
purchase of 86,000 shares of common stock, pursuant to which IBSS received gross
proceeds of $860,000. The warrants are exercisable at $1.00 per share during the
first year following their issuance and at $1.25 per share during the second
year following their issuance.
F-24
<PAGE> 39
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
FORM 10-KSB
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company incorporated
by reference to Exhibit 2.1 to the Company's Form 1-A filed July 9,
1997
3.2 Amended and Restated Bylaws of the Company incorporated by reference to
Exhibit 2.2 to the Company's Form 1-A filed July 9, 1997
10.1 Employment Agreement dated as of December 31, 1996 between the Company
and Harry P. Langley incorporated by reference to Exhibit 6.2 to the
Company's Form 1-A filed July 9, 1997
10.2 Amendment No. 1 dated as of September 1, 1997, to Employment Agreement
dated as of December 31, 1996, between the Company and Harry P.
Langley incorporated by reference to Exhibit 6.21 to the Company's
Amendment No. 1 to Form 1-A filed September 15, 1997
10.3 Employment Agreement dated as of January 1, 1997, as amended January
1, 1998, between the Company and George E. Mendenhall incorporated by
reference to Exhibit 6.3 to the Company's Form 1-A filed July 9, 1997
10.4 Amendment No. 1 dated as of September 1, 1997, to Employment Agreement
dated as of January 1, 1997, between the Company and George E.
Mendenhall incorporated by reference to Exhibit 6.22 to the Company's
Amendment No. 1 to Form 1-A filed September 15, 1997
10.5 Amendment No. 2 dated as of January 1, 1998 to Employment Agreement dated
January 1, 1997, between the Company and George E. Mendenhall
incorporated by reference to Exhibit 6.17(b) to the Company's
Amendment No. 1 to Form SB-1 filed April 6, 1998 (Registration No.
333-43437)
10.6 Employment Agreement dated as of December 31, 1996 between the Company
and Stuart E. Massey incorporated by reference to Exhibit 6.4 to the
Company's Form 1-A filed July 9, 1997
10.7 Amendment No. 1 dated as of September 1, 1997, to Employment Agreement
dated as of December 31, 1996, between the Company and Stuart E.
Massey incorporated by reference to Exhibit 6.23 to the Company's
Amendment No. 1 to Form 1-A filed September 15, 1997
10.8 Employment Agreement dated as of July 3, 1995, between the Company and
Donald J. Crossley incorporated by reference to Exhibit 6.20 to the
Company's Form 1-A filed July 9, 1997
10.9 Employment Agreement effective as of January 1, 1998 between the
Company and Donald R. Futch incorporated by reference to Exhibit 6.20
to the Company's Amendment No. 1 to Form SB-1 filed April 6, 1998
(Registration No. 333-43437)
10.10 Integrated Business Systems and Services, Inc. Stock Option Plan
incorporated by reference to Exhibit 6.18 to the Company's Form 1-A
filed July 9, 1997
10.11 Loan Agreement dated February 7, 1996 between the Company and Carolina
Capital Investment Corporation incorporated by reference to Exhibit
6.5 to the Company's Form 1-A filed July 9, 1997
10.12 Promissory Note dated February 7, 1996 given by the Company to
Carolina Capital Investment Corporation incorporated by reference to
Exhibit 6.6 to the Company's Form 1-A filed July 9, 1997
10.13 Assignment of Contracts dated February 7, 1996, between the Company
and Carolina Capital Investment Corporation incorporated by reference
to Exhibit 6.7 to the Company's Form 1-A filed July 9, 1997
10.14 Security Agreement dated February 7, 1996, between the Company and
Carolina Capital Investment Corporation incorporated by reference to
Exhibit 6.8 to the Company's Form 1-A filed July 9, 1997
</TABLE>
<PAGE> 40
<TABLE>
<S> <C>
10.15 Recourse Factoring Contract and Security Agreement dated December 22,
1995 between the Company and Liberty Finance Company incorporated by
reference to Exhibit 6.13 to the Company's Form 1-A filed July 9, 1997
10.16 Lease Agreement dated November 8, 1995 between the Company and Atrium
Northeast Limited Partnership incorporated by reference to Exhibit
6.14 to the Company's Form 1-A filed July 9, 1997
10.17 Escrow Agreement among Pacific Corporate Trust Company, the Company,
Harry P. Langley, George E. Mendenhall and Stuart E. Massey
incorporated by reference to Exhibit 6.24 to the Company's Amendment
No. 2 to Form 1-A filed October 8, 1997
10.18 Premier Reseller Agreement dated April 10, 1997 between the Company
and Intermec Corporation incorporated by reference to Exhibit 6.15 to
the Company's Amendment No. 1 to Form 1-A filed September 15, 1997
10.19 Business Alliance Program Agreement dated May 22, 1996 between the
Company and Oracle Corporation, together with a Runtime Sublicense
Addendum dated May 22,1996, and a Full Use and Deployment Sublicense
Addendum dated May 22, 1996 incorporated by reference to Exhibit 6.16
to the Company's Form 1-A filed July 9, 1997
27 Financial Data Schedule (for SEC use only)
</TABLE>
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC. FOR THE
TWELVE MONTHS ENDING DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,593
<SECURITIES> 0
<RECEIVABLES> 159,122
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 206,621
<PP&E> 358,083
<DEPRECIATION> (217,327)
<TOTAL-ASSETS> 1,203,116
<CURRENT-LIABILITIES> 1,391,080
<BONDS> 542,000
0
0
<COMMON> 2,007,803
<OTHER-SE> (2,737,767)
<TOTAL-LIABILITY-AND-EQUITY> 1,203,116
<SALES> 87,123
<TOTAL-REVENUES> 1,021,023
<CGS> 49,317
<TOTAL-COSTS> 527,147
<OTHER-EXPENSES> 1,551,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,451
<INCOME-PRETAX> (1,128,761)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,128,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,128,761)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
