FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 2-96392-A
ELECTRONIC BUSINESS SERVICES, INC. f/k/a @ebs, inc.
f/k/a TRIANGLE IMAGING GROUP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 65-0952956
------------------------------ ---------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
1800 NW 49th Street, Suite 100, Ft. Lauderdale, FL 33309
---------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
954-229-5100
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of registrant's Common Stock, $.001 par value,
outstanding as of November 18, 1999 was 13,989,255 shares.
<PAGE>
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 1999................................ 3
Consolidated Statement of Operations -
For the Nine and Three Months Ended
September 30, 1999 and 1998........................ 5
Consolidated Statement of Cash Flows-
For the Nine and Three Months Ended
September 30, 1999 and 1998........................ 6
Notes to Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis..................... 10
PART II - OTHER INFORMATION................................................ 19
SIGNATURES................................................................. 20
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
September 30, 1999
------------------
CURRENT ASSETS
Cash and cash equivalents $ 129,817
Accounts receivable, net
of allowance for
doubtful accounts of: $(147,473.91) 881,916
Prepaid expenses 46,177
TOTAL CURRENT ASSETS $ 1,057,910
EQUIPMENT 540,840
GOODWILL 1,899,514
OTHER ASSETS 412,914
$ 3,911,178
===========
3
<PAGE>
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, 1999
------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,540,055
Deferred revenue 343,735
Dividend Payable 68,990
Current portion of long term debt 748,965
Current portion of QCC Puts payable 630,000
TOTAL CURRENT LIABILITIES $ 3,331,745
NOTES PAYABLE SUBJECT TO PUTS $ 600,000
LONG TERM DEBT $ 266,500
STOCKHOLDERS EQUITY
Preferred stock, Class C $1,000 par value
12.5% cumulative 1,500 shares issued
Redemption value $1,500,000 $ 1,424,473
Preferred stock, Class D $1,000 par value
12.5% cumulative 700 shares issued
Redemption value $700,000 632,700
Common stock, $.001 par value,
Authorized 50,000,000 shares 13,988
issued and outstanding 13,988,000
----------
Additional paid-in capital 6,481,354
Additional paid-in capital -
Subject to Puts (1,230,000)
Accumulated deficit (7,578,532)
Deferred compensation (31,050)
------------
TOTAL STOCKHOLDERS' EQUITY $ (287,066)
$ 3,911,178
============
See notes to Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended Three months ended Nine months ended Nine months ended
September 31, September 31, September 31, September 31,
1999 1998 1999 1998
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
SALES $ 1,475,475 $ 2,216,989 $ 5,366,312 $ 6,052,264
COST OF SALES 771,293 924,763 2,435,109 2,470,753
------------ ------------ ------------ ------------
GROSS PROFIT $ 704,181 $ 1,292,226 $ 2,931,203 $ 3,581,511
SELLING, GENERAL & ADMIN 1,359,466 1,574,584 3,404,362 2,759,024
PRODUCT DEVELOPMENT 682,738 247,084 1,195,655 413,922
NON-CASH IMPUTED COMPENSATION 10,295 47,390 30,885 146,670
AMORTIZATION OF GOODWILL 36,552 57,275 108,019 123,445
GAIN FROM SETTLEMENT OF LAWSUIT -- -- (212,000) --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS $ (1,384,870) $ (634,107) $ (1,595,718) $ 138,450
INTEREST EXPENSE 17,636 24,959 145,200 87,867
NON RECURRING CHARGES ASSOCIATED
WITH ACQUISITIONS -- -- -- 151,200
RESTRUCTURING EXPENSE -- 60,000 -- 60,000
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAX $ (1,402,505) $ (719,066) $ (1,740,918) $ (160,617)
TAX PROVISION -- (107,000) -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
DISCONTINUED OPERATIONS $ (1,402,505) $ (612,066) $ (1,740,918) $ (160,617)
GAIN/(LOSS) FROM DISCONTINUED OPERATIONS -- (248,183) -- (189,675)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,402,505) $ (860,249) $ (1,740,918) $ (350,292)
PREFERRED DIVIDENDS 115,865 -- 115,865 --
EARNINGS (LOSS) ON COMMON SHARES $ (1,518,370) $ (860,249) $ (1,856,783) $ (350,292)
NET INCOME PER SHARE:
BASIC (0.11) (0.05) (0.13) (0.01)
============ ============ ============ ============
DILUTED (0.11) (0.05) (0.13) (0.01)
============ ============ ============ ============
NUMBER OF SHARES USED IN COMPUTATION:
BASIC 14,366,790 13,015,073 13,779,912 11,368,226
============ ============ ============ ============
DILUTED 14,366,790 15,470,437 13,779,912 13,823,589
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $(1,856,783) $ (350,292)
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation 155,975 90,568
Amortization of goodwill 108,019 123,445
Non Cash imputed compensation 30,885 146,670
Gain from settlement of lawsuit (212,000) --
Changes in assets and liabilities
(Increase)/decrease in accounts receivable (74,675) (790,626)
Increase in prepaid expenses -- (36,883)
Increase in Inventory -- (35,957)
(Increase)/decrease in other assets (205) (777,115)
Increase in accounts payable and accrued expenses 487,335 472,003
Increase in bank line of credit -- --
Decrease in deferred revenue 40,316 (87,505)
----------- -----------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $(1,321,133) $(1,245,692)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition -- (484,942)
Purchase of equipment/software (365,447) (182,279)
----------- -----------
CASH USED IN INVESTING ACTIVITIES $ (365,447) $ (667,221)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock 632,700 --
Proceeds from sale of common stock 1,436,810 1,525,316
Decrease in stock subscription receivable -- 501,250
Purchase of treasury stock -- (10,649)
Payment of note payable subject to puts (155,000) --
Payment of note payable (327,535) (350,000)
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES $ 1,586,975 $ 1,665,917
----------- -----------
NET INCREASE (DECREASE) IN CASH (99,606) (246,996)
CASH - BEGINNING OF PERIOD 229,423 525,009
----------- -----------
CASH - END OF PERIOD $ 129,817 $ 278,013
=========== ===========
</TABLE>
See notes to financial statements
6
<PAGE>
ELECTRONIC BUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Electronic
Business Services, Inc. f/k/a @ebs, inc. f/k/a Triangle Imaging Group, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a
fair representation (consisting of normal recurring accruals) have been
included. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Operating results for the nine month period ended
September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
2. EARNINGS PER SHARE
Basic earnings per share are computed on the weighted average number of
common shares actually outstanding during the period. Diluted earnings per
share considers potential shares issuable upon exercise or conversion of
other outstanding instruments where dilution would result.
3. STOCKHOLDERS' EQUITY
During the quarter ended September 30, 1999, the Company issued 446,000
shares of common stock, $.001 par value ("Common Stock") for a total value
of $427,100 in a private placement of the Company's securities. During the
same period the Company cancelled 17,500 shares of Common Stock held by the
former shareholders of Credit Bureau Services, Inc. at a cost to the
Company of $52,500 pursuant to an amendment dated April 7, 1999 to that
certain Agreement and Plan of Merger by and among the Company, QuickCREDIT
Corp., CBS Acquisition Corp., Credit Bureau Services, Inc. and the
Shareholders of Credit Bureau Services, Inc., entered into on April 30,
1998. In addition, during the quarter ended September 30, 1999 the Company
and the former shareholder of Florida Credit Bureau, Inc. (the "FCB
Shareholder") entered into an agreement providing for termination of the
right of the FCB Shareholder, granted in that certain Agreement and Plan of
Merger by and among the Company, QuickCREDIT Corp., FCB Acquisition Corp.,
Florida Credit Bureau, Inc. and the FCB Shareholder dated May 22, 1998, to
cause the Company to repurchase on demand, at a purchase price of $3.00 per
share, 50,000 shares of Common Stock held by the FCB Shareholder (the "Put
7
<PAGE>
Option"). Pursuant to the agreement, the Company cancelled 10,000 shares of
Common Stock issued to the FCB Shareholder in exchange for payment of
$51,000 and the issuance of a promissory note in the original principal
amount of $100,000. Upon delivery of payment of the third installment and
the final installment under the Note, the Company shall receive for
cancellation from the FCB Shareholder to additional blocks of 5,000 shares
each. The note bears interest at the rate of 8% per year beginning June 4,
1999 and is payable in six equal monthly installments beginning September
1, 1999. During the quarter the Company made the cash payment of $51,000 as
called for in the agreement and one payment of principal and interest under
the note at a cost to the Company of $17,275.32.
During the period the Company also issued 353 shares to an employee of a
subsidiary of the Company pursuant to the cashless exercise of an incentive
stock option granted under the Company's 1999 Incentive Plan. In addition,
the Company issued 10,000 shares to another employee of one of the
Company's subsidiaries in lieu of compensation pursuant to the terms of a
compensation agreement with such entity.
4. PREFERRED DIVIDENDS
At a meeting of the Company's shareholders held on May 27, 1999, a majority
of the Company's shareholders voted in favor of an amendment to the
Company's Articles of Incorporation to, among other things, enable the
Company's Board of Director's to establish the preferences, limitations and
relative rights with respect to any class of unissued shares of capital
stock. Accordingly, on June 30, 1999 the Company filed an amendment to the
Company's Articles of Incorporation effecting such changes to its Articles
of Incorporation and, in connection with a private sale of its securities
to Waterside Capital Corporation, a small business investment company
("Waterside"), the Company established preferences, limitations and
relative rights with respect to Series C Preferred Stock and Series D
Redeemable Convertible Preferred Stock. In exchange for the issuance of the
Series C Preferred Stock on June 30, 1999, the Company cancelled a
promissory note payable to Waterside in the original principal amount of
$1,500,000 and bearing interest at the rate of 14% per year and entered
into an agreement to retroactively pay dividends on the Series C Preferred
Stock, accruing at the rate of 12.5% per year payable quarterly, beginning
April 15, 1999 in lieu of paying interest under the note from the same
date. The Series D Convertible Redeemable Preferred Stock was issued to
Waterside in exchange for an investment in the Company of $700,000 and
accrues dividends at the rate of 12.5% per year payable quarterly. During
the quarter ended September 30, 1999, the Company recorded a charge of
$115,865 for Preferred Dividends accrued for the Series C and Series D
Preferred Stock. The Company paid Waterside a dividend payment on the
Series C Preferred Stock during the period in the amount of $46,875 and
recorded a Preferred Dividend Payable in the amount of $68,990 for the
unpaid portion of the Series C and D Preferred Stock Dividend.
8
<PAGE>
5. DISCONTINUED OPERATIONS - Restatement of 1998 Results
In September and December 1998, the Company decided to discontinue the
operation of Trimax and Multitask, respectively. Third Quarter 1998 results
have been restated to reflect these changes according to the following
schedule:
<TABLE>
<CAPTION>
3 Months Ending 9 Months Ending
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Revenue $ 2,216,989 $ 6,052,264
Cost of Sales $ 640,225 $ 1,072,959
SG&A $ 1,943,893 $ 4,408,426
Net Income $ (612,066) $ (160,616)
Net Income per share (Basic) (.05) (.01)
Net Income per share (Fully Diluted) (.05) (.01)
Number of Shares used in computation (Basic) 13,015,073 11,368,226
Number of Shares used in computation (Fully Diluted) 15,470,437 13,823,589
</TABLE>
An adjustment of $(248,183) is shown separately as "Discontinued
Operations" for the three months ended September 30,1998 and $(189,676) for
the nine month period ended September 30,1998.
6. COST RECLASSIFICATION - Restatement of 1998 Results
Certain costs that have been historically classified as Selling, General
and Administrative Expenses have been reclassified to more accurately
categorize the costs. The reclassification does not effect the Company's
net income during the relevant period. The following schedule restates the
Three Month Period Ending Sept. 30, 1998 and the Nine Month Period Ending
Sept. 30, 1998 to reflect the changes:
<TABLE>
<CAPTION>
3 Months Ending 3 Months Ending
September 30, 1998 September 30, 1998
As Reported Reclassification Reclassified
----------- ---------------- ------------
<S> <C> <C> <C>
Cost of Sales $ 640,225 $ 284,538 $ 924,763
SG&A $ 1,943,893 $ (369,309) $ 1,574,584
Product Development $ 162,313 $ 84,771 $ 247,084
9 Months Ending 9 Months Ending
September 30, 1998 September 30, 1998
As Reported Reclassification Reclassified
----------- ---------------- ------------
<S> <C> <C> <C>
Cost of Sales $ 1,072,959 $ 1,397,794 $ 2,470,753
SG&A $ 4,408,426 $ (1,649,402) $ 2,759,024
Product Development $ 162,313 $ 251,609 $ 413,922
</TABLE>
9
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF
OPERATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES
THERETO APPEARING ELSEWHERE IN THIS DOCUMENT.
STATEMENTS IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS DOCUMENT AS WELL AS STATEMENTS
MADE IN PRESS RELEASES AND OR STATEMENTS THAT MAY BE MADE BY THE COMPANY OR BY
OFFICERS, DIRECTORS, OR EMPLOYEES OF THE COMPANY ACTING ON THE COMPANY'S BEHALF
THAT ARE NOT STATEMENTS OF HISTORICAL OR CURRENT FACT CONSTITUTE "FORWARD
LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES, AND OTHER UNKNOWN FACTORS THAT COULD CAUSE THE ACTUAL
RESULTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM THE HISTORICAL RESULTS OR
FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
IN ADDITION TO STATEMENTS WHICH EXPLICITLY DESCRIBE SUCH RISKS AND
UNCERTAINTIES, READERS ARE URGED TO CONSIDER STATEMENTS LABELED WITH THE TERMS
"BELIEVES", "BELIEF", "EXPECTS", "INTENDS", "ANTICIPATES", OR "PLANS" TO BE
UNCERTAIN FORWARD-LOOKING STATEMENTS. THE FORWARD LOOKING STATEMENTS CONTAINED
HEREIN ARE ALSO SUBJECT GENERALLY TO OTHER RISK AND UNCERTAINTIES THAT ARE
DESCRIBED FROM TIME TO TIME IN THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
The following table sets forth information on operations for the periods
indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
Consolidated
Three months ended Three months ended Nine months ended Nine months ended
30-Sep-99 30-Sep-98 30-Sep-99 30-Sep-98
$ % $ % $ % $ %
-------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 1,475,475 100% $ 2,216,989 100% $ 5,366,312 100% $ 6,052,264 100%
Cost of Sales $ 771,293 52% $ 924,763 42% $ 2,435,109 45% $ 2,470,753 41%
Operating Expenses $ 2,106,686 143% $ 1,904,292 86% $ 4,672,121 87% $ 3,742,128 62%
Income from Operations $(1,402,505) -95% $ (612,066) -28% $(1,740,918) -32% $ (160,617) -3%
Earnings (Loss) on Common Shares $(1,518,370) -103% $ (860,249) -39% $(1,856,783) -35% $ (350,292) -6%
Engineered Business Systems
Net Sales $ 1,184,307 100% $ 1,689,167 100% $ 4,273,045 100% $ 5,012,050 100%
Cost of Sales $ 565,940 48% $ 523,064 31% $ 1,595,870 37% $ 1,698,192 34%
Quick Credit Corporation
Net Sales $ 291,167 100% $ 527,821 100% $ 1,093,267 100% $ 1,039,214 100%
Cost of Sales $ 196,728 68% $ 401,699 76% $ 820,614 75% $ 772,560 74%
</TABLE>
10
<PAGE>
Three Months Ended September 30, 1999 vs. Three Months Ended September 30, 1998
CONSOLIDATED
Sales for the Three Months ended September 30, 1999 were $1,475,475 or a
decrease of 33% from the $2,216,989 in sales for the period ended September 30,
1998. The factors contributing to the Company's reduction in sales is the rise
in residential mortgage interest rates that has resulted in a significant
reduction of the volume of credit reports associated with home mortgage
originations and mortgage refinancings, the continued consolidation within the
Company's wholesale credit client base and a resistance of clients to acquire
and install new software applications in light of Year 2000 compliance
priorities. The overall cost of sales during the third quarter of 1999 was
$771,293 representing a decrease of $153,470 from the cost of sales for the same
period last year primarily due to the lower volume. Cost of sales as a
percentage of sales increased 10%, from 42% for the quarter ended September 30,
1998 to 52% for the quarter ended September 30, 1999. The increase is primarily
a result of a reduction in the amount of software sales and the continued shift
in the revenue mix from the more profitable CRIS products to outsourcing
services revenue which has a higher cost as a percentage of revenue. Gross
profit as a percentage of revenue has decreased from 58% for the third quarter
of 1998 to 48% for the third quarter of 1999.
Selling, general and administrative ("SG&A") expenses were $1,359,466 for the
quarter ended September 30, 1999 representing a decrease of 14% from SG&A
expenses of $1,574,584 for the quarter ended September 30, 1998. The decrease in
SG&A is primarily attributable to employee layoffs and terminations resulting in
lower labor, wage taxes, and insurance costs. Also contributing to the reduction
in SG&A is a decrease in selling and travel expenses during the third quarter
when compared to the same period last year. Offsetting the decrease in SG&A was
a charge of $189,214 to SG & A for the write-off of bad debts. This charge is
comprised of a write-off of $137,928 of uncollectable accounts and an increase
to the reserve for doubtful accounts of $51,286.
Development expenses during the quarter were $682,738 compared with $247,084 for
the same period in 1998. The development expense during the third quarter of
1999 was primarily associated with the development by the Company of two new
products for resale to bank credit card holders. Management believes that
investment in these products is essential to the growth of the Company and to
diversify the Company's revenue sources into areas that are less interest rate
sensitive in order to reduce the impact of negative interest rate changes on the
Company's financial well being.
Non-cash imputed compensation decreased by $39,345 from $47,390 for the quarter
ended September 30, 1998 to $10,295 for the quarter ended September 30, 1999. In
December 1998, the Company wrote-off the balance of the deferred compensation
associated with the future services to be provided by the Company's former
Chairman and Chief Executive Officer. In March 1999, the Company's former
Chairman and Chief Executive Officer was terminated for "cause" under his
employment agreement with the Company. The Company no longer incurs the expense
associated with these services. However, the Company has entered into a
settlement agreement with the Company's former Chairman and Chief Executive
Officer that requires periodic payments to him and/or his spouse.
Amortization of goodwill was $36,552 for the quarter ended September 30, 1999
compared to $57,275 for the quarter ended September 30, 1998, a decrease of
$18,723. The decrease in the amortization of goodwill is a result of a goodwill
adjustment that was made in December 1998 in connection with the revaluation of
the credit bureaus acquired by QCC in April and May of 1998.
11
<PAGE>
The Company's loss from operations for the quarter ending September 30, 1999 was
$1,384,870, which represents an increase of $750,763 from the loss from
operations of $634,107 for the quarter ending September 30, 1998 for the reasons
stated above. Net income was $(1,402,505) for the period ending September 30,
1999, compared to $(860,249) for the same period in 1998. The comparative
difference of $542,256 was less than the comparative loss from operations
primarily because of a 1998 charge associated with the discontinued Trimax and
Mutitask operations Earnings on Common Shares for the period ending September
30, 1999 were $(1,518,370) compared to earnings on Common Shares of $(860,249)
for the third quarter of 1998. Preferred Dividends of $115,865 accrued during
the third quarter of 1999. There were no Preferred Dividends accrued during the
same period in 1998.
ENGINEERED BUSINESS SYSTEMS, INC.
Sales for Engineered Business Systems accounted for $1,184,307 or 80 % of the
Company's total revenue for the quarter ended September 30, 1999 compared to
$1,689,167 or 76% of the Company's total revenue for the quarter ended September
30, 1998. The revenue decrease was a result of higher interest rates that have
caused a reduction in the volume of new home sales and residential mortgage
refinancings ,a reduction of software sales brought on by the reluctance of
clients to install new software applications prior to Year 2000, and the
continued decline of the revenue generated from the CRIS product line due to the
consolidation of the CRIS client base. During the third quarter of 1999 the
Company entered into a strategic alliance that will enable the Company to
process Fannie Mae mortgages and to offer certain future product enhancements
that will better position the Company's products to reduce the rate of decline
of this revenue stream.
The revenue mix for the quarter ended June 30, 1999 was comprised of recurring
revenue from the ACES product line, the CRIS product line, annual software
maintenance contracts, technical support revenues, revenues generated on a
transactional per report basis and monthly software rental programs ("Recurring
Revenue") (37%), outsourcing services (49%), software sales (10%) and consulting
services (4%). The comparable revenue mix for the quarter ended June 30, 1998
was Recurring Revenue (41%), outsourcing services (36%), software sales (14%),
Hardware (1%), and consulting services (8%). Sales of the DESC product and
continued growth of outsourcing service revenues offset declines in the amount
of revenue generated by the CRIS products and decreased software sales of the
ACES product. Cost of sales as a percentage of revenue increased from 31% for
the quarter ended September 30, 1998 to 48% for the quarter ended September 30,
1999. Management believes that the increase is due to the shift in the Company's
product mix from higher margin CRIS transactional revenue to lower margin
outsourcing services revenue. The Company's resulting gross margins for all
products and services for the quarter ended September 30, 1999 was 52 % compared
to 69 % for the quarter ended September 30, 1998.
12
<PAGE>
QUICKCREDIT CORP.
QCC was formed under the laws of the State of Florida on February 23, 1998 for
the purpose of acquiring and operating formerly independent credit bureaus. QCC
had no operations from its inception until the second quarter of 1998.
Total revenues for the three months ended September 30, 1999 were $291,167
compared to $527,821 for the same period in 1998. The 45% decrease in revenue
from period to period was primarily due to a reduction in sales of credit
reports associated with mortgage originations and mortgage refinancings that
have steeply declined as a result of an increase in residential mortgage
interest rates during the third quarter of 1999. Cost of sales during the third
quarter of 1999 was $196,728, 49% lower than cost of sales of $401,699 that was
recorded during the same period in 1998. Gross profit as a percentage of
revenues was 32% for the three months ending September 30, 1999 compared to 24%
for the three month period ending September 30, 1998. The gross profit as a
percentage of revenue has improved as a result of the cost savings from the
consolidation of the credit operations into QCC's Jacksonville, Florida credit
bureau operations.
Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998
CONSOLIDATED
Sales for the Nine Months ending September 30,1999 were $5,366,312 or 11% less
than sales of $6,052,264 for the period ending September 30, 1998. The decrease
in sales was primarily due to a decline in revenue generated by the CRIS client
base that has been negatively impacted by the rise in mortgage interest rates.
Cost of sales decreased by $35,644 for the Nine Months ending September 30, 1999
from $2,470,753 to $2,435,109, however cost of sales as a percentage of sales
increased by 4% due to a shift in product mix from the more mature and
profitable products to the lower margin service offerings. SG&A for the Nine
Months ending September 30,1999 was $3,404,362 compared to $2,759,024 for the
same period in 1998. The increase was due to expenses associated with an
increase in the number of employees in the sales and administrative
organizations as well as the relocation of the corporate offices. Research and
Development for the nine month period ending September 30, 1999 was $1,195,655
compared to $413,922 during the same period in 1998. The increase in Research
and Development expense was primarily associated with the development by the
Company of two new credit services products for resale to bank credit card
holders.
Non-cash imputed compensation decreased by $115,785 from $146,670 for the
quarter ended September 30, 1998 to $30,885 for the quarter ended September 30,
1999. In December 1998, the Company wrote off the balance of the deferred
compensation associated with the future services to be provided by the Company's
former Chairman and Chief Executive Officer. In March 1999, the Company's former
Chairman and Chief Executive Officer was terminated for "cause" under his
employment agreement with the Company. The Company no longer incurs the expense
associated with these services. However, the Company has entered into a
settlement agreement with the Company's former Chairman and Chief Executive
Officer that requires periodic payments to him and/or his spouse. See Part II
"Legal Proceedings."
Amortization of goodwill was $108,019 for the nine months ending September 30,
1999 compared to $123,445 for the same period ending September 30, 1998
representing a decrease of $15,426. The decrease in the amortization of goodwill
is a result of a goodwill adjustment that was made in December 1998 in
connection with the revaluation of the credit bureaus acquired by QCC in April
and May of 1998.
13
<PAGE>
The loss from operations for the period ending September 30, 1999 was
$1,595,718, which represents a difference of $1,734,168 from the income from
operations of $138,450 for the period ending September 30, 1998. Net income was
$(1,740,918) and Earnings on Common Shares were $(1,856,783) after Preferred
Dividends of $115,865 for the period ending September 30, 1999, compared to Net
Income of $(350,292) for the same period in 1998 for the reasons stated above.
ENGINEERED BUSINESS SYSTEMS, INC.
Sales for Engineered Business Systems accounted for $4,273,045 or 80 % of the
Company's total revenue for the nine months ended September 30, 1999 compared to
$5,012,050 or 83 % of the Company's total revenue for the same period ended
September 30, 1998. The revenue decrease of $739,005 or 15%, was a result of the
continued decline of the revenue generated from the CRIS system and the
continued consolidation of the CRIS client base. Higher interest rates that have
caused a reduction in the residential mortgage refinancing market have
accelerated the rate of this decline. Management believes that certain product
enhancements to the CRIS System that are under development will reduce the rate
of decline of this revenue stream.
The revenue mix for the nine months ended September 30, 1999 was comprised of
recurring revenue from the ACES product line, the CRIS product line, annual
software maintenance contracts, technical support revenues, revenues generated
on a transactional per report basis and monthly software rental programs
("Recurring Revenue") (37%), outsourcing services (42%), software sales (15%),
hardware (1%) and consulting services (5%). The comparable revenue mix for the
period ended September 30, 1998 was Recurring Revenue (47%), outsourcing
services (32%), software sales (15%), Hardware (2%), and consulting services
(4%). Software sales of the DESC product of $289,845 for the period ending
September 30, 1999 compared to $42,000 for the same period during 1998 and
continued growth of the outsourcing business from $1,570,171 during the nine
month period ended September 30, 1998 to $1,810,727 for the same period in 1999
offset declines in the amount of revenue generated by the CRIS products
($1,067,948 for the nine month period ended September 30, 1999 compared to
$1,777,693 during the comparable period of 1998) and decreased software sales of
the ACES product ($329,185 for the nine months ended September 30, 1999 compared
to $682,692 for the same period in 1998).
Cost of sales as a percentage of revenue increased from 34% for the nine months
ended September 30, 1998 to 37% for the same period ended September 30, 1999.
Management believes that the increase is due to the shift in the Company's
product mix from higher margin CRIS transactional revenue to lower margin
outsourcing services revenue.
QUICKCREDIT CORP.
QCC was formed under the laws of the State of Florida on February 23,1998 for
the purpose of acquiring and operating formerly independent credit bureaus. QCC
had no operations from its inception until the second quarter of 1998.
14
<PAGE>
Total revenues for the nine month period ended September 30, 1999 were
$1,093,267 compared to $1,039,214 for the same period in 1998. The increase of
$54,053 was a result of nine months of revenue during 1999 compared to six
months of revenue during the same period in 1998.
Cost of sales during the nine months ended September 30, 1999 was $820,614
compared to $772,560 during the same period in 1998. The increase of $48,054 was
a result of nine months of revenue during 1999 compared to six months of revenue
during the same period in 1998. Gross profit as a percentage of revenues was 25%
for the nine months ended September 30, 1999 compared to 26% for the same period
ending September 30, 1998. Management believes that Gross profit as a percentage
of revenue will continue to improve as a result of cost savings from the
consolidation of the Fort Lauderdale, Florida credit bureau operations into
QCC's Jacksonville, Florida credit bureau operations.
Due to the continued business downturn the company initiated reductions in force
during the quarter that eliminated approximately 25% of its current workforce.
Annualized savings from these actions will be $960,000.
ISSUANCE OF SERIES C PREFERRED STOCK
On October 15, 1998, the Company, QCC, EBS and Waterside Capital Corporation
("Waterside") entered into an Agreement for Purchase of Preferred Stock to be
Secured Until Issuance by Promissory Note pursuant to which the Company issued
to Waterside a promissory note in the original principal amount of $1,500,000
with the agreement that the Company would issue shares of Series C Preferred
Stock to Waterside in exchange for cancellation of the note at such time as the
Company became authorized to do so. Accordingly on June 30, 1999, the Company
established preferences, limitations and relative rights with respect to a class
of Series C Preferred Stock and during the quarter ended September 30, 1999
issued all shares of such class to Waterside and canceled the note.
The class of Series C Preferred Stock created by the Company consists of 1,500
shares designated as Series C Preferred Stock. The Series C Preferred Stock has
a par value of $1,000 per share and ranks senior to all series of preferred
stock and common stock. Holders of Series C Preferred Stock are entitled to
receive a quarterly cash dividend of $31.25 per share out of funds legally
available for the payment of such dividend, commencing on April 15, 1999. Each
share of Series C Preferred Stock is not convertible into any other securities
of the Company. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, each share of Series C
Preferred Stock shall have a liquidation preference of $1,000 plus unpaid
dividends that have accrued to the date of payment, if any. Each holder of
Series C Preferred Stock shall not be entitled to vote, except that (i) a
majority of the holders of Series C Preferred Stock are entitled to appoint one
member to the Company's Board of Directors and (ii) the Company may not effect
any of the following actions without the prior written consent of at least
66.67% of the shares of Series C Preferred Stock:
(a) alter or change the powers, rights, limitations, preferences or
restrictions of the Series C Preferred Stock;
(b) Create a class or series of capital stock having rights,
preferences or privileges prior or superior to the Series C Preferred Stock;
15
<PAGE>
(c) Increase or decrease the aggregate number of authorized shares of
Series C Preferred Stock, except for any decrease resulting from any redemption,
repurchase or other reacquisition, or effect an exchange or reclassification of
the shares of Series C Preferred Stock;
(d) Repurchase redeem or otherwise acquire any shares of the Company's
capital stock other than the Series C Preferred Stock if any dividends on the
Series C Preferred Stock which have accrued and are payable remain outstanding
at the time;
(e) Liquidate, dissolve or wind-up the affairs of the Company or merge
or consolidate the Company with any other entity or sell or encumber all or
substantially all of the Company's assets or issue in one or a series of related
transactions shares representing more than fifty percent (50%) of the aggregate
voting power of all classes and series of the Company's voting stock if any
dividends on the Series C Preferred Stock which have accrued and are payable
remain outstanding at the time; or
(f) Declare or pay any dividend or other distribution with respect to
stock ranking junior to the Series C Preferred Stock if any dividends on the
Series C Preferred Stock which have accrued and are payable remain outstanding
at the time.
ISSUANCE OF SERIES D REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 1999 the Company entered into a Series D Redeemable Convertible
Preferred Stock Purchase Agreement with Waterside pursuant to which Waterside
paid an aggregate purchase price of $700,000 in immediately available funds in
exchange for the issuance of 700 shares of its Series D Redeemable Convertible
Preferred Stock and a Stock Purchase Warrant. The Warrant entitles the holder to
purchase up to 80,000 shares of the Company's Common Stock at an exercise price
of $1.15 per share until June 30, 2009, so long as the Series D Redeemable
Convertible Preferred Stock remains outstanding. The right to exercise the
Warrant vests with respect to 20,000 shares on June 30, 1999 and with respect to
12,000 shares on each June 30th thereafter during the five year period
commencing on June 30, 2000. Pursuant to the terms of an Investor Rights
Agreement, the Company and Harold S. Fischer granted Waterside the right to put
the shares of Series D Redeemable Convertible Preferred Stock first, to the
Company, and then, to Harold S. Fischer, on the fifth anniversary of its
issuance or earlier upon a Change of Control (as defined) at a price of $1,000
per share plus accrued and unpaid dividends. In exchange for Mr. Fischer's
agreement to become obligated to repurchase the Series D Redeemable Convertible
Preferred Stock from Waterside (in the event that the Company fails to do so),
the Company issued to Mr. Fischer an option to purchase 200,000 shares of the
Company's Common Stock at an exercise price equal to $.875 per share. In
addition, under a Registration Rights Agreement, the Company granted Waterside
certain piggy back registration rights with respect to the shares of Common
Stock issuable upon the conversion of the Series D Redeemable Convertible
Preferred Stock and upon the exercise of the Warrant.
The 700 shares of Series D Redeemable Convertible Preferred Stock issued to
Waterside constitute all of the shares of the series designated Series D
Redeemable Convertible Preferred Stock. The Series D Redeemable Convertible
Preferred Stock has a par value of $1,000 per share and ranks senior to all
series of preferred stock and common stock, except for shares of Series C
Preferred Stock which rank senior to the shares of Series D Redeemable
Convertible Preferred Stock. Holders of Series D Redeemable Convertible
Preferred Stock are entitled to receive a quarterly cash dividend of $31.25 per
share out of funds legally available for the payment of such dividend,
commencing on October 15, 1999. Each share of Series D Redeemable Convertible
Preferred Stock is convertible at any time into 870 shares of the Company's
common stock, subject to anti-dilution protection. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of the
16
<PAGE>
Company, each share of Series D Redeemable Convertible Preferred Stock shall
have a liquidation preference of $1,000 plus unpaid dividends that have accrued
to date of payment, if any. Each holder of Series D Redeemable Convertible
Preferred Stock shall not be entitled to vote, except that the Company may not
effect any of the following actions without the prior written consent of at
least 66.67% of the shares of Series D Redeemable Convertible Preferred Stock:
(a) alter or change the powers, rights, limitations, preferences or
restrictions of the Series D Redeemable Convertible Preferred Stock;
(b) Create a class or series of capital stock having rights,
preferences or privileges prior or superior to the Series D Redeemable
Convertible Preferred Stock (other than the Series C Preferred Stock);
(c) Increase or decrease the aggregate number of authorized shares of
Series D Redeemable Convertible Preferred Stock, except for any decrease
resulting from any redemption, repurchase or other reacquisition, or effect an
exchange or reclassification of the shares of Series D Redeemable Convertible
Preferred Stock;
(d) Repurchase redeem or otherwise acquire any shares of the Company's
capital stock other than the Series D Redeemable Convertible Preferred Stock if
any dividends on the Series D Redeemable Convertible Preferred Stock which have
accrued and are payable remain outstanding at the time;
(e) Liquidate, dissolve or wind-up the affairs of the Company or merge
or consolidate the Corporation with any other entity or sell or encumber all or
substantially all of the Company's assets or issue in one or a series of related
transactions shares representing more than fifty percent (50%) of the aggregate
voting power of all classes and series of the Company's voting stock if any
dividends on the Series D Redeemable Convertible Preferred Stock which have
accrued and are payable remain outstanding at the time; or
(f) Declare or pay any dividend or other distribution with respect to
stock ranking junior to the Series D Redeemable Convertible Preferred Stock if
any dividends on the Series D Redeemable Convertible Preferred Stock which have
accrued and are payable remain outstanding at the time.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital and capital expenditures requirements
with cash provided from operations, the private sale of the Company's stock, and
debt and other equity financing. In 1999 the primary source of cash receipts
will be from payments for software and services. The Company's management
believes that cash flows from the issuance of equity and debt financing will be
required to fund day-to-day operational expenditures, planned expansion and
research and development in the immediate future. Management estimates the
future spending for operations, research and development and the repayment of
trade payables and other current obligations of the Company during the nine
month period beginning September 30, 1999 will require a minimum of $1,300,000
of debt or equity financing. FAILURE TO OBTAIN SUCH FINANCING MAY HAVE A
MATERIAL ADVERSE EFFECT ON THE COMPANY AND ITS PROSPECTS.
During the three month period ended September 30, 1999, the Company issued
452,000 shares of common stock for a total value of $427,100.
17
<PAGE>
At September 30, 1999 the Company had working capital of ($2,273,835) as
compared to working capital of $ 533,846 at September 30,1998. The reduction in
working capital is primarily due to an increase in Current Liabilities of which
the following represent the significant items: (i) $630,000 of the Notes Payable
Subject to Puts was reclassified into Current Liabilities based on an agreement
reached in April 1999 with the former shareholders of Credit Bureau Services,
Inc. (ii) in April 1999, the Company incurred a liability in connection with the
settlement with the Company's former Chairman and Chief Executive Officer of
$468,000 of which $156,000 was classified as a Current Liability, (iii) the note
payable to the former shareholders of Engineered Business Systems, Inc. has a
balloon payment of $400,000 due in February 2000, (iv) an accrued expense to
reserve for additional costs associated with the change of control of the
Company in the amount $285,384.17, (v) and a Preferred Dividend payable to
Waterside Capital in the amount of $68,990.
YEAR 2000
The Company recognizes that a challenging problem exists in that many
computer systems worldwide do not have the capability of recognizing the year
2000 or the years thereafter. No easy technological "quick fix" has yet been
developed for this problem. The Company has spent a considerable sum of money to
assure that all of its software programs are year 2000 compliant and believes
that it has achieved this objective. This "Year 2000 Computer Problem" creates
risk for the company from unforeseen problems in its own software and from third
parties with whom the company deals. Such failures of the Company and/or third
parties' computer systems could have a material adverse effect on the Company
and its ability to conduct its business in the future.
INFLATION
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in the cost
of supplies and services, or other operating costs, could adversely affect the
Company's operations; however, the Company believes it could increase prices to
offset increases in costs of goods sold or other operating costs.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During the first quarter of 1999 the Company was a defendant in the lawsuit
styled, Thomas L. Bauer, et al v. Triangle Imaging Group, Inc., Vito A.
Bellezza, Judith Bellezza a/k/a Judith Klotz, Peter Bellezza and Franz Fideli in
the Circuit Court of the 17th Judicial Circuit in and for Broward County,
Florida filed in December 1998. On January 14, 1999, a hearing was held before
the Circuit Court for Broward County, Florida with regard to the litigation and
an order was entered by the Court on February 22, 1999 (the "Order").
The Order, among other things, required the parties to submit their dispute to
non-binding mediation. On April 30, 1999, the Company attended the required
mediation conference and entered into a settlement agreement (the "Agreement")
with Vito A. Bellezza, the Company's former Chief Executive Officer and Chairman
of the Board of Directors, Judith Bellezza, Mr. Bellezza's wife and a former
employee of the Company, Peter Bellezza, Mr. Bellezza's brother and a former
director of the Company, and Franz Fideli, a former director of the Company. The
Agreement includes a general release of all claims by the parties against all
other parties and also (i) requires Messrs. Bellezza, Fideli and Peter Bellezza
to surrender for cancellation (a) an aggregate of 900,000 shares of the
Company's Common Stock and (b) options to purchase an aggregate of 2,200,000
shares of the Company's Common Stock at exercise prices ranging from $.05 per
share to $1.875 per share, (ii) grants the Company's Board of Directors the
right to vote, subject to certain limitations, all shares of the Company's
Common Stock owned by such individuals (presently believed to be in excess of 3
million shares) in accordance with the majority vote of the other shareholders
of the Company's Common Stock, and (iii) requires that the Company pay to Vito
Bellezza and/or Judith Bellezza a total of $468,000 over a period of three (3)
years and to provide them with health and dental insurance coverage. As a result
of the execution and delivery of the Agreement, Mr. Bellezza and the other
defendants in the lawsuit will not serve as officers or directors of the Company
and will not otherwise be involved in the day-to-day activities of the Company
in any capacity. The Company has received from Vito A. Bellezza for cancellation
800,000 shares of Common Stock in connection with the settlement and has
received 50,000 shares of Common Stock for cancellation from each of Peter
Bellezza and Franz Fideli. All shares delivered for cancellation have been
retired by the Company.
Item 2. Changes in Securities and Use of Proceeds
In August 1999, the Company issued 452,000 shares of Common Stock to certain
individual accredited investors for an aggregate purchase price of $452,000
pursuant to Section 4(2) of the Securities Act of 1933 (the "Act"). The proceeds
from the sale of Common Stock were used by the Company for day to day
operational expenses and for research and development.
In September 1999, the Company canceled 10,000 shares of Common Stock incident
to an agreement with the former shareholder of Florida Credit Bureau, Inc.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
None.
B. Reports on Form 8-K
Current Report on Form 8-K dated July 15, 1999, Item 5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ELECTRONIC BUSINESS SERVICES, INC.
Dated: November 19, 1999 By: /s/ HAROLD S. FISCHER
--------------------------------------
Harold S. Fischer,
President, Chief
Executive Officer and Director
20
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