<PAGE> 1
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, 1999
[ ] 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.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
South Carolina 57-0910139
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
115 Atrium Way, Suite 228, Columbia, SC 29223
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(803) 736-5595
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
- --------------------------------------------------------------------------------
(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 [ ]
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, 1999, the issuer's most
recent fiscal year end, were $779,217.
The aggregate market value of voting stock held by nonaffiliates of the issuer
on February 29, 2000 was approximately $115,309,954.*
The number of shares outstanding of the registrant's common stock, no par value,
was 10,537,635 at December 31,1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Proxy Statement in connection with its 2000 Annual
Meeting of Shareholders (Part III).
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
- -----------------
* 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.
<PAGE> 2
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
INDEX TO FORM 10-KSB
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
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.................................................8
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations....................9
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.....................................................................................14
Item 10. Executive Compensation..................................................................................14
Item 11. Security Ownership of Certain Beneficial Owners and Management..........................................14
Item 12. Certain Relationships and Related Transactions..........................................................14
Item 13. Exhibits and Reports on Form 8-K........................................................................14
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company was incorporated in South Carolina in 1990, and its principal office
is located at Suite 228, 115 Atrium Way, Columbia, South Carolina, 29223. Its
telephone number is (803) 736-5595.
Integrated Business Systems and Services, Inc. ("IBSS") provides computer
technology products and services to manufacturers and other industries
throughout the country that require automation of manufacturing processes and/or
business-to-business on-line transaction processing products. IBSS licenses,
installs and services its proprietary products, Synapse Manufacturing, Synapse
EAI+, and Synapse B2B. Synapse Manufacturing is typically licensed to
manufacturers that have already installed or are planning to install ERP
(Enterprise Resource Planning) systems. ERP systems use database technology to
control all of the information relating to a manufacturing company's customers,
products, employees and financial data. IBSS' Synapse EAI+ product is typically
licensed to companies that require seamless integration between disparate
systems and applications. IBSS and its system integrators utilize Synapse B2B to
integrate their customer's suppliers and customers together via the Internet and
link other legacy system applications together without requiring traditional or
object oriented programming techniques.
IBSS' MISSION STATEMENT:
THE COMPANY'S MISSION IS TO BE A HIGHLY PROFITABLE WORLD-CLASS PROVIDER OF VALUE
ADDED ELECTRONIC BUSINESS SOFTWARE PRODUCTS TO MANUFACTURING COMPANIES AND OTHER
INDUSTRIES THAT REQUIRE THE USE OF TRANSACTION PROCESSING TECHNOLOGY.
PRODUCTS AND SERVICES
The Company announced on February 22, 2000, the availability of SYNAPSE B2B.
IBSS' Synapse B2B product enables business-to-business integration via the
Internet with other business systems and legacy applications. Resolving the
problems of complex, time consuming and costly integration issues is now
critical for an enterprise to be successful. Business-to-business (B2B)
integration is the automated exchange of information between different
organizations.
The Company announced on October 11, 1999, the availability of SYNAPSE EAI+, the
Company's open Enterprise Modeling tool, that offers more than just data mapping
and message switching. IBSS' enterprise application integration (EAI) tool
provides companies with true enterprise modeling and application extension.
Synapse EAI+ allows complete access to data from suppliers, distributors and
customers across legacy, homegrown, or customized applications as well as
packaged front and back office applications.
The Company announced on September 7, 1999, the delivery of SYNAPSE
MANUFACTURING. Synapse Manufacturing is a fully configurable Manufacturing
Execution, Order Fulfillment and Enterprise Application Integration System that
can be applied horizontally across manufacturing industry verticals.
The Company installed Synapse Manufacturing Version 2.0 to a leading supplier of
private label knitted hosiery during 1999. Implementation of Synapse EAI+ was
completed for a manufacturer of airbags during the fourth quarter of 1999.
Synapse B2B and Synapse EAI+
Synapse B2B, IBSS' business-to-business and Internet integration environment,
and Synapse EAI+, IBSS' enterprise application integration environment, depend
on the robust versatility of the Synapse architecture. The Synapse architecture
provides a framework for modern electronic businesses to react to change. The
world is rapidly becoming inter-connected and inter-dependent. For a business to
compete effectively, it has to react with a pre-
3
<PAGE> 4
defined efficient environment that can produce an immediate solution while
maintaining on-going synergy with legacy systems and yet to be defined future
systems. The traditional approach of custom programming and object-oriented
programming cannot keep up with this new demand. Mergers, electronic trading
partners and trading portals, collaborative manufacturing and distribution,
collaborative product development, customer relationship management all arrive
with constantly changing business process rules applied to an open-ended number
of electronic systems.
A new architecture is needed; one that reacts in business terms, not programmer
terms. Synapse offers application and enterprise modeling. Synapse transactions
model the enterprise and its business processes directly, allowing third party
systems, like ERP, supply chain and Web portals, to be more loosely coupled.
System integrators require an environment that is capable of defining and
maintaining an entire business topology in business processing terms, not
programmer terms. It must extend the functionality of legacy systems and provide
rapid integration with new business functionality and extension simply and
efficiently.
Synapse Manufacturing
Synapse manufacturing bundles the integration capability of the Synapse
architecture with the application modules capable of fully automating the
manufacturing plant. Synapse manufacturing is a powerful Manufacturing Execution
Management System (MES), which enables the sharing of real-time information with
the manufacturing plant, the manufacturer's customers, and supply chain.
Providing a shrink-wrapped Manufacturing Execution System (MES) package, which
fits all industries without huge modifications, has proved nearly impossible for
software vendors. Many companies develop MES applications using the most
advanced programming tools available. Recently, that has meant the use of
object-oriented and component-based development tools. Although many software
products gain flexibility from the use of these techniques, these methods still
require many programmers and a significant amount of time because new
application functionality must still be encoded in software components. This
object-oriented/component-based technology approach has forced each software
vendor to focus on only a few vertical markets, effectively limiting their MES
from broad applicability across market segments. IBSS, using the Synapse
architecture, has developed an MES application (Synapse Manufacturing)
environment whereby configuration of any manufacturing vertical system can be
provided rapidly and efficiently.
Synapse Manufacturing provides on-line process management for manufacturing shop
floor environments. Synapse Manufacturing utilizes Synapse, the Company's
on-line transaction processing configuration environment to provide maximum
configurability, maintainability and efficiency for client's systems. 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 competing MES applications.
Synapse Manufacturing 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, clients
achieve a return on their computer technology investment more quickly than by
using other MES systems. 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. Synapse
Manufacturing is designed to allow configuration of MES applications for any
manufacturing industry by a manufacturing industrial analyst without the
involvement of computer programmers for custom software development.
Reseller Programs
The Company announced on September 22, 1999 the availability of the IBSS
Reseller/Referral Program that provides Value Added Resellers (VARs) and
solutions integrators the ability to focus on their vertical markets within the
manufacturing industry using IBSS' solutions. The new Reseller/Referral Program
is structured to
4
<PAGE> 5
distribute IBSS' products, Synapse Manufacturing, Synapse EAI+, and Synapse B2B
through systems integrator channels.
The Company is actively signing up integrators who will provide system
configuration and integration services in conjunction with the Synapse products
for the Company's clients as well as resale or refer the products to the
integrator's clients. Osprey Systems, an SAP integrator based in Charlotte,
N.C., was the first integrator who adopted the Synapse based applications as
"Best of Breed" solutions to track shop floor processes and integrate real-time
information to SAP for Osprey's clients. TRW Information Systems and The Thomas
Group were added in November of 1999 and NuTechs, a manufacturing integrator
based in Detroit, Michigan was added during the first quarter of 2000.
RESEARCH AND DEVELOPMENT
Further research and development of the Synapse based products are scheduled for
2000. The Synapse environment is currently "Internet enabled", in that it can be
distributed to connect multiple plant locations through the Internet. However,
the Company plans to "Web enable" Synapse during the first two quarters of 2000.
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" configuration tool so that
system integrators and consultants can support and configure the Synapse
Manufacturing applications remotely. Management believes these value added
additions will increase both the need and demand for the Synapse Manufacturing
product.
MARKETING STRATEGY
IBSS' marketing strategy is to focus on integrators who are positioned in the
e-business integration and/or the ERP and shop floor automation market. These
integrators are looking for an application whereby they can expand their service
revenue with their existing customer base and grow market share with a strategic
position over their competition. Until now, there has not been an application
that would allow integration firms to focus on shop floor automation without
huge investments in programming resources. IBSS has developed a tool that allows
integrators to automate any manufacturing shop floor, regardless of the
vertical, without the traditional programming costs required by current
technology
The Company has developed a marketing strategy with several key components,
including the following:
- Target strategic alliances with integrators of e-business, ERP
and shop floor systems;
- Identify and target large manufacturers who have implemented
ERP systems or who are in the process of implementing ERP
systems as potential customers;
- Identify and target large companies who have implemented
e-business solutions or who are in the process of implementing
e-business solutions 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 and e-business industries;
- Establish awareness of product and name recognition to
industry analysts and have analyst reports on the Synapse
Manufacturing, Synapse EAI+, and Synapse B2B products
completed; and
- Increase investor awareness locally, regionally and
nationally.
The sales and marketing efforts are currently being conducted and are expected
to continue to be conducted, primarily by Joseph R. Dunkley, Vice President of
Sales, Stuart E. Massey, Vice President of Engineering; Donald R. Futch, Vice
President of Business Development, Harry P. Langley, President and Chief
Executive Officer and various account representatives and consultants for the
Company.
5
<PAGE> 6
MARKETS AND COMPETITION
The IBSS Synapse B2B product is a quantum leap forward in solving problems that
run the gamut, from automated procurement, inventory management and distribution
management to order processing, integrated customer support and collaborative
planning. Forrester Research maintains that e-business is about to reach a
threshold from which it will accelerate into "hyper-growth." Inter-company trade
of goods over the Internet, Forrester forecasts, will double every year over the
next five years, surging from $43 billion last year to $1.3 trillion in 2003.
Undeniably, B2B integration is rapidly becoming a business requirement. To quote
the June 26, 1999 issue of The Economist, "It will become progressively harder
for firms that cannot or do not want to trade online to survive."
When the Manufacturing Execution System ("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. However, 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 proved 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 industry
specific 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 using object oriented or component-based
programming techniques using Microsoft's standards. While these methods may be
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 Synapse
Manufacturing 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.
EMPLOYEES
As of December 31, 1999, the Company had 26 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
6
<PAGE> 7
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.
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
18,124 square feet of office space. The lease expires in October 2004, which 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 1999.
7
<PAGE> 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company traded on the Vancouver Stock Exchange ("VSE")
under the symbol "IBS" from October 1997 until the Company announced its
voluntary de-listing of its common shares from the VSE at the close of business
on June 29, 1999. The Company 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 United States dollars) for the
indicated periods.
<TABLE>
<CAPTION>
SALES PRICE (VSE) BID PRICE (OTCBB)
FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW HIGH LOW
<C> <C> <C> <C> <C>
1st quarter (1/1/99 - 3/31/99)..................Cdn$1.70 Cdn.$.75 US$1.125 US$.562
2nd quarter (4/1/99 - 6/30/99)......................1.35 .62 .812 .375
3rd quarter (7/1/99 - 9/30/99)....................... 1.687 .656
4th quarter (10/1/99 - 12/31/99)..................... 2.375 .593
SALES PRICE (VSE) BID PRICE (OTCBB)
FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW HIGH LOW
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
3rd quarter (7/1/98 - 9/30/98)......................3.45 0.95 US$2.75 US$0.50
4th quarter (10/1/98 - 12/31/98)....................1.40 0.53 1.25 0.38
</TABLE>
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 February 29, 2000, there were 38 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 three months ended December 31, 1999, the securities identified below
were issued by the Company without registration under the Securities Act of
1933, as amended (the "1933 Act"). In each case, all of the securities were
issued pursuant to the exemption from registration contained in Section 4(2) and
Rule 506 of Regulation D of the 1933 Act as a transaction, not involving a
general solicitation, in which the purchaser was purchasing for investment. The
Company believes that each purchaser was given or had access to detailed
financial and other information with respect to the and possessed requisite
financial sophistication.
In the fourth quarter of 1999, the Company received approximately $475,500 in
gross proceeds from the exercise by four holders of warrants for the purchase of
459,680 shares of the Company's Common Stock.
8
<PAGE> 9
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, 1999, 1998, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Sales $ 779,217 $ 1,021,023 $ 1,821,816 $ 2,357,939 $ 2,202,869
Cost of Sales 543,845 527,147 893,397 1,045,500 1,160,639
Gross Profit 235,372 493,876 928,419 1,312,439 1,042,230
Research and Development Expenses 429,436 50,992 332,139 362,983 292,850
Sales and Marketing Expenses 528,144 342,609 331,328 207,460 173,768
General and Administrative Expenses 1,197,650 1,229,036 1,010,653 995,261 691,235
(including interest expense)
Total Expenses 2,155,230 1,622,637 1,674,120 1,565,704 1,157,853
Operating Income (Loss) (1,919,858) (1,128,761) (745,701) (253,265) (115,623)
Income (Loss) Before Income Taxes (1,919,858) (1,128,761) (745,701) (253,265) (115,623)
Income Taxes -0- -0- -0- -0- -0-
Net Income (Loss) (1,919,858) (1,128,761) (745,701) (253,265) (115,623)
Basic and Diluted Earnings (Loss) (0.20) (0.14) (0.16) (0.07) (0.03)
Per Share
As at December 31,
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- -----------
Balance Sheet Data
Working Capital $ (285,719) $(1,184,459) $ (156,566) $ (956,920) $ (792,332)
Property, Plant and Equipment 155,654 140,756 115,559 156,447 149,548
Capitalized Software Costs 768,001 852,996 207,642 50,950 71,353
Other Assets 2,793 2,743 3,318 3,218 2,154
Total Assets 1,447,017 1,203,116 707,483 528,928 620,220
Long Term Liabilities 1,430,000 542,000 78,000 114,000 -0-
Shareholders' Equity (Deficiency)
Dollar Amount (706,327) (729,964) 91,953 (860,305) (569,277)
Number of shares issued and
outstanding (1) 10,537,635 8,438,663 7,987,763 3,600,000 3,600,000
</TABLE>
- ------------------
(1) All share numbers in the table retroactively reflect the Company's stock
split on March 5, 1997.
9
<PAGE> 10
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Total revenues decreased $241,806 (approximately 24%) from $1,021,023
in 1998 to $779,217 in 1999. This decrease was primarily attributable to a
decrease in the sales of services, data collection equipment and maintenance due
to the increased emphasis in the completion of Synapse Manufacturing 2.0 and
Synapse EAI+. This decrease was partially offset by an increase in license
revenue due to the implementation of the Company's Synapse EAI+ in the fourth
quarter of 1999.
Cost of Revenues. Cost of revenues increased to $16,698 (approximately 3%) from
$527,147 in 1998 to $543,845 in 1999. This increase was attributable to an
increase in amortization of software costs due to the completion of Synapse
Manufacturing 2.0 as well as an increase in labor costs due to an increase in
the number of technical employees. This increase was basically offset by a
decrease in the cost of sales of integration services and data collection
equipment due to the increased emphasis in the completion of Synapse
Manufacturing 2.0. The cost of revenues as a percentage of total revenues was
52% and 70% for 1998 and 1999, respectively.
Research and Development. Research and development expenses increased $378,444
(approximately 742%) from $50,992 in 1998 to $429,436 in 1999. The Company
released Version 2.0 of Synapse Manufacturing System for general product
availability; therefore, additional development costs were expensed rather than
capitalized. Research and development expenses represented approximately 5% and
55% of total revenues for 1998 and 1999, respectively.
General and Administrative. General and administrative expenses, including
interest expense, decreased $31,386 (approximately 3%) from $1,229,036 in 1998
to $1,197,650 in 1999. Rent expense decreased due to a reduction in leased
facilities as of the beginning of 1999. This decrease was partially offset by in
increase in interest expense as a result of private placement of a five- year
convertible note in the amount of $1,250,000 in July 1999. General and
administrative expenses, including interest expense, represented approximately
120% and 154% of total revenues for 1998 and 1999, respectively.
Sales and Marketing. Sales and marketing expenses increased $185,535
(approximately 54%) from $342,609 in 1998 to $528,144 in 1999. This increase was
primarily attributable to an increase in public relations, investor relations
awareness and marketing travel expenses. This increase was partially offset by a
reduction in marketing salaries due to a reduction of marketing personnel, and
reductions in marketing advertising and convention expenses. Sales and marketing
expense represented approximately 34% and 68% of total revenues for 1998 and
1999, 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 working capital deficit and negative shareholders' equity. As a result,
the Company has had liquidity problems from time to time. As of December 31,
1996, 1997, 1998 and 1999, the shareholders' equity (deficit) was $(860,305),
$91,953, $(729,964), and ($706,327) respectively. As of December 31, 1996, 1997,
1998 and 1999, the Company's working capital deficit was $956,920, $156,566,
$1,184,459, and $285,719 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.
10
<PAGE> 11
In December 1995, the Company entered into a factoring arrangement that was
being administered as a short-term borrowing arrangement collateralized by
accounts receivable, which generally permits borrowing of up to 75% of accounts
receivable. This arrangement was terminated by the Company in March, 1999. In
February 1996, the Company entered into a loan for $180,000 collateralized by
substantially all of the assets of the Company. This loan was retired was
retired in July of 1999.
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. During 1999, the Company received
approximately $43,500 in gross proceeds from the exercise by Wolverton
Securities, Ltd., of warrants for the purchase of 56,000 shares of the Company's
common stock.
In June 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 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 June 1999, $320,000 of the $500,000
convertible note was converted into 346,692 common shares at a conversion price
of $0.923 per share. In November and December, 1999, 259,680 shares were issued
due to the exercise of non-transferable share purchase warrants at a price of
$1.061 per share. Additional non-transferable warrants were issued entitling the
holders to purchase an aggregate of 259,680 common shares of the Company at a
rate of $1.07 per share during the first year, $1.15 per share during the second
year, $1.25 during the third year, $1.41 during the fourth year and $1.52 during
the fifth year.
In the first quarter of 1999, the Company completed a private placement of
800,000 shares of Common Stock and two-year warrants for the purchase of 80,000
shares of Common Stock, pursuant to which the Company received gross proceeds of
$800,000. 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.
In the second quarter of 1999, the Company completed a private placement of
60,000 shares of Common Stock and two-year warrants for the purchase of 6,000
shares of Common Stock, pursuant to which the Company received gross proceeds of
$60,000. Under the terms of this private placement, the Company also issued
1,800 shares of Common Stock as finder's fees. The warrants are exercisable at
$1.00 per share during the first year following their issuance and at $1.25
during the second year following their issuance.
In the second quarter of 1999, the company completed a Common Stock Purchase
Warrant agreement with accredited investors for the purchase of 1,000,000 shares
of Common Stock, pursuant to which the Company received gross proceeds of
$200,000. The warrants are exercisable at $1.00 per share during the term of
this Agreement. In the fourth quarter of 1999, the company received $200,000 in
gross proceeds from the exercise of 200,000 of these warrants. A new Common
Stock Warrant Agreement was issued for the purchase of the balance of 800,000
shares of Common Stock.
In the third quarter of 1999, the Company completed a Private Placement Offering
for an aggregate principal amount of $1,250,000 through a convertible Debenture
with an interest rate of 7% thru January 2000; 10% thereafter with a maturity
date of January 1, 2002. In conjunction with the Convertible Debenture, the
Company also entered into a Common Stock Purchase Warrant Agreement for the
purchase of 1,850,000 shares of common stock.
In the fourth quarter of 1999, the Company received approximately $475,500 in
gross proceeds from the exercise by four holders of warrants for the purchase of
459,680 shares of the Company's Common Stock.
11
<PAGE> 12
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
twelve 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 leased its principal facilities under a non-cancelable operating
lease through October 31, 1999, which had a five-year renewable term at market
rates. The lease was 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 was approximately $82,700. The rent expense under this
lease in 1999 and 1998 was approximately $82,700 and $133,200 respectively.
The Company entered into a lease agreement dated October 1, 1999, with the
Atrium Northeast Limited Partnership effective November 1,1999, for a 5 year
period with an option to renew for one 5-year period at market rates. The lease
is for 18,124 square feet of office space at a base rate of $276,391 for the
first year. The second year base rent increase to $280,922. The third through
fifth year base rent increases to $285,453.
Net cash used in operating activities was approximately $2,080,000 during the
twelve months ended December 31, 1999, as compared to approximately $127,000
during the twelve months ended December 31, 1998. The increase in cash used in
operating activities in 1999 was mainly due to an increase in the net loss, in
the amortization of software costs, pre-paid expenses, and other assets, as well
as accrued expenses. These increases were partially offset by decreases in
accounts receivable and the write-off of pre-paid commissions.
Net cash used in investing activities was approximately $212,000 during the
twelve months ended December 31, 1999, as compared to approximately $748,000
during the twelve months ended December 1998. The net cash used in investing
activities in 1999 was for the capitalization of internal software development
costs, the purchase of property and equipment, as well as a related party
receivable.
Net cash provided by financing activities was approximately $2,350,000 during
the twelve months ended December 31, 1999, as compared to approximately $807,000
during the twelve months ended December 31, 1998. The net cash provided by
financing activities in 1999 resulted primarily from the completion of a private
placement in the amount of $800,000 [less expenses of approximately $20,000], a
private placement in the amount of $60,000, a private placement of $1,250,000
through a convertible debenture, and approximately $600,000 from the exercise of
common stock options and warrants offset by the reductions of the Company's
long-term debt.
THE YEAR 2000
During the years leading up to the year 2000, an important business issue arose
over the concern that the Company's computer and other business systems, of
those of the Company's vendors, working either alone or in conjunction with
other software or systems, would incorrectly accept input of, store, manipulate
or output dates in the years 1999, 2000 or thereafter (commonly known as the
"Y2K Problem"). In response, the Company conducted a review of its business
systems, including computer systems, to identify and address the Y2K Problem.
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
accounting software and accompanying hardware, all of which were replaced by
fully compliant systems, all of the systems and machinery evaluated by the
Company
12
<PAGE> 13
were found to be Y2K immune or compliant. The Company spent approximately $5,000
on replacement systems for its existing accounting software and accompanying
hardware.
Core Products. In accordance with industry guidelines, the Company determined
that 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.
Internal Risks. The Company believes that its most significant internal risk
posed by the Y2K Problem was the possibility of a failure of its accounting
systems and hardware. As discussed above, the Company replaced its accounting
software and hardware in 1999.
Third Party Compliance. 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. In
advance of the advent of the year 2000, the Company gathered information from
and 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 has resolved any significant Y2K Problems with
its own systems, it cannot guarantee that its vendors or others have resolved
any or all Y2K Problems with their systems. 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.
Summary Assessment. Evidence of system performance in the computer and other
business systems of the Company and third parties with whom it conducts business
following January 1, 2000 indicates that most of the areas of exposure to system
malfunctions associated with the Y2K Problem have been properly addressed,
Nevertheless, there can be no assurance that the Company has identified 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 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.
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.
13
<PAGE> 14
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, 1999 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 F-25 sets
forth the exhibits that are filed as part of this Report on
Form 10-KSB.
(b) Reports on Form 8-K:
None.
14
<PAGE> 15
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: March 9, 2000 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, Chief Executive March 9, 2000
- ------------------------------------- Officer, and Chief Financial
Harry P. Langley Officer (Principal Executive
President and Chief Executive Officer Officer and Principal Financial
and Accounting Officer) and
Director
/s/ GEORGE E. MENDENHALL Executive Vice President March 9, 2000
- ------------------------------------- and Director
George E. Mendenhall
/s/ STUART E. MASSEY Vice President of Engineering March 9, 2000
- ------------------------------------- and Director
Stuart E. Massey
/s/ RICHARD MICHAEL CAMPBELL Director March 9, 2000
- -------------------------------------
Richard Michael Campbell
Director
- -------------------------------------
Raymond Burdiak
Director
- -------------------------------------
Russell C. King, Jr.
Director
- -------------------------------------
Carl Joseph Berger, Jr.
</TABLE>
15
<PAGE> 16
Integrated Business Systems and Services, Inc.
Index to Financial Statements
Pages
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
F-1
<PAGE> 17
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
SCOTT MCELVEEN, L. L. P.
Columbia, South Carolina
February 1, 2000
(March 2, 2000 as to Note 18)
F-2
<PAGE> 18
Integrated Business Systems and Services, Inc.
Balance Sheets
December 31,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 82,996 $ 16,593
Accounts receivable, trade 89,270 131,705
Accounts receivable other 2,368 --
Related party notes receivable 183,680 --
Unbilled revenue 28,885 27,417
Prepaid commissions, net (Note 1) -- 17,353
Other prepaid expenses 50,426 13,553
----------- -----------
Total current assets 437,625 206,621
Capitalized software costs, net (Note 3) 768,001 852,996
Property and equipment, net (Note 4) 155,654 140,756
Related party receivable 82,944 --
Other assets 2,793 2,743
----------- -----------
Total assets $ 1,447,017 $ 1,203,116
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Notes payable (Note 5) $ 28,976 $ 89,828
Related party payable (Note 13) -- 35,300
Long-term debt, current portion (Note 7) -- 39,000
Accounts payable 129,223 147,140
Accrued liabilities:
Accrued compensation and benefits 63,767 56,809
Accrued payroll taxes 305,402 407,312
Accrued professional fees 25,958 286,552
Accrued rent -- 66,618
Accrued interest 43,407 52,757
Other 38,338 89,581
Deferred revenue (Note 6) 88,273 120,183
----------- -----------
Total current liabilities 723,344 1,391,080
Long-term debt, net of current portion (Note 7) 1,250,000 42,000
Subordinated debt (Note 8) 180,000 500,000
----------- -----------
Total liabilities 2,153,344 1,933,080
----------- -----------
Commitments and contingencies (Note 15)
Shareholders' deficiency (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, 10,537,635 and 8,438,663 shares outstanding at December
31, 1999 and 1998, respectively 4,142,098 2,007,803
Notes receivable officers/directors (Note 13) (190,800) --
Accumulated deficit (4,657,625) (2,737,767)
----------- -----------
Total shareholders' deficiency (706,327) (729,964)
----------- -----------
Total liabilities and shareholders' deficiency $ 1,447,017 $ 1,203,116
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-3
<PAGE> 19
Integrated Business Systems and Services, Inc.
Statements of Operations
for the years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Services and funded development $ 558,293 $ 676,013 $ 1,216,559
Hardware sales 1,576 87,123 351,646
Software licensing 74,483 -- 51,660
Maintenance 144,865 257,887 201,951
----------- ----------- -----------
Total revenues 779,217 1,021,023 1,821,816
----------- ----------- -----------
OPERATING EXPENSES
Cost of revenues 543,845 527,147 893,397
Research and development costs 429,436 50,992 332,139
General and administrative 1,102,712 1,157,585 917,237
Sales and marketing 528,144 342,609 331,328
----------- ----------- -----------
Total operating expenses 2,604,137 2,078,333 2,474,101
----------- ----------- -----------
Loss from operations (1,824,920) (1,057,310) (652,285)
Interest expense 94,938 71,451 93,416
----------- ----------- -----------
Net loss $(1,919,858) $(1,128,761) $ (745,701)
=========== =========== ===========
Loss per share:
Net loss
Basic and diluted $ (0.20) $ (0.14) $ (0.16)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-4
<PAGE> 20
Integrated Business Systems and Services, Inc.
Statements of Changes in Shareholders' (Deficiency) Equity
for the three years ended December 31, 1999
<TABLE>
<CAPTION>
Number of Class A Notes Total
Class A Share Receivable Shareholders'
Shares Carrying Officers/ Accumulated (Deficiency)
Outstanding Value Directors Deficit Equity
----------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 3,600,000 $ 3,000 $ -- $ (863,305) $ (860,305)
Sale of common shares (Note 9) 3,950,000 1,545,259 -- -- 1,545,259
Subordinated debt converted to common
shares 437,763 119,700 -- -- 119,700
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)
Sale of common shares (Note 9) 861,800 839,695 -- -- 839,695
Subordinated debt converted to common
shares 346,692 320,000 -- -- 320,000
Exercise of options 76,374 240,038 -- -- 240,038
Exercise of warrants 515,680 519,066 -- -- 519,066
Issuance of warrants -- 215,496 -- -- 215,496
Notes receivable officers/directors 298,426 -- (190,800) -- (190,800)
Net loss -- -- -- (1,919,858) (1,919,858)
---------- ---------- --------- ----------- -----------
Balance, December 31, 1999 10,537,635 $4,142,098 $(190,800) $(4,657,625) $ (706,327)
========== ========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-5
<PAGE> 21
Integrated Business Systems and Services, Inc.
Statements of Cash Flows
for the years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,919,858) $(1,128,761) $ (745,701)
Adjustments to reconcile net loss to cash
Used in operating activities:
Depreciation 58,688 59,508 48,335
Amortization of software costs 137,138 21,500 20,403
Loss on disposal of equipment 3,077 -- --
Write off of prepaid commissions -- 70,751 141,573
Changes in assets and liabilities:
Accounts receivable 40,067 108,818 (82,149)
Unbilled revenue (1,468) (27,417) --
Inventory -- -- 8,842
Prepaid commissions (70,000) (50,694) (54,621)
Prepaid expenses and other assets 50,430 1,442 (7,372)
Accounts payable (17,917) (27,527) (255,269)
Accrued expenses (325,781) 832,864 (319,677)
Deferred revenue (31,910) 12,380 (212,997)
----------- ----------- -----------
Cash used in operating activities (2,077,534) (127,136) (1,458,633)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment, net (76,663) (80,743) (7,447)
Capitalized internal software development costs (52,143) (666,854) (177,095)
Related party receivable (82,944) -- --
----------- ----------- -----------
Cash used in investing activities (211,750) (747,597) (184,542)
----------- ----------- -----------
FINANCING ACTIVITIES
(Payments on) proceeds from notes payable, net (217,828) (2,467) 92,295
Proceeds from issuance of subordinated debt -- 500,000 --
Payments on long-term debt (81,000) (33,000) (42,000)
Sale of common shares 839,695 -- 1,545,259
Proceeds from exercise of common stock options and
warrants 384,624 306,844 --
Issuance of warrants 215,496 -- --
Proceeds from issuance of convertible promissory
notes 1,250,000 -- 190,232
Repayment on convertible promissory notes -- -- (70,532)
Payable to a related party, net (35,300) 35,300 (3,055)
----------- ----------- -----------
Cash provided by financing activities 2,355,687 806,677 1,712,199
----------- ----------- -----------
Net increase (decrease) in cash 66,403 (68,056) 69,024
Cash and cash equivalents at beginning of period 16,593 84,649 15,625
----------- ----------- -----------
Cash and cash equivalents at end of period $ 82,996 $ 16,593 $ 84,649
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-6
<PAGE> 22
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, except as otherwise noted. The Canadian exchange rates to one
U.S. dollar at December 31, 1999 and 1998, were $1.4529 and $1.5368,
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 processing 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 "Synapse Manufacturing 2.0 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 EAI+ to on-line transaction processing businesses.
IBSS' primary efforts are now directed to the development of a market for its
Synapse Manufacturing 2.0 (previously known as FIS 2.0) and Synapse EAI+
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.
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.
PREPAID COMMISSIONS - Included in prepaid expenses are commission advances to
employee sales representatives and contract sales representatives. These
commissions are advances against future anticipated sales and are to be used to
cover commissions owed against future sales. Upon termination, IBSS may not have
the ability to collect the commission advances from the terminated employee or
contract sales representative, 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. In 1999, IBSS fully reserved prepaid commissions in
the approximate amount of $87,000.
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" as amended.
F-7
<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 maintenance
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 maintenance 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 maintenance
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 under
funded development arrangements 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-8
<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 charged to income 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-9
<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 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.
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, related party receivables, 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-10
<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:
1999 1998 1997
- ---------------- ---------------- -------------------
AMERICAL - 78% Americal - 67% Americal - 29%
Coty, Inc. - 13%
Motorola - 11%
Healthdyne - 11%
Americal has been the predominant customer of IBSS for the three years ended
1999. Future revenues from Americal are budgeted to significantly decrease as a
result of completion of the related contract. The loss of this customer could
have a material adverse effect on IBSS' financial condition and results of
operations.
FOREIGN CURRENCY TRANSACTIONS - Transaction gains and losses are included in the
results of operations of the period in which they occur. Assets and liabilities
are translated utilizing year-end exchange rates. Transaction losses for the
three years ended December 31, 1999 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.
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
items which affected comprehensive income during the three years ended 1999.
NOTE 2. LIQUIDITY
IBSS has incurred net losses of approximately $1,920,000, $1,129,000, and
$746,000 for the three years ended December 31, 1999. The continuing losses have
adversely affected the liquidity of IBSS. At December 31, 1999, IBSS has an
accumulated deficit of approximately $4,660,000 and negative working capital of
approximately $286,000, which includes deferred revenue of approximately
$88,000.
F-11
<PAGE> 27
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 2. LIQUIDITY (CONTINUED):
Management has devoted substantial resources towards the completion and
marketing of Synapse Manufacturing 2.0 and Synapse EAI+, and, as a result, a
lesser effort was directed towards other services offered by IBSS, such as
integration and consulting services.
Despite IBSS' negative operating cash flows, IBSS has been able to secure
financing or equity to support its operations to date (Note 18).
NOTE 3. CAPITALIZED SOFTWARE COSTS:
Capitalized software costs consist of the following at December 31:
1999 1998
--------- ---------
Internally developed software $ 998,105 $ 945,962
Less accumulated amortization (230,104) (92,966)
--------- ---------
Capitalized software costs, net $ 768,001 $ 852,996
========= =========
IBSS has determined that no write-down of capitalized software costs for
impairment is necessary for the reporting periods included in these financial
statements.
NOTE 4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31:
1999 1998
--------- ---------
Computer equipment $ 278,550 $ 247,874
Furniture and fixtures 79,209 49,208
Office and other equipment 43,388 44,306
Computer software 13,115 8,869
Leasehold improvements 372 7,826
--------- ---------
414,634 358,083
Less accumulated depreciation (258,980) (217,327)
--------- ---------
Property and equipment, net $ 155,654 $ 140,756
========= =========
F-12
<PAGE> 28
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
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. At December 31, 1998, the outstanding balance under this agreement was
approximately $20,000. Administrative fees paid under this agreement for the
years ended December 31, 1998 and 1997, were approximately $7,000 and $17,000,
respectively, and are included in interest expense.
In February 1999, the balance on the note was paid in full.
Short-term Note - A $70,000 non-interest bearing note payable matured 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 as
private performance shares at a purchase price of $0.01 per share upon earn-out
of the stock from escrow. (Note 9 and 13).
During 1999, IBSS established an agreement with a vendor to restructure payment
of outstanding invoices. IBSS transferred approximately $157,000 from accrued
expenses to notes payable. Payments of $20,000 plus interest at prime plus 2%
are due monthly.
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:
1999 1998
-------- ----------
Negative working capital $285,719 $1,184,459
======== ==========
Deferred revenue $ 88,273 $ 120,183
======== ==========
NOTE 7. LONG-TERM DEBT:
In 1998, long-term debt consisted of a note payable to Carolina Capital
Investment Corporation ("CCIC") bearing an interest rate of prime plus 3%. At
December 31, 1999 the balance on the note was paid in full.
During 1999, IBSS issued $1,250,000 principal amount of convertible notes (the
"Convertible Notes") due in full on January 1, 2002. Interest on the Convertible
Notes is payable quarterly commencing in October 1999 at rates ranging from 7%
to 10%. The Convertible Notes are convertible into common shares at $2.50 per
share, at the option of the holder. The Convertible Notes are redeemable at the
holders' option, in whole prior to the maturity date or in whole or in part, at
the maturity date.
F-13
<PAGE> 29
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 "Subordinated Notes") due June 5, 2003. Interest on the
Subordinated Notes is payable monthly, commencing in June 1999. The Subordinated
Notes are convertible into common shares at $0.923, $1.098, $1.273, $1.448 and
$1.623 per share in years one through five, respectively, at the option of the
holder. The Subordinated Notes are redeemable at IBSS' option, in whole or in
part, at any time after June 5, 2002. The Subordinated Notes are subordinate to
all other indebtedness of IBSS. On June 4, 1999, notes in the principal amount
of $320,000 were converted to 346,692 shares of stock at the first year
conversion rate of $0.923. (Note 18).
As part of the Subordinated 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
were exercisable at a price of $0.923 in year one and are exercisable at a price
of $1.061 in year two (Note 9). On November 2, 1999, 259,680 of the warrants
were exercised at a price of $1.061.
NOTE 9. SHAREHOLDERS' (DEFICIENCY) EQUITY:
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 (Canadian) 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-14
<PAGE> 30
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 9. SHAREHOLDERS' (DEFICIENCY) EQUITY (CONTINUED):
Warrants - The following table shows warrants outstanding for the purchase of
Class A common shares at December 31, 1999. Warrants are exercisable at the
option of the holder.
<TABLE>
<CAPTION>
Warrants
Issue Date Exercise Price Outstanding
- ---------------------------- --------------------------------------------------------- ----------------------
<S> <C> <C>
June 5, 1998 $1.061 per share in year two. 281,320
February 17, 1999 $1.00 and $1.25 per share in years one through two,
respectively. 80,000
March 18, 1999 $1.00 and $1.25 per share in years one through two,
respectively. 6,000
July 1, 1999 $1.00 per share in years one through two. 50,000
July 23, 1999 $2.40 per share in years one through three. 900,000
July 23, 1999 $3.40 per share in years one through three. 370,000
July 23, 1999 $1.40 per share in years one through three. 150,000
July 23, 1999 $1.40, $2.40 and $3.40 per share in years one through
three, respectively. 430,000
August 2, 1999 $1.00 per share in years one through two. 25,000
October 27, 1999 $1.07, $1.15, $1.25, $1.41 and $1.62 per share in years
one through five, respectively. 259,680
December 14, 1999 $.75 and $1.00 per share in years one through two,
respectively. 800,000
----------------------
Total Outstanding Warrants 3,352,000
======================
</TABLE>
F-15
<PAGE> 31
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 9. SHAREHOLDERS' (DEFICIENCY) EQUITY (CONTINUED):
Weighted average
exercise
Warrants price per share
------------------- ---------------------
Outstanding at December 31, 1997(1) 500,000 $ 1.08
Granted during the year 541,000 $ .99
Exercised during the year (1) (444,000) $ 1.00
------------------- ---------------------
Outstanding at December 31, 1998 (1) 56,000 $ 1.15
Outstanding at December 31, 1998 541,000 $ .99
Granted during the year 3,270,680 $ 1.85
Exercised during the year (1) (56,000) $ 1.15
Exercised during the year (459,680) $ 1.03
------------------- ---------------------
Outstanding at December 31, 1999 3,352,000 $ 1.84
=================== =====================
(1) Canadian Dollars
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>
1999 1998 1997
------------------ ----------------- ------------------
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted loss per
share $ (1,919,858) $ (1,128,761) $ (745,701)
------------------ ----------------- ------------------
DENOMINATOR:
Weighted average common shares - basic and
diluted calculation 9,478,146 8,210,542 4,615,647
------------------ ----------------- ------------------
BASIC AND DILUTED LOSS PER SHARE $ (0.20) $ (0.14) $ (0.16)
================== ================= ==================
</TABLE>
Warrants to purchase 3,352,000 shares of common stock at a weighted average of
$1.83 per share and stock options to purchase 481,400 (Canadian) shares of
common stock and 376,300 shares of common stock at an average price of $1.25
(Canadian) per share and $0.54 per share were outstanding during 1999. 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.
F-16
<PAGE> 32
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
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 1,360,000. The number of common shares reserved for issuance to any
one person cannot exceed 5% of the number of issued and outstanding common
shares, and no person is entitled to receive in any one year grants regarding
more than 50,000 shares.
Information with respect to options granted under the Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
Weighted average
exercise
Stock Options price per share
------------------------- -------------------------
<S> <C> <C>
Outstanding at December 31, 1997(1) 251,160 $ 1.00
Granted during the year (1) 605,500 $ 1.24
Exercised during the year (1) (6,900) $ 1.00
Expired or cancelled during the year (1) (73,400) $ 1.00
------------------------- -------------------------
Outstanding at December 31, 1998 (1) 776,360 $ 1.19
Granted during the year (1) 222,500 $ 1.03
Granted during the year 401,300 $ 1.33
Exercised during the year (1) (374,800) $ 0.91
Expired or cancelled during the year (1) (142,660) $ 1.44
Expired or cancelled during the year (25,000) $ 0.63
========================= =========================
Outstanding at December 31, 1999 (1) 481,400 $ 1.25
========================= =========================
Outstanding at December 31, 1999 376,300 $ 1.31
========================= =========================
Exercisable at December 31, 1999 (1) 374,650 $ 1.32
========================= =========================
Exercisable at December 31, 1999 42,500 $ 0.63
========================= =========================
</TABLE>
(1) Canadian Dollars
F-17
<PAGE> 33
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 11. EMPLOYEE BENEFITS (CONTINUED):
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.
1999 1998
------------------------------------
Net Loss
As reported $ (1,919,858) $ (1,128,761)
Pro forma $ (2,446,134) $ (1,386,387)
Net loss per share
As reported $ (0.20) $ (0.14)
Pro forma $ (0.26) $ (0.17)
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 4.087 and 1.678 for options
issued during 1999 and 1998, respectively; 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 1999 and 1998 was $0.77 and $0.09, respectively.
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.
F-18
<PAGE> 34
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
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:
1999 1998
----------- ---------
Deferred tax assets:
Operating loss carryforwards $ 1,552,876 $ 867,380
Deferred revenue 33,544 45,670
Other, net 6,437 5,182
Valuation allowance (1,297,236) (591,542)
----------- ---------
Total deferred tax assets 295,621 326,690
----------- ---------
Deferred tax liabilities:
Capitalized software costs (291,841) (324,138)
Depreciation (3,780) (2,552)
----------- ---------
Total deferred tax liabilities (295,621) (326,690)
----------- ---------
Total $ -- $ --
=========== =========
Temporary differences and carryforwards which gave rise to significant portions
of deferred tax assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating loss carryforward-federal $ 613,339 $ 591,896 $ 184,181
Operating loss carryforward-state 72,157 69,635 21,668
Deferred revenue (12,126) 4,705 40,965
Other, net 27 4,999 (2,369)
Capitalized software costs 32,297 (245,234) (78,904)
Valuation allowance (705,694) (426,001) (165,541)
--------- --------- ---------
Net deferred income taxes $ -- $ -- $ --
========= ========= =========
</TABLE>
F-19
<PAGE> 35
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 12. INCOME TAXES (CONTINUED):
The principal reasons for the differences between income tax expense and the
amount computed by applying the statutory federal rate to pre-tax loss were as
follows for the three years ended December 31:
<TABLE>
<CAPTION>
(April 18 -
December 31)
------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory federal rate $(652,752) $(383,779) $(131,741)
Effect on rate of:
Life insurance premiums (4,720) (7,368) (7,610)
Penalties (10,968) (27,519) (23,864)
Non-deductible expenses (4,098) (2,863) (2,326)
State income taxes, net of federal income
tax effect (33,156) (4,472) --
Change in valuation allowance 705,694 426,001 165,541
--------- --------- ---------
Total $ -- $ -- $ --
========= ========= =========
</TABLE>
As of December 31, 1999, IBSS had federal and state net operating loss
carryforwards of approximately $4,000,000. The net operating loss carryforwards
will expire between 2017 and 2019 if not utilized.
NOTE 13. RELATED PARTY TRANSACTIONS:
In 1999, the Company loaned money to related parties for the purchase of 173,120
shares of the Company's Class A common stock at an exercise price of $1.061 per
share. These notes, which are non-interest bearing, are due on demand. In the
first quarter of 2000, IBSS received full payment of the related party notes
receivable.
Related party receivables at December 31, 1999 are advances primarily to Company
directors. Substantially all of these advances are provided to three
officers/directors of the Company. Upon employee termination, IBSS may not have
the ability to collect the advances from the terminated employees. To date, no
employee advances have been written off.
At December 31, 1999, the Company held six notes receivable with balances
totaling $190,800 from officers/directors of the Company. These notes arose from
transactions in 1999 whereby the Company loaned the officers/directors money to
exercise Common Stock purchase warrant agreements to purchase an aggregate of
300,000 shares of the Company's Class A common stock at the applicable exercise
price of $0.60 to $0.68 per share. These notes, which bear interest at the prime
rate per annum, mature on April 29, 2002 with principal balance and interest due
at maturity. The loans are collaterized by 300,000 shares of Class A common
stock. The receivable is shown on the balance sheets as a reduction in
stockholders' equity.
F-20
<PAGE> 36
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 13. RELATED PARTY TRANSACTIONS (CONTINUED):
Included in related party payables 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). In February 1999, the balance on these demand notes
payable, including accrued interest, was paid.
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION:
During the years presented below, interest paid amounted to:
1999 1998 1997
--------------- --------------- ---------------
Interest paid $ 104,287 $ 19,787 $ 104,716
=============== =============== ===============
The following table summarizes non-cash investing and financing activities:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------
<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 8) $ 320,000 $ -- $119,700
============== ============== ========
Transfer of accrued expenses to notes payable (Note 5) $ 156,976 $ -- $ --
============== ============== ========
Issuance of notes for purchase of common stock
(Note 13) $ 374,480 $ -- $ --
============== ============== ========
</TABLE>
F-21
<PAGE> 37
Integrated Business Systems and Services, Inc.
Notes To Financial Statements (continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES:
Operating Lease Commitments - IBSS leases its principal facilities under a
noncancellable operating lease expiring in October 2004 with an option to renew
for one five year period at market rates. The lease is subject to annual
adjustments for facility operating costs in excess of an established base year.
At December 31, 1999 minimum lease payments are as follows:
2000 $ 297,146
2001 281,677
2002 285,453
2003 285,453
2004 237,878
-----------------
$ 1,387,607
=================
Rent expense was approximately as follows for the years ended December 31:
1999 1998 1997
------------------ ----------------- -----------------
Rent expense $ 88,000 $ 145,000 $ 142,000
================== ================= =================
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, 1999, excluding bonuses, is approximately $530,000.
Payroll Tax Liabilities - All employee payroll taxes for September through
December 1999 are not paid as of December 31, 1999. Significant interest and
penalties continue to accrue until the obligation is satisfied. Delinquent
payroll taxes subject the Company to significant Internal Revenue Service
penalties and other potential actions.
F-22
<PAGE> 38
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
transaction processing industries. Significant changes in the regulatory or
market environment of this industry 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' 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.
IBSS' primary efforts are now directed to the development of a market for its
Synapse Manufacturing 2.0 and Synapse EAI+ 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. These
products and services have similar economic characteristics, customers and
distribution methods. All of IBSS's operations, assets, and employees are
located in the United States and its revenues are generated in the United
States.
F-23
<PAGE> 39
NOTE 18. SUBSEQUENT EVENTS:
On February 16, 2000, Subordinated Notes in the principal amount of $180,000
were converted to 163,934 shares of common stock at the second year conversion
rate of $1.098.
Private Placement - In the first quarter of 2000, IBSS completed a $3,000,000
private placement for 1,200,000 shares of common stock, and warrants for the
purchase of 600,000 shares of common stock. The warrants are comprised of two
separate and equal pools, designated Warrants A and B, and are exercisable at
$2.50 per share and $3.50 per share, respectively.
In addition, during the first quarter of 2000, IBSS completed two private equity
placements. Each private placement included 250,000 shares of common stock and a
3-year stock purchase warrant for the purchase of 125,000 shares of common
stock. IBSS received gross proceeds of $2,000,000. The warrants are exercisable
at $5.50, $6.00 and $6.50 per share during the first, second and third year,
respectively.
F-24
<PAGE> 40
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
FORM 10-KSB
EXHIBIT INDEX
EXHIBIT NO.
- -----------
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
F-25
<PAGE> 41
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
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 October 1, 1999 between the Company and Atrium
Northeast Limited Partnership incorporated by reference as Exhibit
10.16 of the Company's Form 10QSB for the quarter ended September 30,
1999.
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
F-26
<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, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 82,996
<SECURITIES> 0
<RECEIVABLES> 304,203
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 437,625
<PP&E> 414,634
<DEPRECIATION> (258,980)
<TOTAL-ASSETS> 1,447,017
<CURRENT-LIABILITIES> 723,344
<BONDS> 1,430,000
0
0
<COMMON> 4,142,098
<OTHER-SE> (4,848,427)
<TOTAL-LIABILITY-AND-EQUITY> 1,447,017
<SALES> 1,576
<TOTAL-REVENUES> 779,217
<CGS> 1,161
<TOTAL-COSTS> 543,845
<OTHER-EXPENSES> 2,060,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,938
<INCOME-PRETAX> (1,919,858)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,919,858)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,919,858)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
