==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission File Number 2-96392-A
ELECTRONIC BUSINESS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 65-0952956
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1800 NW 49th Street, Suite 100, Ft. Lauderdale, FL 33309
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 229-5100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-KSB. [ ]
Revenues for the Issuer's most recent fiscal year are $6,486,533
The aggregate market value of the voting stock held by non-affiliates
of the Issuer as of April 12, 2000 was approximately $1,378,820.
The number of outstanding shares of the Issuer's common stock as of April
14, 2000 was 13,989,255 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE.
==============================================================================
<PAGE>
ELECTRONIC BUSINESS SERVICES, INC.
TABLE OF CONTENTS
PAGE
PART I
Business.......................................................................1
Properties....................................................................17
Legal Proceedings.............................................................17
Submission of Matters to a Vote of Security Holders...........................19
PART II
Market for Common Equity and Related Stockholder Matters......................19
Management's Discussion and Analysis..........................................20
Financial Statements .........................................................25
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.........................................25
PART III
Directors, Executive Officers, Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act..................26
Executive Compensation........................................................30
Security Ownership of Certain Beneficial Owners and Management................33
Certain Relationships and Related Transactions................................34
Exhibits, Lists and Reports on Form 8-K.......................................40
i
<PAGE>
ITEM 1. BUSINESS
GENERAL
Electronic Business Services, Inc. f/k/a @ebs, Inc. f/k/a Triangle Imaging
Group, Inc. (collectively with the subsidiaries, the "Company" or "EBSI")
through its operating subsidiaries creates software and provides services to the
mortgage lending and credit agency industries. All of the Company's business
operations are conducted through Engineered Business Systems, Inc. ("EBS") and
QuickCREDIT Corp. ("QCC") and its subsidiaries. EBS, acquired by the Company in
December 1996, develops and sells software quality assurance products and
services for the mortgage and credit industry. QCC, formed by the Company in
February 1998, acquired three (3) credit agencies in April and May 1998. Through
its three (3) wholly owned subsidiaries, QCC compiles, organizes and sells
comprehensive credit reports to its customers.
The 1999 fiscal year was a difficult year for the Company which suffered
significant financial losses stemming primarily form the effects of the change
of control occurring in December 1998 and the related litigation continuing into
the second quarter of 1999, a failed business partnership with Interfinancial
Services Corp. and an increase in residential mortgage interest rates causing a
dramatic downturn in the mortgage industry. Losses for the 1999 fiscal year were
$2,104,246 on sales of $6,486,533 during the 1999 fiscal year (which had
decreased from $7,608,904 for the prior fiscal year). As a result of the
continued deterioration of the Company's financial condition giving rise to
employee layoffs, terminations and resignations in 1999 and the first part of
2000, the Company's total workforce decreased from approximately 84 employees at
March 31, 1999 to approximately 42 employees at April 14, 2000. As a cost saving
measure and as a result of the loss of a significant operations manager, in the
case of QCC's Jacksonville, Florida location, and the termination of QCC's
agreement with Interfinancial Services Corp., in the case of QCC's Atlanta,
Georgia location, QCC closed and consolidated its Jacksonville, Florida
operations and its Atlanta, Georgia operations into the Company's Fort
Lauderdale, Florida headquarters. The Company remains dependent upon outside
sources of equity and debt capital and may be unable to continue its operations
in the absence of receipt of significant capital funding in the near future.
During the fourth quarter of 1999 and the first quarter of 2000, the
Company's cash flow situation required it to prioritize the payment of certain
accounts payable and other expenditures resulting on several occasions in
delayed payment of salary and expenses to the Company's executive officers and
other members of the Company's management. All salary obligations to management
delayed during such period have been satisfied as of the date of this report.
The Company's management believes that future delays in satisfying the Company's
payroll obligations may occur if the Company's business and prospects do not
improve or if the Company does not receive additional investment capital.
On October 8, 1999, in a transaction approved by the Company's
shareholders at its annual meeting of shareholders held on May 27, 1999, the
Company merged with and into Electronic Business Services, Inc., a wholly owned
Delaware subsidiary of the Company. The result of the merger was to change the
1
<PAGE>
Company's name to Electronic Business Services, Inc. and to change its state of
incorporation from Florida to Delaware. The Certificate of Incorporation and
By-laws of Electronic Business Services, Inc. survive the merger. In addition,
on October 15, 1999 the Company changed its trading symbol on the OTC Bulletin
Board from "TRIG" to "AEBS".
The Company relocated its principal corporate offices from Coconut Creek,
Florida to a larger facility in Fort Lauderdale, Florida in March 1999. The
executive offices of the Company are located at 1800 NW 49th Street, Suite 100,
Ft. Lauderdale, FL 33309 (Telephone (954) 229-5100).
RECENT DEVELOPMENTS
On January 27, 2000, due to the further deterioration of the business of
the Company and its subsidiaries, the Company and QCC entered into a line of
credit transaction with Waterside Capital Corporation. The purpose of the line
of credit is to provide the Company and QCC with working capital, to fund the
prosecution of QCC's claims against Interfinancial Services Corp. and to cover
the cost of registration with the Securities and Exchange Commission of certain
warrants and shares of Company common stock. The line of credit is evidenced by
a promissory note that provides that the Company and QCC may from time to time
request advances of principal under the note up to an aggregate maximum of
$500,000. The Company and QCC do not have the right to re-borrow funds that have
been previously advanced and repaid under the note. The unpaid principal balance
of the note bears interest at the annual rate of twelve and one-half percent (12
1/2%) until all sums due under the note are paid in full. The Company is
obligated to pay to Waterside interest only payments under the note with the
first payment of interest due on August 1, 2000, and on the first day of each
month thereafter until all sums due under the note are paid in full. If the note
is not earlier repaid, the entire unpaid principal balance, all accrued and
unpaid interest and any other sums due under the note must be paid in full by
the Company on or before December 31, 2005. In addition, the note provides that
the outstanding balance of the note may be converted into shares of Company
common stock at any time after April 28, 2000 and prior to the payment of the
outstanding balance of the note. The initial conversion rate is one share of
common stock for each $.20 of the outstanding balance of the note so converted,
subject to anti-dilution protection. The line of credit is secured by a second
lien position on all of the assets of QCC, and by a pledge of all of the issued
and outstanding common shares of QCC. In addition, EBS guaranteed the
performance of the Company and QCC under the note and ancillary documents that
are part of the transaction.
In connection with the agreement to establish the line of credit,
Waterside Capital Corporation and the Company agreed to cancel the 1,500 shares
of Series C Preferred Stock and the 700 shares of Series D Preferred Stock of
the Company owned by Waterside, constituting all outstanding shares of each such
class, and to issue to Waterside in exchange therefor 2,200 shares of a new
class of preferred stock designated Series E Convertible Redeemable Preferred
Stock. The Series E Preferred Stock has substantially the same rights and
preferences as the cancelled shares of Series C Preferred Stock and Series D
Preferred Stock except that the shares of Series E Preferred Stock are
convertible into shares of Company common stock, subject to certain limitations,
at the rate of 5,000 shares of common stock for each converted share of Series E
2
<PAGE>
Preferred Stock. The accrued and unpaid dividends due to Waterside on the
canceled shares of Series C Preferred Stock and Series D Preferred Stock, as
well as any accrued and unpaid dividends that may become due to Waterside on the
Series E Preferred Stock, are also convertible into shares of common stock at
the rate of one share of Common Stock for each $.20 of accrued and unpaid
dividends so converted. In addition, the Company granted to Waterside Common
Stock purchase warrants to purchase 30,000 shares of Common Stock for $.20 per
share. The stock purchase warrants are exercisable for a period of 10 years from
the date of issuance. In connection with the transaction, the Company agreed to
register for resale with the Securities and Exchange Commission all of the
shares of restricted common stock owned by Waterside as of the date of the
agreement and all shares of common stock issuable upon conversion of the Series
E Preferred Stock, conversion of the accrued and unpaid dividends on the Series
E Preferred Stock, conversion of the note and the exercise of the common stock
purchase warrants.
On January 31, 2000 the Company entered into a Promissory Note
Modification and Extension Agreement, Renewal Promissory Note and warrant
agreements with the former shareholders of EBS in order to restructure the
Company's obligation to deliver payment of $400,000 to such individuals due on
February 1, 2000. The renewal promissory note provides for eight consecutive
monthly payments of $50,000 on the first day of each month beginning February 1,
2000. The renewal promissory note is prepayable without penalty at any time and
bears interest at the rate of 21% per annum in contrast to the 8% annual rate of
interest charged under the original note. All of the covenants and restrictions
contained in the original note were made a part of the renewal promissory note.
In addition, the renewal promissory note is secured by the original Stock Pledge
and Security Agreement, dated December 2, 1996, that secured the obligations
under the original note. The terms, covenants and conditions of such Stock
Pledge and Security Agreement are expressly incorporated into the renewal note.
The original note holders were issued 200,000 stock purchase warrants in
consideration for restructuring the payment obligation in addition to the
increase in the interest rate payable on the borrowed funds. The stock purchase
warrants may be exercised in whole or in part into restricted shares of Company
common stock at any time after February 1, 2000 and have a five-year term
expiring on February 1, 2000. The warrant exercise price is $.40 per share. The
warrants are protected against dilution if the Company subdivides or combines
its outstanding shares of common stock or in the event the Company issues
capital stock by reclassification of its common shares. In the event of the
occurrence of any such event, the warrant agreement provides that the warrant
exercise price in effect immediately prior to such action shall be adjusted so
that the warrant holder shall be entitled to receive the number of shares of
common stock or other capital stock that he would have owned or been entitled to
receive immediately following such event had the warrant been exercised
immediately prior thereto. The warrant agreement also provides the warrant
holders the right to convert the warrants into the kind and amount of
securities, cash or other property that they would have been entitled to receive
if they had exercised the warrants immediately prior to the occurrence of any
merger in which the Company is not the continuing corporation or in case of any
sale or conveyance to another entity of all or substantially all of the
Company's assets or in the event of a statutory exchange of securities with
another entity.
3
<PAGE>
As of the date of this report the Company has not satisfied its payment
obligations due on the first day of March and April of 2000 as required under
the Promissory Note Extension and Modification Agreement. The former EBS
shareholders have verbally agreed to give the Company an unspecified period of
time to obtain financing or to otherwise become in a position to begin
satisfying its payment obligations under the modified note. There is no guaranty
that the former EBS shareholders will continue to delay their right to demand
immediate payment of the modified note or to otherwise enforce their legal
remedies triggered by the default by the Company of its payment obligations.
ENGINEERED BUSINESS SYSTEMS, INC.
EBS designs, develops, markets and supports client/server based software
for the mortgage credit reporting and mortgage banking industries. EBS software
products for mortgage credit reporting currently include CRIS(R), Xchange(R),
and QuickCREDIT for Windows(TM). CRIS(R) is used by a mortgage credit reporting
agency to verify credit information in the national credit repositories and to
produce a Residential Mortgage Credit Report. Xchange(R) provides the electronic
data interchange (EDI) between CRIS(R), QuickCREDIT for Windows(TM), and the
national credit repositories. QuickCREDIT for Windows(TM) is used by a mortgage
bank to request credit information via Xchange(R).
EBS software products for mortgage banking currently include ACES
2000(TM), DESC(TM), and DESC 2000. ACES(TM) was developed for mortgage banks to
evaluate the quality of their loan origination process. ACES 2000(TM) integrates
OLAP technology from Business Objects Americas to provide reporting with text,
data and graphics, ad hoc database query and analysis, and electronic
distribution of the results. DESC(TM) is a statistical sampling tool developed
for ACES(TM) users. DESC 2000(TM) includes the Automated Loan Selection feature
from ACES(TM) for mortgage banks using a quality control system that was either
developed in-house or acquired from another vendor.
In addition to developing and selling proprietary risk management
software, EBS has a Quality Control Solutions division that offers outsourcing
of the quality control review process and a Consulting Services division that
offers clients extensive expertise in, among other things, mortgage quality
evaluation, program risk analysis, and operation reviews that focus on
maximizing revenue and reducing risk. It is critical for mortgage lenders to
establish and evaluate effective operating procedures while assessing and
managing risk inherent in the mortgage industry.
PRODUCTS AND SERVICES
ACES(TM)
ACES(TM) assists mortgage lenders in assessing the accuracy of the
information gathered in connection with making a loan. When considering whether
to lend funds, a mortgage lender has potential borrowers complete a mortgage
application. From this application and other accumulated information, the lender
determines whether the applicant qualifies for a loan. As part of this loan
4
<PAGE>
process, the lender must also assess whether the property being purchased is of
sufficient value to collateralize the loan. If the information obtained
regarding the potential borrower and the property to be pledged as collateral
satisfy certain lending criteria, the loan can then be made by the mortgage
lender. Frequently, the mortgage lender then bundles a number of loans together
and sells the portfolio of loans to Fannie Mae, Freddie Mac, Federal Housing
Authority ("FHA"), Veterans Administration ("VA"), and other mortgage investors.
In order to affect the sale of a mortgage portfolio, a lender, or loan
originator, must review the information compiled in connection with originating
the loan on a representative sample of loans in the portfolio. ACES(TM) software
simplifies this process greatly. The ACES(TM) product enables each customer to
perform quality control reviews based upon the risk management philosophy
determined by their company. ACES(TM) provides either (i) a questionnaire, which
the customer may modify, or (ii) an exception based analysis. The questionnaire
enables the analyst reviewing the information gathered during the origination of
the loan to quickly and accurately determine whether any information was omitted
or misstated. ACES(TM) then creates reverification letters for the application,
employment, deposits (source of funds), credit, and sometimes property
appraisal. The exception based analysis enables the reviewer to identify
specific exceptions, or items of concern.
ACES(TM) also contains a loan selection module that enables the user to
select loans for review from the entire universe of loans originated, with
specific criteria or risk elements. This module randomly selects loans to insure
no undue bias.
EBS either sells or leases the ACES(TM) program. When a customer leases
ACES(TM) software the maintenance fee is included. When selling the ACES(TM)
software, the Company charges an additional annual software maintenance fee.
In the second quarter of 1998, EBS released its ACES 98(TM) software. ACES
98(TM), a Year 2000 compliant program, is a Windows 95(R) and Windows NT(R)
based product, which includes enhanced reporting modules. These reporting
modules generated clearer and more concise reports as well as trend information
that was not available in the previous versions of ACES(TM). As a result, ACES
98(TM) functioned more efficiently and effectively than earlier versions of
ACES(TM).
In the first quarter of 2000, EBS released ACES 2000(TM), which integrates
OLAP technology from Business Objects Americas, Inc. to provide reporting with
text, data and graphics, ad hoc database query and analysis, and electronic
distribution of the results. ACES 2000(TM) features an SQL-compliant database
for improved speed, reliability, and functionality. Demonstrations of the
product have been well received and four orders with payment were received prior
to general release of the product.
ACES(TM) Quality Control Solutions
In lieu of purchasing or leasing the ACES(TM) software, mortgage lenders
can outsource the quality review task to EBS. By using the ACES(TM) software,
trained specialists at EBS analyze the original file containing information
compiled in connection with a loan. EBS customers utilizing ACES(TM) Quality
Control Solutions include some of the largest mortgage companies nationwide.
Pursuant to the terms of a contract with its customers, EBS charges its
customers a fixed fee for each reviewed file.
5
<PAGE>
EBS provides third party quality review services for professional reviews
of Conventional, FHA, VA, Jumbo, and specialty mortgage loans. The ACES(TM)
software also enables EBS to perform reviews for various transactions, including
preliminary reviews prior to funding, post lending reviews and reviews of
portfolios in connection with acquisitions or divestitures.
DESC(TM)
In the second quarter of 1998 EBS released DESC(TM) (Data Evaluation and
Selection Criteria), its statistical sampling software. This new tool, while
providing mortgage lenders with the ability to draw sample data based on their
own criteria, also allows them the ability to categorize their samples into
predetermined risk groups for statistical sampling purposes. Known as
"stratification", this function gives lenders the ability to validate risk
assumptions by any number of factors as well as to assure themselves of the
overall quality of the mortgage loans being sold into the secondary market. This
methodology supports EBS' clients' ability to maximize the information obtained
from the quality control process while minimizing the actual number of mortgage
files to be reviewed. In the third quarter of 1999, EBS released DESC 2000(TM),
which includes the Automated Loan Selection feature from ACES(TM) for mortgage
banks using a quality control system that was either developed in-house or
acquired from another vendor.
COMPAREX
Due to funding priorities, this previously announced product, which would
allow a mortgage bank to compare the quality of its loan origination process to
an industry benchmark, is delayed until 2001. Similar to the use of Business
Objects for ACES 2000(TM), EBS will now develop the COMPAREX product by using
its knowledge of the mortgage banking industry to integrate technology-leading
software to offer clients the most robust, open software available. This will
enable EBS to deliver a functionally superior product with less time and
expense.
EBS CONSULTING SERVICES
Since its inception in February 1998, EBS Consulting Services has provided
advice to a variety of mortgage lenders on operations, systems and personnel.
Aimed at supporting the efforts of the mortgage quality professional, the
consulting division ensures that all clients are assisted in the effective
implementation of software products marketed by EBS. This program is focused
towards a process measurement approach which has proven to be effective in
providing mortgage-lending management with key process quality information. EBS
Consulting Services also provides an analysis of overall quality control
operations for lenders and has the ability to assist them in the development and
implementation of large-scale quality initiatives.
CRIS(R)
CRIS(R) assists mortgage credit reporting agencies in compiling
comprehensive credit reports for their customers. To date, over 350 mortgage
credit reporting agencies have purchased CRIS(R), each of which have also
6
<PAGE>
entered into a software maintenance agreement with the Company. CRIS(R) enables
mortgage credit reporting agencies to verify the credit information provided by
the national repositories and generate Residential Mortgage Credit Reports,
which are required whenever an automated underwriting system cannot be used. In
addition, CRIS(R) also provides mortgage credit reporting agencies with an
accounts receivable and billing system for invoicing of reports generated by the
CRIS(R) program.
CRIS(R), a Year 2000 compliant program, is installed by EBS on a
customer's system or sold pre-loaded on new computer equipment.
XCHANGE(R)
Xchange(R) provides the Electronic Data Interchange (EDI) between CRIS(R)
and the national repositories. Xchange(R) retrieves the credit information from
one, two or three of the national repositories, consolidates the information,
formats the data, and forwards it to CRIS(R) or the end-user as requested.
Xchange(R), a Year 2000 compliant program, is installed by EBS on a
customer's system, sold pre-loaded on new equipment or available as an
application service via EBS. EBS currently provides Xchange(R) application
services for approximately 60 mortgage credit reporting agencies nationwide.
QUICKCREDIT FOR WINDOWS(TM)
In June of 1998, EBS introduced QuickCREDIT for Windows(TM), a software
application that enables mortgage credit reporting agency clients to access the
EBS Xchange(R) system for the purpose of requesting and compiling individual
credit reports. This application operates on Windows 3.1, Windows 95(R) and
Windows NT(R) operating systems. QuickCREDIT for Windows(TM) is provided without
cost to the client, however it derives revenue on a transactional basis when
used.
SALES AND MARKETING
In order to service its customers, EBS and QCC presently employ a combined
sales force of seven sales representatives. These sales representatives work on
a salary plus commission basis and are responsible for placing their respective
products with its principal customers, which include commercial banks, mortgage
brokers, savings and loan associations, credit unions, mortgage credit reporting
agencies and other lenders. The sales representatives are supported by a
marketing services staff and three technical support representatives and seven
customer service representatives.
In addition, customers acquire CRIS(R) and EBS Xchange(R) through
referrals to EBS or contacts through the sales organization. EBS derives revenue
from these products based upon sale of software and hardware, annual service
maintenance agreement payments, and monthly transactional fees.
7
<PAGE>
COMPETITION
The Company is aware of several software programs produced by private
non-mortgage banking companies that compete directly with the ACES(TM) suite of
products. More significantly, mortgage companies continually develop their own
proprietary software in-house. ACES(TM) Quality Assurance Outsourcing has
competition from many local, regional and national privately held companies.
The credit reporting industry is highly competitive. Many credit reporting
agencies have other software programs which generate credit reports from
information supplied by the credit information repositories. As a result, both
CRIS(R) and Xchange(R) have significant competition.
BACKLOG
At December 31, 1999, EBS had no contract backlog. Revenues from sales are
recorded upon software delivery, hardware delivery, and training. EBS has
entered into one to two year contracts for services that obligate customers to
specific minimum transactions with EBS.
EMPLOYEES
As a result of the deterioration of the Company's financial condition
giving rise to employee layoffs, terminations and resignations in 1999 and the
first part of 2000, the Company's total workforce decreased from approximately
84 employees at March 31, 1999 to approximately 42 employees at April 14, 2000.
Of the approximately 42 people employed with the Company as of the date of this
report, seven (7) are engaged in marketing and sales, nineteen (19) are engaged
in programming and customer service and five (5) are involved in finance and
administration. None of the employees are union members and none are covered
under any collective bargaining agreements.
PATENTS AND TRADEMARKS
The EBS Xchange(R) and QuickCREDIT(R) trademarks have been registered in
International Class 9 in the United States Patent and Trademark Office ("PTO")
and the Company has several applications for registration pending in the PTO.
Through the Company's five (5) year long use of the ACES(TM) trademark in the
United States in connection with computer software, the Company has also
acquired common law trademark rights in the ACES(TM) trademark. There can be no
assurance, however, that the Company will be able to effectively obtain rights
in the Company's mark throughout all the countries of the world. The failure of
the Company to protect such right from unlawful and improper appropriation may
have a material adverse effect on the Company's business, financial condition
and results of operation.
INSURANCE
The Company maintains insurance with respect to its properties and
operations in such form, in such amounts and with such insurers as is customary
in the businesses in which the Company is engaged. The Company believes that the
amount and form of its insurance coverage are adequate at the present time.
8
<PAGE>
RESEARCH AND DEVELOPMENT
During 1999, the Company expensed approximately $848,208 of research and
development costs. Approximately 60% of the EBS programming resources are
engaged in research and development activities. These internal resources
accounted for $229,629 of the total research and development costs. Research and
development expenses related to external vendors were $618,579. The development
activities were focused on upgrading the ACES and QCC products and the
development of the two new QCC consumer products in connection with the
agreement with Interfinancial Services Corp. which was terminated in November
1999.
The Company estimates the future spending for research and development for
the fiscal year 2000 to be approximately $340,000.
QUICKCREDIT CORP.
QCC was formed by the Company as a wholly owned subsidiary in February
1998 for the purpose of acquiring local credit reporting agencies. In April
1998, QCC acquired two privately held mortgage credit reporting agencies located
in Fort Lauderdale, Florida and Orlando, Florida. In May 1998, QCC acquired a
third mortgage credit reporting agency located in Jacksonville, Florida. QCC
maintains each of the acquired mortgage credit reporting agencies as separate
subsidiaries and has consolidated their operations in QCC's corporate offices in
Fort Lauderdale, Florida. Despite the mortgage industry downturn due to rising
interest rates, QCC has maintained relatively steady revenues from the sale of
credit reports by aggressively pursuing new accounts. QCC is currently
implementing two nationwide mortgage banks, one having over 50 locations and one
having over 400 locations.
In March 1999, QCC entered into an Agreement for Joint Product
Development, Sales and Marketing with Interfinancial Services Corp., an Atlanta,
Georgia based company, for the development and marketing of two new products.
The two products developed by QCC under the agreement are a credit card
registration product and a credit monitoring product. The card registration
product offers to the credit card holder the opportunity to register each of his
or her bank credit cards, oil company credit and store credit cards to allow
quick and easy cancellation by the cardholder in the event any or all of the
registered credit cards are lost or stolen. In the event of loss or theft, the
cardholder notifies QCC through a toll free telephone call of the loss or theft
and QCC (i) arranges for cancellation of the cards identified by the card holder
to be cancelled (ii) reorders the cancelled cards and (iii) provides emergency
cash and certain other emergency services to the card holder. The credit
monitoring product offers credit reporting services and related data collection
services to individual consumers to permit such persons to obtain periodic
information about their credit history. Credit information is gathered from each
of the three credit repositories (Equifax, TransUnion Corporation and Experian)
and reported to the customer each calendar quarter. Customers having questions
or concerns regarding the information appearing on their credit report will be
directed to the National Consumer Credit Counseling Service.
9
<PAGE>
On November 24, 1999, QCC terminated its agreement with Interfinancial
Services Corp. due to the alleged failure of Interfinancial Services Corp. to
perform its material obligations under such contract despite full and timely
performance by QCC of its obligations under the agreement. In connection with
QCC's rights under the agreement, it is pursuing a claim against Interfinancial
Services Corp. in an effort to recover in excess of $1.3 million of costs
associated with its performance under the contract. QCC demanded arbitration in
accordance with the terms of the agreement on February 2, 2000 after failing to
reach an amicable resolution of the dispute with Interfinancial Services Corp.
The Company anticipates that this matter will proceed to arbitration in May or
June of 2000 if a settlement is not reached at the mediation. See "Legal
Proceedings."
On December 23, 1999, QuickCREDIT Corp. and BrandDirect Marketing, Inc.
entered into an agreement for the sale and marketing by BrandDirect of the two
products developed by QCC pursuant to the agreement with Interfinancial Services
Corp. that was terminated in November 1999. BrandDirect will market the products
to bank card and oil card customers as potential benefits in a membership
service to be created by BrandDirect. Pursuant to the agreement, BrandDirect is
responsible for the design and preparation, subject to QCC's approval, of all
marketing and sales materials used by BrandDirect to market or describe the
products and for marketing the membership service including the products through
direct mail and telemarketing sales efforts. Product orders will be delivered to
QCC either directly from the end customers or through BrandDirect. QCC has
responsibility for all aspects of product fulfillment and product delivery
including the design and preparation, subject to BrandDirect approval, of all
registration materials and other reports and fulfillment materials to be
delivered to subscribers to the membership service that purchase either or both
of the products.
BrandDirect began test marketing the products in January 2000 and will
continue to do so until June 16, 2000 unless BrandDirect elects an earlier
termination of the test. The purpose of the test marketing is to assess the
feasibility of further roll-out of the products to begin during or immediately
after the test period. BrandDirect may elect not to roll-out the products
following the test period, and terminate the agreement if the data collected
during the test period indicates that (i) inbound telemarketing calls result in
sales per hour of less than 2.0 with a retention rate of less than 35% and (ii)
outbound telemarketing calls result in sales per hour of less than 1.2 with a
retention rate of less than 35%. If BrandDirect elects to roll-out the products,
QCC and BrandDirect will use their good faith efforts to agree upon (i) a
minimum monthly revenue guaranty to QCC by BrandDirect for new product sales and
renewals for the first twelve (12) calendar months immediately thereafter and
(ii) exclusivity protection for both BrandDirect and QCC for the term of this
Agreement following the roll-out date. Under the contract BrandDirect guaranteed
to QCC a minimum of $300,000 of gross revenues from product sales during the
test period. The guaranteed minimum revenue is to be paid in unequal
installments on the first day of each month of the test period in accordance
with the schedule provided in the agreement.
10
<PAGE>
In March 2000, QCC began operating a 7-day per week, 24 hour per day, call
center to support the credit card registration and credit monitoring products.
EBS invested significant time and resources in 1999 to develop the call center
software application which supports these products and is believed by QCC
management to create a significant barrier to competition. EBS has recruited and
trained dedicated customer service representatives to national credit repository
standards for these products.
BrandDirect has begun marketing these products for a major electronics
distributor and is preparing to launch these products for a major furniture
retailer. The results of the test have been favorable thus far and the Company
anticipates that BrandDirect and QCC will elect to undertake a full roll-out the
products in the summer of 2000. BrandDirect is also in discussion with one of
the largest credit card issuers as well as a major consumer finance company. QCC
is currently in contract negotiation with a second client that markets to major
oil companies for immediate implementation and is in discussions with several
other marketing organizations for possible marketing and sale of the products to
take place in the second half of 2000. As of the date of this report,
BrandDirect has delivered minimum revenue payments to QCC of $187,500.
HISTORICAL INFORMATION
The Company was incorporated in December 1984 as Benefit Performances of
America, Inc. ("Benefit") to engage in the business of promoting concerts, shows
and other entertainment productions. In April 1988, Benefit ceased operations
and in September 1988 Benefit acquired all of the outstanding stock of The
Triangle Group, Inc., a data processing consulting and software development
firm. In November 1988, Benefit changed its name to The Triangle Group, Inc.
("Triangle Group"). In September 1992, Triangle Group concluded its business as
a result of insufficient working capital. From September 1992 to January 1993,
the Company had no business activities and Vito Bellezza, a minority
stockholder, approached the Board of Directors regarding the purchase of the
shares of Common Stock held by management and other insiders. In January 1994,
Mr. Bellezza acquired from certain existing stockholders 2,970,000 shares of
Common Stock, representing 52% of the total shares of common stock outstanding.
In April 1995, Triangle Group acquired Pegasus Technologies, Inc.
("Pegasus"), a company that purportedly owned cutting edge imaging technology
used for the inspection of aircraft. In May 1995, Triangle Group, under the
direction of the principal of Pegasus, changed its name to Triangle Imaging
Group, Inc. After discovering that Pegasus misrepresented its ownership rights
to the imaging technology, the Company rescinded the transaction and canceled
certain of the shares issued in connection therewith.
In December 1996, the Company paid an aggregate purchase price of
$2,620,915 to acquire 760 shares of EBS common stock, or 95% of the total number
of shares of EBS common stock outstanding. The purchase price included the
payment of $896,000 in cash, 500,000 shares of Company common stock and a
promissory note in the principal amount of $1,600,000. The note, in its original
form, (i) bore interest at the prime rate per annum (but no less than 8% and no
more than 9% per annum), (ii) was payable monthly, (iii) was secured by all
assets of the Company and EBS, and (iv) required a balloon payment of the
balance of the note on February 1, 2000. In December 1997, the Company acquired
11
<PAGE>
40 shares of EBS Common Stock (the remaining 5% of shares outstanding) for an
aggregate purchase price of $153,250. In October 1998, the Company made an
additional principal payment of $375,000 to reduce the balance of the note
incident to certain capital raising activities of the Company as required by the
agreements ancillary to the purchase by the Company of the EBS Common Stock.
Effective January 31, 2000, the Company entered into a Promissory Note Extension
and Modification Agreement with the note holders which agreement (i) modified
the Company's obligation to pay the $400,000 balloon payment due on February 1,
2000 by dividing such payment into 8 equal consecutive monthly installments of
principal plus interest with the first installment due February 1, 2000 and (ii)
increased the interest rate applicable to the loan to 21% per annum. As of the
date of this report the Company has not satisfied its payment obligations due
March 1, 2000 and April 1, 2000 required under the Promissory Note Extension and
Modification Agreement. See "Recent Developments."
CREDIT FACILITY
On December 16, 1999, QCC and American Factors Group, Inc., a Florida
corporation, entered into a Purchase and Sale Agreement for the purpose of
consummating an accounts receivable factoring arrangement. Under the terms of
the agreement, American Factors Group is granted ownership of QCC's accounts
receivable in exchange for delivery of an immediate cash payment equal to 75% of
the face value of the receivables so purchased. American Factors Group is also
granted the exclusive right to collect payment of the accounts receivable from
QCC customers. Upon collection of the accounts receivable, American Factors
Group is to provide a cash payment to QCC equal to the dollar amount of the
receivables collected less the initial amount paid to QCC and less the
collection fees and certain other costs, discounts, off-sets and other expenses.
American Factors Group was granted a security interest in, among other things,
all of QCC's existing and future accounts, contract rights and receivables to
secure the performance by QCC of its obligations under the agreement. QCC may be
found to be in default under the agreement giving American Factors Group certain
remedies due to, among other things, (i) QCC making any misrepresentations of
any of the representations or warranties in the agreement, (ii) QCC mistating
any fact (as to amount, validity, lack of defenses, offsets, counterclaims or
credits by the account debtor or liability for payment of the invoice in
accordance with its terms) regarding any of the accounts receivable purchased by
American Factors Group under the agreement, (iii) failure of American Factors
Group to receive payment for any purchased account receivable due the act or
failure to act of QCC (excluding any such failure resulting from the account
debtor's financial inability to pay or its bankruptcy), or (iv) QCC breaching
the terms of any other written agreement between QCC and American Factors Group
which is not cured within 10 days of receipt of fax notice of breach. In the
event of a default by QCC under the agreement, American Factors Group may be
entitled to (w) take a credit against a reserve account for the amount of any
losses resulting from QCC's breach, (x) demand that QCC repurchase any account
receivable that is affected by such breach and require that QCC refund the
amount of the initial payment received for such receivable(s) plus the
collection fee that would have been earned by American Factors Group, (y)
require QCC to repurchase all accounts receivable purchased under the agreement
and (z) exercise any rights and remedies available to it as a secured party,
deduct and offset any amounts due QCC for any loss, liability, damage or expense
caused by such breach and/or sue to recover damages.
12
<PAGE>
In addition to other information in this Annual Report on Form 10-KSB, the
following important factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact on the Company's business, prospects, financial condition and results of
operations.
Going Concern Opinion Issued by Auditors. Our independent certified public
accountants have qualified their report on our consolidated financial statements
for the year ended December 31, 1999 with respect the fact that the auditors
have substantial doubt about the Company's ability to continue as a going
concern. The factors cited include the following:
o recurring losses from operations
o working capital and stockholders' equity deficiency
o the Company is in default on several debt obligations
If the Company is unsuccessful in its efforts to raise the necessary financing,
the Company will be materially and adversely effected.
Limited History of Business Operations; Anticipated Losses. The Company
has a limited operating history, having only commenced its present operations
through its Engineered Business Systems, Inc. subsidiary in December 1996. The
Company has a limited operating history on which to base an evaluation of its
business and prospects. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stage of development. Such risks for the Company include, but are
not limited to, an evolving and unpredictable business model and the management
of growth. To address these risks, the Company must, among other things,
maintain and increase its customer base, implement and successfully execute its
business and marketing strategy, continue to develop and upgrade its technology,
provide superior customer service, respond to competitive developments, and
attract, retain and motivate qualified personnel. Although initial customer
acceptance of the Company's services has been encouraging, the Company is unable
to predict with certainty how demand for these services may develop over time.
The Company's future profitability depends in large measure on acceptance of the
Company's products and services.
The Company has incurred losses for the twelve months ended December 31,
1999 of approximately $2,104,246 and has past due accounts payable in the
aggregate amount of approximately $1,300,000. The Company anticipates that it
will continue to incur losses until such time as the Company is able to generate
sufficient revenues to finance its operations.
Significant Capital Requirements; Working Capital Deficit; Need for
Additional Financings. The Company's capital requirements have been and will
continue to be significant. At December 31, 1999, the Company had a working
capital deficit of $3,289,092 and the Company's working capital deficit is
increasing through the date of the filing of this Annual Report on Form 10-KSB.
13
<PAGE>
To date, the Company's capital requirements have been satisfied primarily by the
sale of debt and equity securities. The Company remains dependent upon outside
sources of equity and debt capital and may be unable to continue its operations
in the absence of receipt of significant capital funding in the near future.
Possible Dilution from Sale of Equity Securities. In order to raise
additional capital, it may be necessary for the Company to sell a substantial
percentage of its authorized capital stock to one or more individual investors
or investor groups. Future sales of Company capital stock could adversely affect
the market price of the Company's common shares and could result in significant
dilution to the stock ownership of existing shareholders causing a decrease in
the value of their shares. Dilution is a reduction in the value of the holder's
investment measured by the difference between the purchase price of the shares
of the common stock and the net tangible book value of the shares after the
purchase takes place.
Recent Developments; Litigation. The Company is currently a defendant in
several material litigation matters. In the event that any one or more of the
legal disputes or any other legal matters are determined in favor of an opposing
party, the Company may be materially and adversely effected. See "Legal
Proceedings."
Economic Conditions. The mortgage industry is significantly effected by
general economic conditions, particularly long-term interest rates. When long
term interest rates are relatively low, homeowners refinance their existing
mortgages and demand for new mortgages increases significantly. When interest
rates are rising or are perceived to be high, the converse is true. Beginning in
the third quarter of 1999, long-term interest rates began increasing causing a
severe decline in the Company's revenues. If long-term interest rates do not
stabilize or if they continue to rise, the Company's revenues will continue to
be materially impacted.
Impact of Warrant and Option Exercise, Preferred Stock Conversion and Note
Conversion. As of the date hereof, the Company believes there are warrants and
options outstanding exercisable for in excess of 3,600,000 shares of Company
common stock. and conversion rights held by Waterside Capital Corporation
permitting the conversion of Waterside's preferred stock investment, at any time
after April 28, 2000, into in excess of 12,000,000 shares of common stock.
Waterside also has conversion rights in connection with a line of credit granted
to the Company and QCC in January 2000 permitting, under certain circumstances,
Waterside to convert such indebtedness into up to 2,500,000 common shares. The
exercise price of these warrants, options and conversion rights range from $.20
per share to in excess of $3.00 per share. In the event of the exercise of a
substantial number of warrants and/or options and/or conversion rights, the
resulting increase in the amount of common stock of the Company could
substantially dilute investors ownership interests in the Company and may
negatively effect the market price of the shares of its common stock.
Reliance on Key Persons. The Company is dependent upon each of the members
of its executive management team to operate the business. Should one or more of
such individuals cease to be affiliated with the Company, there could be a
material adverse effect on the Company's business and prospects. There can be no
assurance that suitable replacements could be hired quickly enough to prevent
such adverse effect.
14
<PAGE>
Limited Trading Market; Restrictions on Transferability. The Company's
shares of common stock trade on the OTC Bulletin Board with limited daily
trading volume. Investors should be aware that the nature of the OTC Bulletin
Board, the lack of market analysts following the Company's common stock and the
resulting limited trading volume may make it difficult or impossible for
investors to sell their holdings. In addition, efforts to sell blocks of Company
common stock that are large in relation to the average daily trading volume may
cause significant downward pressure on the market price of the Company's common
stock.
Product Concentration. Although the Company sells a variety of products
and services, the bulk of the Company's revenues are currently concentrated in
the ACES(R) product line. The Company Revenues from the ACES(TM) products
represented over 68% of the Company's total revenues in 1998. The Company
expects that revenues from these products will continue to account for a
substantial portion of the Company's revenues. The life cycles of the Company's
products are difficult to estimate due in large measure to the recent emergence
of some of the Company's products to market, the future effect of product
enhancements and future competition. Declines in demand for these products,
whether as a result of competition, technological change or otherwise, or price
reductions would have a material adverse effect on the Company's operating
results.
Competition. The market for the Company's products is intensely
competitive. The Company expects competition to increase and the Company's
market share to decline as other companies introduce additional and more
competitive Microsoft Windows(R)-based products in this emerging market segment.
Many of the Company's present or anticipated competitors have substantially
greater financial, technical, marketing and sales resources than the Company.
There can be no assurance that the Company will be able to compete successfully
in the future.
Dependence on Operating Environments. The Company's software development
tools are designed for use with computers running in the Microsoft Windows(R)
operating environment. Future sales of the Company's products are dependent upon
continued use of this operating environment. In addition, changes to these
software programs require the Company to continually upgrade its products. Any
inability to produce upgrades or any material delay in doing so would adversely
affect the Company's operating results. The successful introduction of new
operating systems or improvements of existing operating systems that compete
with these software programs also could adversely affect sales of the Company's
products and have a material adverse effect on the Company's operating results.
Rapid Technological Change. The market for the Company's products is
characterized by rapid technological advances, evolving industry standards,
changes in end-user requirements and frequent new product introductions and
enhancements. While the Company to date has been committed to the Microsoft
Windows(R), and Windows(R) NT, platforms, the introduction of products embodying
new technologies and the emergence of new industry standards could render the
Company's existing products and products currently under development obsolete
and unmarketable. The Company's future success will depend upon its ability to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving end-user requirements
and achieve market acceptance. Any failure by the Company to anticipate or
15
<PAGE>
respond adequately to technological developments or end-user requirements, or
any significant delays in product development or introduction, could result in a
loss of competitiveness or revenues. In the past, the Company occasionally
experienced delays in the introduction of new products and product enhancements.
There can be no assurance that the Company will be successful in developing and
marketing new products or product enhancements on a timely basis or that the
Company will not experience significant delays in the future, which could have a
material adverse effect on the Company's results of operations. In addition,
there can be no assurance that new products or product enhancements developed by
the Company will achieve market acceptance.
Dependence on Proprietary Rights. The Company regards its software as
proprietary and attempts to protect it with copyrights, trademarks, trade secret
laws and restrictions on disclosure, copying and transferring title. However,
the Company has no patents, and existing copyright laws afford only limited
practical protection for the Company's software. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. The Company licenses its products
primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain foreign
jurisdictions. In addition, in some instances the Company licenses its product
under agreements that give licensees limited access to the source code of the
Company's products. Accordingly, despite precautions taken by the Company, it
may be possible for unauthorized third parties to copy certain portions of the
Company's products or to obtain and use information that the Company regards as
proprietary. As the number of software products in the industry increases and
the functionality of these products further overlaps, the Company believes that
such software will become increasingly the subject of claims that such software
infringes the rights of others. Although the Company does not believe that its
products infringe on the rights of third parties, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that any such assertion will not result in costly litigation or
require the Company to obtain a license to intellectual property rights of such
parties. In addition, there can be no assurance that such licenses will be
available on reasonable terms, or at all.
No Dividends and None Anticipated. To date, the Company has paid no
dividends. For the foreseeable future, earnings generated from the Company's
proposed operations will be retained for use in the Company's business.
Forward-Looking Information May Prove Inaccurate. This Memorandum contains
forward-looking statements and information that are based on management's
beliefs as well as assumptions made by, and information currently available to,
management. When used in this Memorandum (including Exhibits), words such as
"anticipate," "believe," "estimate," "except," and, depending on the context,
"will" and similar expressions, are intended to identify forward-looking
statements. Such statements reflect the Company's current views with respect to
future events and are subject to certain risks, uncertainties and assumptions,
including the specific risk factors described above. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
estimated or expected. The Company does not intend to update these
forward-looking statements and information.
16
<PAGE>
ITEM 2. PROPERTIES
The Company leases a facility in Fort Lauderdale, Florida consisting of
approximately 20,000 square feet of office and research and development space.
The Company has a lease through January 2003, at a base monthly rental
increasing from approximately $16,800 per month to $20,000 per month during the
first year of the lease. The lease provides for a base monthly rental of
approximately $20,000 during years two through five of the lease. Prior to the
end of the fifth year of the lease, the Company has the right to renew the lease
for an additional five year term at a base monthly rent of approximately $23,500
during each of the five years of the renewal term.
On January 31, 2000, QCC closed its Atlanta, Georgia offices and relocated
its Atlanta operations to Fort Lauderdale, Florida. The principal reason for
moving the Atlanta operations to Fort Lauderdale was the termination of the
agreement with Interfinancial Services, Inc. which relationship required an
Atlanta presence and was the basis for opening the Atlanta offices.
On January 31, 2000, QCC consolidated its Florida operations by closing
the Jacksonville, Florida office and moving the business to its Fort Lauderdale,
Florida location. The reason for the consolidation of the business is due to,
among other things, the resignation of the Vice President of operations in
charge of the Jacksonville location and the reduction of certain costs
associated with the elimination of duplicate overhead expenses resulting from
the separate locations.
ITEM 3. LEGAL PROCEEDINGS
On March 23, 1999, QCC and Interfinancial Services entered into a Joint
Product Sales and Marketing Agreement pursuant to which QCC was obligated to
develop and provide two new consumer products, a credit monitoring product and a
card registration product, and Interfinancial Services was to market and sell
such products. On November 24, 1999, QCC terminated its agreement with
Interfinancial Services Corp. due to the alleged failure of Interfinancial
Services Corp. to perform its material obligations under such contract despite
full and timely performance by QCC. Particularly, Interfinancial Services Corp.
was obligated under the agreement to, among other things, design and prepare
certain marketing and sales materials, to establish a telemarketing sales
effort, to undertake general marketing of the products and to introduce and
market the products to Interfinancial Services Corp.'s institutional clients. At
the time of termination, QCC demanded payment under section 17 of the agreement
which entitles QCC to recover certain incremental expenses incurred in the
furtherance of its obligations under the contract. QCC currently believes the
amount of damages to which it is entitled under the agreement is in excess of
$1.3 million. QCC demanded arbitration in accordance with the terms of the
agreement on February 2, 2000 after failing to reach an amicable resolution of
the dispute with Interfinancial Services Corp. The Company anticipates that this
matter will proceed to arbitration in May or June of 2000. QCC has received
substantial funding from Waterside Capital Corporation to be used to fund the
prosecution of its claims against Interfinancial Services Corp. See "Certain
Relationships and Related Transactions."
17
<PAGE>
On January 20, 2000, the former shareholder of Florida Credit Bureau,
Inc., a credit reporting bureau acquired by QuickCREDIT Corp. in May 1998, filed
a lawsuit against the Company styled HOWARD M. WATCH V. TRIANGLE IMAGING GROUP,
INC. in the Circuit Court in and for Orange County, Florida seeking collection
of approximately $52,000 plus costs and expenses allegedly due under a letter
agreement and promissory note dated July 22, 1999 and June 4, 1999,
respectively. The letter agreement and note were entered into by the parties to
restructure the Company's obligation to repurchase 50,000 shares of Company
common stock at a purchase price of $3.00 per share pursuant to the acquisition
agreement entered into by the parties at the time of the acquisition of Mr.
Watch's business by QCC. The letter agreement required that the Company deliver
to Mr. Watch payment of $51,000 on or before July 23, 1999 with the balance of
$100,000 due in six equal monthly installments beginning September 1, 1999. The
Company's obligation to pay the $100,000 was evidenced by a promissory note in
that original principal amount providing for interest of 8% per annum beginning
June 4, 1999. The complaint alleges the Company failed to make all payments due
under the note. In consideration for restructuring the obligation, Mr. Watch was
permitted to keep 20,000 shares of common stock under the terms of the letter
agreement with that number to increase to 30,000 shares if the Company did not
prepay the note on or before September 1, 1999. Upon receipt of the complaint in
the lawsuit, the Company challenged the plaintiff's choice of venue and was
successful in having the case transferred to Broward County, Florida. Once the
suit is properly transferred to a court in Broward County, Florida having
jurisdiction over the matter the Company will respond to the suit.
On January 25, 2000, Florcor I Limited Partnership, the Company's
landlord, filed a lawsuit against the Company styled FLORCOR I LIMITED
PARTNERSHIP, ET AL. V. @EBS, INC. F/K/A TRIANGLE IMAGING GROUP, INC. in the
Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida,
seeking recovery of damages due from alleged nonpayment of rent and certain
other charges allegedly due under a lease agreement between the parties and
seeking eviction of the Company from its principal corporate offices. On
February 1, 2000, the Company paid the entire amount due to the landlord for
past due rent and other charges that were not in dispute between the parties,
leaving in dispute two months of base rent. On March 3, 2000, the Company
entered into a settlement agreement with the landlord pursuant to which the
Company agreed to pay approximately $14,000 (equal to approximately 2/3 of one
month of base rent) in two equal payments due on April 1, 2000 and May 1, 2000.
Pursuant to the settlement agreement, the landlord agreed to dismiss the lawsuit
with prejudice, provided that the landlord retained the right to obtain an
immediate eviction of the Company, without opportunity for a hearing, if the
Company failed to make either the April 1st or May 1st payments (along with the
rent due on such dates) on time or during the applicable grace period. The
Company timely delivered the April 1, 2000 payment and rent and fully intends to
deliver the payment due on May 1, 2000. If the Company is unable to raise
additional equity or debt financing, the Company may be unable to satisfy the
May 1, 2000 payment obligation.
On March 12, 1999, Quest Communications International filed a lawsuit
against Engineered Business Systems, Inc. styled QUEST COMMUNICATIONS
INTERNATIONAL, INC. F/K/A PHOENIX NETWORK, INC. F/K/A AUTOMATED
18
<PAGE>
COMMUNICATIONS, INC. V. ENGINEERED BUSINESS SYSTEMS, INC. in the Circuit
Court of the 17th Judicial Circuit in and for Broward County, Florida,
seeking recovery of payments, interests and costs in excess of $34,000
allegedly due under a long-distance telephone service agreement. Engineered
Business Systems denies liability for the amounts allegedly due and is
defending the suit.
On May 30, 1998 the Company acquired TriMax Systems Corp. and MultiTask
Corp. for 405,000 shares of the Company's common stock. At the time of the
acquisition, the Company understood TriMax to have certain business
relationships and to have a financial history that was later revealed to be
different than that initially contemplated. On September 30, 1998, the Company
and the former principal shareholders of TriMax mutually agreed to rescind the
acquisition of TriMax. Pursuant to the rescission agreement, the shares
delivered by the Company as payment of the purchase price for all of the
outstanding shares of TriMax were cancelled and the TriMax shares were returned
to the former TriMax shareholders. In addition, the Company entered into
consulting contracts with each of the former TriMax shareholders and the former
Chairman of the Board of the Company caused the Company to grant 100,000 stock
options having an exercise price of $0.20 per share to each of the two former
shareholders of TriMax. The Company has not made any payments under the
consulting contracts and has canceled the stock option agreements. The former
shareholders of TriMax Systems Corp. have demanded the right to exercise the
canceled stock options purportedly granted to each of them by the Company's
former Chairman and the Company has refused such demand. The Company will
vigorously defend any action brought to attempt to enforce the alleged stock
option rights.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's fiscal fourth quarter covered by this report, no
matter was submitted to a vote of security holders of the Company.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's shares of common stock trades on the OTC Bulletin Board (the
"Bulletin Board") under the trading symbol "AEBS". The common stock is regularly
quoted and traded on the Bulletin Board.
As of April 12, 2000, there were 13,989,255 shares of common stock issued
and outstanding with approximately 971 holders of record of the Company's common
stock with approximately 1200 beneficial owners.
The following table indicates the high and low closing prices for the
Company's common stock for the two year period ending December 31, 1999 based
upon information supplied by the Bulletin Board. Prices represent quotations
between dealers without adjustments for retail markups, markdowns or
commissions, and may not represent actual transactions.
19
<PAGE>
HIGH ($) LOW ($)
-------- -------
CALENDAR 1999
January 1 through March 31 1.50 .88
April 1 through June 30 1.53 .88
July 1 through September 30 1.06 .31
October 1 through December 31 .53 .13
CALENDAR 1998
January 1 through March 31 2.81 1.50
April 1 through June 30 5.75 2.25
July 1 through September 30 4.44 1.94
October 1 through December 31 2.00 .78
As of April 12, 2000, the closing bid price for the Company's common stock
was $.1875 per share.
The Company has never paid dividends on its shares of common stock and
does not expect to pay any in the immediate future. The future dividend policy
will depend on the Company's earnings, capital requirements, financial condition
and other factors considered relevant to the Company's ability to pay dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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 oral 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 risks and
uncertainties that are described from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission.
20
<PAGE>
This section presents a review of the Company's financial condition and results
of operations and should be read in conjunction with the consolidated financial
statements of the Company and the notes included elsewhere herein.
The following table sets forth information on operations for the period
indicated:
This section presents a review of the Company's financial condition and results
operations and should be read in conjunction with the consolidated financial
statements of the Company and the notes included elsewhere herein.
The following table sets forth information on operations for the period
indicated:
PERCENTAGE OF NET REVENUES
Twelve months ended Twelve months ended
31-Dec-99 31-Dec-98
$ % $ %
------------------ -----------------
Net Sales $ 6,486,533 100% $ 7,608,904 100%
Cost of Sales $ 3,131,333 48% $ 3,199,525 42%
Operating Expenses $ 5,559,030 86% $ 8,711,356 114%
Income for Operations $(2,203,830 -34% $(4,301,977) -57%
Earnings (Loss) on Common $(2,368,930) -37% $(5,132,365) -67%
Engineered Business Systems Twelve months ended Twelve months ended
31-Dec-99 31-Dec-98
$ % $ %
------------------ -----------------
Net Sales $ 5,170,197 100% $ 6,058,879 100%
Cost of Sales $ 2,113,155 41% $ 2,214,723 37%
Quick Credit Corporation Twelve months ended Twelve months ended
31-Dec-99 31-Dec-98
$ % $ %
------------------ -----------------
Net Sales $ 1,316,337 100% $ 1,550,025 100%
Cost of Sales $ 993,178 75% $ 984,802 64%
TWELVE MONTHS ENDED DECEMBER 31,1999 VS. TWELVE MONTHS ENDED DECEMBER 31,1998
Consolidated
Sales for the twelve months ended December 31, 1999 were $6,486,533 or a
decrease of 15% from the $7,608,904 in sales for the period ended December 31,
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 cost of sales during 1999 was $3,131,333 representing a decrease
of $68,129 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 6%, from 42%
for 1998 to 48% for the year ended December 31, 1999. The increase is primarily
a result of a reduction in the amount of software sales and the continued shift
21
<PAGE>
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 full year 1998
to 52% for the full year 1999.
Selling, general and administrative ("SG&A") expenses were $4,413,017 for
the year ending December 31,1999 representing a decrease of 9% from SG&A
expenses of $4,841,283 for the year ending December 31,1998. 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 year when
compared to the same period last year. Offsetting the decrease in SG&A was a
charge of $271,463 to SG & A for the write-off of bad debts.
Development expenses during the year were $848,208 compared with
$1,368,651 for the same period in 1998. A reclassification of certain
development cost associated with the Credit Guardian product suite was made
during the fourth quarter of 1999 on the advice of our auditors. Costs of
$740,000 that were classified in previous quarters as developments costs were
reclassified to the Balance Sheet as an asset that will be expensed over the
life cycle of the Credit Guardian products. The development cost incurred during
the year was primarily associated with the development by the Company of two new
products for resale to 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 $547,230 from $637,150 for the
year ended December 31, 1998 to $89,920 for the year ended December 31, 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 $118,534 for the year ended December 31, 1999
compared to $952,003 for the year ended December 31, 1998, a decrease of
$833,469. The decrease in the amortization of goodwill is a result of a goodwill
adjustment of $850,968 that was made in December 1998 in connection with the
revaluation of the credit bureaus acquired by QCC in April and May of 1998.
Outside legal expenses for the period ending December 31, 1999 were
$89,352 compared to $547,000 for the period ending December 31,1998. The
significant year to year change is due to the expenses incurred and accrued
during 1998 associated with the litigation involving the Company's former CEO.
As a result of the settlement reached in April 1999 the Company realized a gain
of $182,000 on the return of 900,000 shares of common stock.
22
<PAGE>
Interest expense net of interest income was $116,762 in 1999 compared to
$130,616 paid during 1998. Interest paid on a note bearing an annual interest
rate of 8% for the year ending December 31, 1999 in connection with the purchase
of EBS was $42,026. The balance of this note as of December 31,1999 was
$425,000. Interest was expensed for a portion of the year ending December 31,
1999, in connection with a note in the original principle amount of $1,500,000
due to Waterside Capital Corp. This note bore interest at the rate of 14% per
annum and was scheduled to be paid in full by October 2003. This note was
cancelled and converted to Preferred Stock on June 30, 1999. Interest of
$104,712 was charged in 1999.
The Company's loss from operations for the year ending December 31, 1999
was $2,203,830 which represents a decrease of $2,098,147 from the loss from
operations of $4,301,977 for the year ending December 31, 1998 for the reasons
stated above. Net loss was $2,104,246 for the period ending December 31, 1999,
compared to $5,132,364 for the same period in 1998. The comparative difference
of $3,028,118 was primarily due to several factors that occurred in 1998 that
were not repeated in 1999: the charge of $473,771 associated with the
discontinued Trimax and Mutitask operations, charges of $191, 269 related to the
acquisitions of the sevice bureaus within QuickCREDIT Corp., restructuring
charges of 174,000, and a 1998 tax provision of $226,000. During 1999, Preferred
dividends of $264,684 were recorded. Included in this amount was $184,615 that
was recorded as the dividend amount and $80,069 was the accretion of the
Preferred Stock from issuance through December 31,1999. There were no Preferred
Dividends accrued during the same period in 1998. For the year 1999, Net Loss to
Common Stockholders was $2,368,930 compared to $5,132,364 for the same period in
1998.
ENGINEERED BUSINESS SYSTEMS, INC.
Sales for Engineered Business Systems accounted for $5,170,197 or 80% of
the Company's total revenue for the year ended December 31, 1999 compared to
$6,058,879 or 80% of the Company's total revenue for the year ended December 31,
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.
The revenue mix for the year ended December 31, 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") (40%), outsourcing services (43%), software sales (13%)
and consulting services (4%). The comparable revenue mix for the year ended
December 31, 1998 was Recurring Revenue (49%), outsourcing services (34%),
software sales (11%), Hardware (2%), and consulting services (4%). 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
23
<PAGE>
increased from 37% for the year ended December 31, 1998 to 41% for the year
ended December 31, 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 year ended December 31, 1999 was
59% compared to 63% for the year ended December 31, 1998.
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 twelve months ended December 31, 1999 were
$1,316,337 compared to $1,550,025 for the period from inception through December
31, 1998. The 15% 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 second half of 1999. Cost of
sales during the period ending December 31, 1999 was $993,178 compared to cost
of sales of $984,802 that was recorded during the same period in 1998. Gross
profit as a percentage of revenues was 25% for the period ending December 31,
1999 compared to 36% for the period ending December 31, 1998. In February, 2000,
the Company has closed the Jacksonville, FL location and consolidated the
operation in Fort Lauderdale, FL. The Company expects to save in excess of $200,
000 per year by operating this business unit from Fort Lauderdale.
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 wias 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 will
require a minimum of $1,300,000 of debt or equity financing. Failure to obtain
such financing will have a material adverse effect on the Company and its
prospects.
During the twelve month period ended December 31, 1999, the Company issued
1,386,813 shares of common stock for a total value of $1,386,813.
At December 31, 1999 the Company had a working capital deficit of
$3,289,092 as compared to working capital deficit of $742,288 at December
31,1998. The reduction in working capital is primarily due to an increase in
Current Liabilities of which the following represent the significant items: (i)
$1,648,423 in accounts payable (ii) Notes Payable Subject to Puts of $630,000
24
<PAGE>
with the former shareholders of Credit Bureau Services, Inc. (iii) 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 is classified as a Current Liability, (iv) a promisory note of $150,000
to a shareholder (v) a note payable to the former shareholders of Engineered
Business Systems, Inc. has a balance of $425,000 as of December 31,1999 (vi)
accrued expenses of $545,074 including a Preferred Dividend payable to Waterside
Capital in the amount of $68,750 (vii) and deferred revenue of $326,561.
ITEM 7. FINANCIAL STATEMENTS
See the Index to Financial Statements following Item 13 of this Annual
Report for a listing of the financial statements included as part of this
report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 15, 2000, the Company dismissed its independent auditors,
Mazars & Guerard, LLP, and on the same date engaged the firm of Radin, Glass &
Co., LLC as its independent auditors for the fiscal year ending December 31,
1999. Each of these actions was unanimously approved by the Board of Directors
of the Company.
The report of Mazars & Guerard on the financial statements of the Company
for the fiscal years ended December 31, 1998 and 1997 did not contain any
adverse opinion or a disclaimer of opinion, nor was it qualified or modified as
to uncertainty, audit scope or accounting principals. In connection with the
audit of the fiscal years ended December 31, 1998 and 1997, and the unaudited
interim period through February 15, 2000, there were no disagreements with
Mazars & Guerard on any matter of accounting principal or practice, financial
statement disclosure, or audit procedure or scope which disagreement, if not
resolved to the satisfaction of Mazars & Guerard, would have caused it to make
reference to the subject matter of the disagreement in its report.
In connection with the audit of the fiscal years ended December 31, 1998
and 1997 and the unaudited interim period through February 15, 2000, Mazars &
Guerard did not advise the Company (i) that the internal controls necessary for
the Company to develop reliable financial statements did not exist; (ii) that
information had come to its attention that led it to no longer be able to rely
on management's representations, or that made it unwilling to be associated with
the financial statements prepared by management; (iii) that there existed a need
to expand significantly the scope of its audit, or that information had come to
Mazars & Guerard's attention during the fiscal periods, that if further
investigated may (a) materially impact the fairness or reliability of a
previously issued audit report or the underlying financial statements, or (b)
cause Mazars & Guerard to be unwilling to rely on management's representations
or be associated with the Company's financial statements, and due to Mazars &
Guerard's dismissal did not expand the scope of its audit or conduct such
further investigation; or (iv) that information had come to Mazars & Guerard's
attention that it concluded materially impacts the fairness or reliability of a
previously issued audit report or the underlying financial statements, and due
to Mazars & Guerard's dismissal, the issue has not been resolved to Mazars &
Guerard's satisfaction prior to its dismissal.
25
<PAGE>
In addition to the foregoing, during the fiscal years ended December 31,
1998 and 1997, and for the unaudited interim period through February 15, 2000,
neither the Company nor any of its representatives sought the advice of Radin,
Glass & Co. regarding the application of accounting principals to a specific or
contemplated transaction or the type of audit opinion that might be rendered on
the Company's financial statements, which advice was an important factor
considered by the Company in reaching a decision as to the accounting, auditing
or financial reporting issue.
Mazars & Guerard has furnished the Company with a letter addressed to the
Securities and Exchange Commission stating that it agrees with the above
statements.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information concerning the
Company's directors and executive officers during the 1999 fiscal year:
- - ------------------------------------------------------------------------------
NAME AGE POSITION(S) WITH THE COMPANY
- - ---- --- ----------------------------
Charles D. Winslow(1) 64 Chairman of the Board of the Company
Harold S. Fischer 62 Chief Executive Officer and President of
the Company, President of EBS and QCC,
and Director of the Company, EBS and QCC
J. Alan Lindauer 61 Director of the Company
Peter B. Barlow(2) 31 General Counsel & Vice President,
Communications
John M. Campbell(3) 46 Vice President, Service Strategy & Credit
Operations
William C. Grose(4) 59 Vice President, Credit Services
Gregory J. Seminack(5) 48 Chief Financial Officer
Rebecca B. Walzak(6) 51 Vice President, Quality Control Services
Thomas J. Hann(7) 53 Vice President, Human Resources
- - ------------------------------------------------------------------------------
1. Mr. Winslow was appointed Chairman of the Company on May 27, 1999.
2. Mr. Barlow has been the Company's General Counsel since June 1998 and
assumed the additional responsibility of the Company's Vice President,
Communications in May 1999.
3. Mr. Campbell was formerly Director of National Sales for EBS prior to
becoming an officer of the Company in May 1999.
4. Mr. Grose was formerly Director of National Sales for EBS prior to
becoming an officer of the Company in May 1999.
5. Mr. Seminack was formerly Vice President, Finance of the Company prior
to becoming its Chief Financial Officer in May 1999. On March 13, 2000,
Gregory Seminack, voluntarily ceased to be a full time employee of the
Company in an effort to reduce the Company's operating costs. The
Company believes that it has in place the accounting policies,
procedures and infrastructure necessary to permit Mr. Seminack to
effectively manage the Company's financial undertakings on a reduced
time basis.
6. Ms. Walzak was formerly Vice President and General Manager of
Consulting Services for EBS prior to becoming an officer of the Company
in May 1999.
7. Mr. Hann was formerly Director of Human Resources prior to becoming an
officer of the Company in 1999. On January 17, 2000, Mr. Hann,
voluntarily resigned his employment as an officer of the Company in
effort to reduce the Company's operating costs. Mr. Hann continues to
provide services to the Company as an independent contractor.
- - ------------------------------------------------------------------------------
26
<PAGE>
Officers and directors are elected on an annual basis. The present terms
for each director will expire at the next annual meeting of shareholders or at
such time as a successor is duly elected. Officers serve at the discretion of
the Board of Directors.
Directors are not paid any fees for membership on the Board of Directors,
but are reimbursed for out-of-pocket expenses incurred in connection with
attending meetings. Presently, there are no family relationships between any of
the officers or directors, except that Harold S. Fischer and the spouse of
Charles D. Winslow are second cousins.
The following is a biographical summary of the business experience of the
directors and executive officers of the Company:
CHARLES D. WINSLOW has served as a member of the Company's Board of Directors
since April 1998 and as its Chairman since December 1998. Prior to his
retirement in 1996, Mr. Winslow spent thirty-four years with Andersen
Consulting, twenty-five of them as a partner. He managed the Columbus, Ohio
consulting practice for several years, and performed the same duties in their
Tokyo office for the five years of its major expansion. Among the major
executive positions he held in the firm was Managing Partner of the Worldwide
Industry Program, and most recently, Worldwide Managing Partner of Change
Management.
HAROLD S. FISCHER has served as Chief Executive Officer of the Company since
March, 1999, as President of the Company since April 1997, President of EBS
since January 1997, President of QCC since February 1998 and as a director
of the Company, EBS and QCC since April 1997. From June 1995 to December
1996, Mr. Fischer was the President of Turnkey Solutions, Inc., a marketing
media replication and logistics firm. Previously, Mr. Fischer served as Vice
President with Wang Laboratories, Inc. from December 1990 to May 1995 and as
a President of the Commercial Systems Division of Unisys Corporation from
June 1988 through December 1990. Mr. Fischer has held various executive
responsibilities with the Unisys Corporation in his 30-year tenure there.
J. ALAN LINDAUER has served as a director of the Company since October
1998. Mr. Lindauer has served as a director since July 1993 and as Chairman
of the Executive Committee since December of 1993 of Waterside Capital
Corporation, a Virginia-based Small Business Investment Company. Mr.
Lindauer has occupied the position of President and Chief Executive Officer
of Waterside Capital Corporation since March 1994. Since 1986, Mr. Lindauer
has been President of JTL, Inc., a business consulting firm. Mr. Lindauer
is a Certified Management Consultant. Mr. Lindauer is a director of the
following publicly-traded companies: (i) Avery Communications, Inc., a long
distance telecommunications billing services company; (ii) Towne Bank, a
commercial bank; and (iii) Netplex Group, Inc., a computer systems
integration company.
27
<PAGE>
PETER B. BARLOW has served as the Company's General Counsel since June 1998 and
has been Vice President of Communications since May 1999. Mr. Barlow came to the
company with a background in mergers and acquisitions, securities and general
corporate practice from the law firm of Smith, Gambrell & Russell, LLP in
Atlanta, Georgia. Mr. Barlow holds a Juris Doctor degree from Emory University
School of Law and has a Bachelor of Arts in International Business from the
University of Texas at Austin.
JOHN M. CAMPBELL served as the Director of National Sales for EBS from June 1998
to May 1999 and has been Vice President of Services Strategy and Credit
Operations for the Company since May 1999 with responsibility for managing
software development and QCC operations. From June 1996 to May 1998, Mr.
Campbell was with Wang Laboratories as Vice President of the Atlanta Help Desk,
responsible for providing outsourcing of help desk services to Microsoft, NEC,
Hughes and Wang Corporate; from January 1994 to June 1996 as Vice President of
Sales for Imaging and Workflow Software; and from October 1991 as General
Manager of the Southern Region. Previously, Mr. Campbell has held sales
management, sales and technical positions with Unysis Corporation. Mr. Campbell
has a Bachelors of Science degree from the University of Alabama.
WILLIAM C. GROSE served as Director of Sales for the Company from January 1998
to May 1999 and has been Vice President of Credit Services for the Company since
May 1999 with responsibility for the QCC's Atlanta operations chartered to
develop, market and service consumer credit based products and services. Mr.
Grose has over 25 years of sales management experience at Unysis Corporation and
at HBO & Company. Mr. Grose has a Bachelor of Science degree from Stetson
University.
GREGORY J. SEMINACK served as the Company's Vice President of Finance from
August 1998 to May 1999 and has been the Company's Chief Financial Officer since
May 1999. From 1987 to July 1998, Mr. Seminack was employed with Unysis
Corporation holding various financial and business management positions, most
recently as Director of Finance having Profit and Loss Statement and Balance
Sheet responsibility for a $250 million division that sells and delivers
computer services and system integration projects. Mr. Seminack voluntarily
ceased full-time employment with the Company on March 13, 2000 in an effort to
reduce the company's operating costs. Mr. Seminack remains in the role of Chief
Financial Officer on a part-time basis.
REBECCA B. WALZAK served as Vice President and General Manager of EBS
Consulting Services from February 1998 to May 1999 and has been Vice
President of Quality Control Services for the Company since May 1999 with
responsibility for both consulting and outsourcing operations. From May 1994
to February 1998, Ms. Walzak was with Chase Manhattan Mortgage Corp. in the
position of First Vice President - Quality Assurance. Previously, Ms. Walzak
was with Prudential Home Mortgage's Quality Control program from 1985 to May
1994 as Regulatory, Compliance and Quality Control Officer. Ms. Walzak
currently serves as an executive board member of the Mortgage Bankers
Association Quality Assurance Committee. Ms. Walzak has an MBA from the
University of Maryland and holds a Quality Management Certification from
George Washington University.
28
<PAGE>
THOMAS J. HANN served as Director of Human Resources for the Company from
July 1998 to May 1999 and as Vice President, Human Resources from May 1999
to January 2000. In January 2000 Mr. Hann became an independent contractor
to the Company providing the same services to the Company as he did during
his tenure as an employee. Mr. Hann continues to have responsibility for
recruiting, compensation, incentive plans (including commissions), employee
benefits and employee relations for the Company, EBS and QCC. Mr. Hann has
an extensive background in managing human resources with Unysis and Data
General Corporation. Mr. Hann has an MS degree from Columbia University.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
On December 23, 1998, the Company filed a registration statement on Form
8-A registering the Company's common stock pursuant to Section 12(g) of the
Securities Exchange Act of 1934 (the "Exchange Act"). Following the filing of
the Form 8-A, the Company became subject to Section 16(a) of the Exchange Act
which requires the Company's directors and executive officers, and persons who
own more than ten percent (10%) of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of common stock and other
equity securities of the Company. Officers, directors and greater than ten
percent shareholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file. The Company is uncertain whether
all persons and entities required to comply with the requirements of Section
16(a) have done so.
29
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows all the cash compensation paid or to be paid by
the Company to the Chief Executive Officer, and all officers who received in
excess of $100,000 in annual salary and bonus, for the fiscal years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted LTIP All Other
Name and Other Annual Stock Options Payouts Compensation
Principal Position Year Salary($) Bonus($) Compensation($) Awards SARs(#) ($) ($)
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vito A. Bellezza(1), 1999 $156,000 -0- -0- -0- -0- -0- -0-
CEO
1998 $154,500 $30,000 $ 28,040(2) -0- 500,000(3) -0- -0-
1997 $120,000 $33,000 $ -0- -0- 200,000(4) -0- -0-
Harold S. Fischer, 1999 $156,000 $ -0- $ -0- -0- 700,000 -0- -0-
President
1998 $154,500 $30,000 $ 9,600(5) -0- 500,000 -0- -0-
1997 $120,000 $23,000 $ -0- -0- 200,000 -0- -0-
John M. Campbell, 1999 $108,188 $ -0- $ -0- -0- 100,000 -0- -0-
Vice President
William C. Grose 1999 $116,709 $ -0- $ -0- -0- 182,250 -0- -0-
Vice President
</TABLE>
- - --------------------------------------------------------------------------------
1. Mr. Bellezza's employment with the Company terminated in March 1999.
2. Housing and automobile allowance paid by the Company on Mr. Bellezza's
behalf.
3. Such options were cancelled in March 1999.
4. Options were canceled in April 1999.
5. Automobile expenses and other perquisites paid by the Company.
30
<PAGE>
The following table sets forth certain information with respect to options
granted during the last fiscal year to the Company's Executive Officers named in
the above Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e)
% of Total Options
Number of Options/SARs
Securities Granted
Underlying to Employees
Option/ in Exercise or Base Expiration
Name SARs Granted(#) Fiscal Year Price (# Share) Date
- - --------------------------------------------------------------------------------
Vito A. Bellezza 0 0 0 --
Harold S. Fischer 500,000 $ .875 4/28/09
200,000(1) $.96875 6/22/09
John M. Campbell 100,000 $ .875 4/28/09
William C. Grose 182,250 $ .875 4/28/09
- - --------------------------------------------------------------------------------
(1) Issued on June 22, 1999 in consideration for Mr. Fischer personally
guaranteeing the obligations of the Company in connection with a $700,000
preferred stock investment in the Company by Waterside Capital Corporation on
June 30, 1999. See "Certain Relationships and Related Transactions."
The following table sets forth certain information with respect to options
exercised during the fiscal year ended December 31, 1999, by the Company's
Executive Officers named in the Summary Compensation Table, and with respect to
unexercised options held by such person at the end of the fiscal year ended
December 31, 1999.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------
Aggregate Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End Option/SAR Values
(a) (b) (c) (d) (e)
-------------------------------------------
Number of Value of
Securities Underlying Unexercised
Unexercised Options/ In-the-Money
SARs at FY-End (#) Options/SARs at
Shares Acquired Value Exercisable/ FY-End Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable(1)
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Vito A. Bellezza 0 0 0 0
Harold S. Fischer 0 0 1,400,000/0 0
John M. Campbell 0 0 150,000/0 0
William C. Grose 0 0 202,250/0 0
- - -------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon a closing price of $.21875 per share of the Company's common
stock as reported by the OTC Bulletin Board for December 31, 1999.
31
<PAGE>
EMPLOYMENT AGREEMENTS
As of January 7, 1998, the Company entered into a two (2) year employment
agreement with Harold S. Fischer, pursuant to which Mr. Fischer has served as
the Company's President. The agreement provides for Mr. Fischer to receive a
salary of $156,000 per annum during the first year and an annual increase as
determined in the discretion of the Board of Directors. The agreement also
provides for the payment of a quarterly bonus in cash to Mr. Fischer based upon
the Company achieving certain quarterly profit targets. In addition, Mr. Fischer
was granted the right to purchase ten percent (10%) of the outstanding Common
Stock of EBS if EBS (i) files an initial public offering, (ii) is acquired by
another company, (iii) in the event of the death of Mr. Fischer or (iv) Mr.
Fischer terminates his employment with the Company. Mr. Fischer is also entitled
to reimbursement of business expenses including a car allowance of $800 per
month under the agreement. The employment agreement with Mr. Fischer was not
renewed or replaced upon its termination in January 2000. Neither the Company
nor its subsidiaries has employment agreements with any of the other officers or
employees of such entities.
DESCRIPTION OF THE OPTION PLANS
As of March 10, 1999 the Board of Directors of the Company adopted the
1999 Incentive Plan which was approved by the Company's shareholders at the 1999
annual meeting of shareholders held on May 27, 1999. The 1999 Plan has been
adopted for the purpose of attracting and retaining persons of ability as
directors, employees or consultants or advisors of the Company and its
subsidiaries, motivate and reward good performance, encourage such employees to
continue to exert their best efforts on behalf of the Company and its
subsidiaries and provide opportunities for stock ownership by such employees in
order to increase their proprietary interest in the Company by providing
incentive awards to key employees, whose responsibilities and decisions directly
affect the performance of the Company and its subsidiaries.
The maximum number of shares of Common Stock with respect to which awards
may be granted pursuant to the 1999 Plan is initially 4,000,000 shares. Shares
issuable under the 1999 Plan may be either treasury shares or authorized but
unissued shares. The number of shares available for issuance will be subject to
adjustment to prevent dilution in the event of stock splits, stock dividends or
other changes in the capitalization of the Company. The awards available to be
granted under the 1999 Plan are incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock, deferred stock,
performance units, loans and supplemental cash payments.
32
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 14, 2000
with respect to the beneficial ownership of the outstanding Common Stock by (i)
any holder of more than five (5%) percent; (ii) each of the Company's officers
and directors; and (iii) the directors and officers of the Company as a group:
Name and Address of Shares of Common Stock
Beneficial Owner(1) Beneficially Owned(2) Percent of Class(3)
- - ------------------- --------------------- -------------------
Vito A. Bellezza(4) 3,350,500(5) 25.2%
Harold S. Fischer(6) 3,683,000(7) 23.9%
J. Alan Lindauer(8) 15,031,250(9) 51.8%
Charles D. Winslow(10) 190,000(11) 1.3%
John M. Campbell(12) 360,631(13) 2.5%
William C. Grose(14) 263,915(15) 1.9%
All Officers and Directors 23,059,296(7)(9)(11)(13)(15) 75.8%
As a Group (6 persons)
- - --------------------------------------------------------------------------------
* represents less than 1% of the total number of shares of the Company's
common stock outstanding
1. Unless noted otherwise, the address for such person is c/o Triangle
Imaging Group, Inc., 1800 NW 49th Street, Suite 100, Fort Lauderdale,
Florida 33309.
2. Unless noted otherwise, all shares indicated as beneficially owned are
held of record by and the right to vote and transfer such shares lies with
the person indicated. A person is deemed to be a beneficial owner of any
securities of which that person has the right to acquire beneficial
ownership within sixty (60) days.
3. Calculated based upon 13,989,255 shares of common stock outstanding.
4. Mr. Bellezza was the Chairman of the Board of the Company until
December 1998 and Chief Executive Officer of the Company, EBS and QCC
until March 1999.
5. The above total is an estimate by the Company and includes (i) 485,500
shares held of record by Judith Bellezza (a/k/a Judith Klotz), Mr.
Bellezza's wife. The beneficial ownership of the Company's securities by
Mr. Bellezza is unclear to the Company because of Mr. Bellezza's failure
to file appropriate documents indicating his beneficial ownership of the
Company's securities with the Securities and Exchange Commission.
6. Mr. Fisher is a director, Chief Executive Officer and President of the
Company and is a director and President of EBS and QCC.
7. Includes (i) 283,000 shares of Common Stock owned by Mr. Fischer's wife,
and (ii) 200,000 shares of common stock issuable upon the exercise of
stock options at an exercise price of $.875 per share, (iii) 500,000
shares of common stock issuable upon the exercise of stock options at an
exercise price of $1.875 per share, (iii) 500,000 shares of common stock
issuable upon the exercise of stock options at an exercise price of $.875
per share and (iv) 200,000 shares of common stock issuable upon the
exercise of stock options at an exercise price of $.96875 per share. Mr.
Fischer disclaims the beneficial ownership of 6,368,454 shares of common
stock held by certain stockholders of the Company, each of whom have
agreed pursuant to the terms of a stockholders agreement to vote in favor
of the directors nominated by Mr. Fischer. See "Stockholders Agreement."In
addition, the above total does not include shares of Company common stock
purchased by Mr. Fischer's relatives in a private placement of Company
securities and all other shares held by such persons of which Mr. Fischer
disclaims beneficial ownership. See "Certain Relationships and Related
Transactions."
8. Mr. Lindauer is a director of the Company.
33
<PAGE>
9. Includes (i) 500,000 shares of common stock held by Waterside Capital
Corporation (ii) 11,000,000 shares of common stock issuable upon the
conversion of 2,200,000 shares of Series E Preferred Stock held by
Waterside Capital Corporation at any time after April 28, 2000, subject to
certain limitations (iii) 687,500 shares of common stock issuable upon the
conversion of certain accrued and unpaid dividends due to Waterside
Capital Corporation on shares of Series C Preferred Stock and Series D
Preferred Stock replaced by a shares of Series E Preferred Stock on
January 27, 2000, (iv) 343,750 shares of common stock issuable upon the
conversion of dividends on shares of Series E Preferred Stock due on April
15, 2000 that the Company anticipates it will not be able to pay, and (v)
2,500,000 shares of common stock issuable upon the conversion of a
promissory note dated, January 27, 2000, held by Waterside Capital
Corporation. Mr. Lindauer is the President and Chief Executive Officer of
Waterside Capital Corporation. See "Certain Relationships and Related
Transactions."
10. Mr. Winslow is a director of the Company.
11. Includes (i) 50,000 shares of common stock issuable upon the exercise of
stock options at an exercise price of $2.50 per share and (ii) 40,000
shares of common stock issuable upon the exercise of stock options at an
exercise price of $.875 per share.
12. Mr. Campbell is Vice President, Service Strategy & Credit Operations of
the Company.
13. Includes (i) 50,000 shares of common stock issuable upon the exercise of
stock options at an exercise price of $2.50 per share, (ii) 100,000 shares
of common stock issuable upon the exercise of stock options at an exercise
price of $.875 per share and (iii) 50,000 shares of common stock issuable
upon the exercise of stock options at an exercise price of $.47 per share.
14. Mr. Grose is Vice President, Credit Services of the Company.
15. Includes (i) 10,000 shares of common stock issuable upon the exercise
of stock options at an exercise price of $1.25 per share, (ii) 10,000
shares of common stock issuable upon the exercise of stock options at an
exercise price of $2.25 per share and (iii) 182,500 shares of common stock
issuable upon the exercise of stock options at an exercise price of $.875
per share.
STOCKHOLDERS AGREEMENT
As of April 16, 1999, shareholders of the Company beneficially holding an
aggregate of 6,368,454 shares of Common Stock, or 45.8% of the total number of
shares outstanding, entered into a Stockholders Agreement pursuant to which the
participating shareholders (the "Participating Shareholders") agreed to certain
matters pertaining to the governance of the Company and the circumstances under
which the shares held by the Participating Shareholders may be sold or
transferred. The Participating Shareholders agreed, among other things, that (i)
at any annual or special meeting of stockholders called for the purpose of
voting on the election of directors, or by consensual action of stockholders
with respect to the election of directors, the Participating Stockholders will
vote the shares of the Company's Common Stock held thereby in favor of the
directors nominated by Harold S. Fischer, the Company's President, and (ii)
except for certain permitted transfers, each Participating Shareholder will not
sell or transfer shares of the Company's Common Stock held thereby without first
granting the Company and then the other Participating Shareholders with a right
of first offer. Although the Company is not a party to the Stockholders
Agreement, certain members of management are Participating Shareholders,
including Harold S. Fischer, the Company's President.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 22, 1995, the Company allegedly issued 10,000 shares of Class A
Convertible Preferred Stock to Vito Bellezza, the Company's former Chairman of
the Board and Chief Executive Officer, in exchange for the payment of $10,000.
The shares of Class A Convertible Stock were allegedly convertible into an
aggregate of 1,500,000 shares of the Company's Common Stock. On March 23, 1998,
the Company issued 1,500,000 shares of Common Stock
34
<PAGE>
to Mr. Bellezza in exchange for the cancellation of the 10,000 shares of Class A
Convertible Preferred Stock.
On October 31, 1995, the Company issued 720,000 shares of Common Stock to
Mr. Bellezza allegedly for consulting fees and expenses incurred by him and
280,000 shares of Common Stock to Omnicap Corp., a corporation controlled by Mr.
Bellezza, allegedly for satisfaction of rent and other services provided by
Omnicap.
On November 15, 1995, the Company issued 100,000 shares of Common Stock to
Mr. Bellezza allegedly for services rendered to the Company without compensation
during 1995.
On September 4, 1996, the Company issued 350,000 shares of Common Stock to
Mr. Bellezza allegedly as compensation for settling an outstanding lawsuit
against the Company.
On October 31, 1996, the Company issued 275,000 shares of Common Stock to
Mr. Bellezza allegedly for services rendered to the Company without compensation
during 1996.
On January 23, 1997, in exchange for an investment of $100,000 made by Mr.
Bellezza, the Company issued (i) a subordinated note in the amount of $50,000,
(ii) options to purchase 1,000,000 shares of the Company's Common Stock at an
exercise price of $.05 per share, and (iii) options to purchase 500,000 shares
of the Company's Common Stock at $.20 per share.
On October 30, 1997, the Company issued to each of Messrs. Bellezza and
Harold S. Fischer options under the Officers and Directors Stock Option Plan in
the amount of 200,000 shares exercisable for a period of five years at $.875 per
share. Mr. Bellezza's options terminated when his employment with the Company
terminated in March 1999.
During 1997, the Company issued an aggregate of 2,283,000 shares of Common
Stock to the Company President and Director, Harold S. Fischer and his wife for
the consideration of $743,700.
On March 13, 1998, the Company issued options to purchase 500,000 shares
of Common Stock at an exercise price of $1.875 per share to each of Vito
Bellezza and Harold S. Fischer.
On April 15 1998, the Company issued options to purchase 50,000 shares of
Common Stock to Charles D. Winslow, the Company's Chairman of the Board, at an
exercise price of $2.50 per share.
On October 15, 1998, the Company entered into a Series C Preferred Stock
Purchase Agreement (the "Purchase Agreement") with Waterside Capital
Corporation, a small business investment company, pursuant to which the Company
agreed to issue 1,500 shares of the Company's Series C Preferred Stock and a
warrant exercisable for shares of the Company's Common Stock in exchange for the
investment of $1,500,000. The Purchase Agreement required that the Company use
the proceeds from the transaction to repay a portion of that certain promissory
note issued by the Company to the former owners of Engineered Business Systems,
35
<PAGE>
Inc., a wholly owned subsidiary of the Company, repay trade payables and for
working capital purposes. The Company was also obligated under the terms of the
Purchase Agreement to cause a nominee of Waterside to be elected to the Board of
Directors of the Company which obligation was satisfied by the appointment of
Mr. J. Alan Lindauer to the Board of Directors. In light of the fact that the
Company was not able to lawfully assign rights and preferences to a class of
preferred stock under its existing Articles of Incorporation, the Company issued
to Waterside a promissory note, bearing interest at the rate of 14% per annum,
in the aggregate principal amount of $1,500,000 in lieu of issuing shares of the
Company's Series C Preferred Stock at the closing. On June 30, 1999, the Company
filed an amendment to the Company's Articles of Incorporation authorizing the
Board of Directors to designate the rights and preferences of new classes of
preferred stock, including the shares of Series C Preferred Stock called for
under the Purchase Agreement, and issued such shares of Series C Preferred
Stock.
The holders of the Series C Preferred Stock have the right (i) to receive
a liquidation payment of $1,000 per share plus accrued unpaid dividends, (ii) to
receive a quarterly cash dividend of $31.25 per share, (iii) to vote with
respect to certain matters which adversely effect the holder of Series C
Preferred Stock, (iv) to elect one member to the Board of Directors of the
Company, and (v) to require the Company to redeem the shares of Series C
Preferred Stock commencing as of October 15, 2003 at a price of $1,000 per
share. In addition, the Company may not (a) issue any shares of capital stock
with rights pari passu with, or superior to, the Series C Preferred Stock or (b)
redeem under certain circumstances shares of capital stock ranking junior to the
Series C Preferred Stock, without the prior written consent of the holders of a
majority of the Series C Preferred shares.
The Warrant entitled the holder to purchase up to the greater of (i)
500,000 shares of the Company's Common Stock or (ii) 1% of the shares of the
Company's Common Stock outstanding on a fully diluted basis. The Warrant was
exercisable at any time prior to October 15, 2005. In connection with the
settlement of a pending legal proceeding brought by Waterside against the
Company, the exercise price of the Warrant was reduced to $.05 per share. The
Warrant was exercised in full in April 1999.
On February 3, 1999, the Company issued 53,313 shares of common stock to
an entity controlled by Harold S. Fischer's brother-in-law in consideration for
$53,313 in a private placement of Company securities pursuant to Section 4(2) of
the Securities Act of 1933.
On February 8, 1999, the Company issued 20,000 shares of common stock to
one of Harold S. Fischer's sons in consideration for $20,000 in a private
placement of Company securities pursuant to Section 4(2) of the Securities Act
of 1933.
On April 28, 1999 the Company issued options to purchase 500,000 shares of
common stock to Harold S. Fischer at an exercise price of $.875 per share. On
the same day the Company also issued options to purchase 40,000 shares of common
stock to each of Charles D. Winslow, the Company's Chairman, and to J. Alan
Lindauer a director of the Company.
On April 30, 1999, the Company attended the required mediation conference
and entered into a Settlement 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
36
<PAGE>
Bellezza, Mr. Bellezza's brother and a former director of the Company, and Franz
Fideli, a former director of the Company. The Agreement grants the Company's
Board of Directors the right to vote, subject to certain limitations, all shares
of Company common stock owned by such individuals in accordance with the
majority vote of the other shareholders of the Company's common stock.The
agreement also includes a general release of all claims by the parties against
all other parties and requires (i) Vito Bellezza, Franz 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, and (ii) that the Company pay to Vito Bellezza and/or
Judith Bellezza a total of $468,000 over a period of three (3) years 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.
On June 21, 1999, the Company issued 2,500 shares of common stock to
Harold S. Fischer's son-in-law in consideration for $2,500 in a private
placement of Company securities pursuant to Section 4(2) of the Securities Act
of 1933.
On June 22, 1999, the Company issued options to purchase 200,000 shares of
common stock to Harold S. Fischer at an exercise price of $.96875 in
consideration for personally guaranteeing the obligation of the Company to
repurchase a $700,000 preferred stock investment in the Company by Waterside
Capital Corporation on June 30, 1999.
On June 30, 1999, the Company entered into a Series D Convertible
Preferred Stock Purchase Agreement with Waterside Capital Corporation, 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 Company's Common Stock at
an exercise price of $1.15 per share until June 30, 2009, so long as the Series
D Redeemable 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 for 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 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 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 of the Company's Common Stock at an exercise price equal to
$.96875 per share. In addition, under a Registration Rights Agreement, the
Company granted Waterside certain piggyback 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.
On July 27, 1999, the Company issued 12,000 shares of common stock to one
of Harold S. Fischer's sons in consideration for $12,000 in a private placement
of Company securities pursuant to Section 4(2) of the Securities Act of 1933.
On January 27, 2000, due to the deterioration of the business of the
Company and its subsidiaries as a result of a significant down turn in the
mortgage industry and the termination of the sales and marketing agreement with
Interfinancial Services Group, Inc., the Company and QCC entered into a line of
credit transaction with Waterside Capital Corporation. The purpose of the line
of credit is to provide the Company and QCC with working capital, to fund the
prosecution of QCC's claims against Interfinancial Services Corp. and to cover
37
<PAGE>
the cost of registration with the Securities and Exchange Commission of certain
warrants and shares of Company common stock. The line of credit is evidenced by
a promissory note that provides that the Company and QCC may from time to time
request advances of principal under the note up to an aggregate maximum of
$500,000. The Company and QCC do not have the right to re-borrow funds that have
been previously advanced and repaid under the note. The unpaid principal balance
of the note bears interest at the annual rate of twelve and one-half percent (12
1/2%) until all sums due under the note are paid in full. The Company is
obligated to pay to Waterside interest only payments under the note with the
first payment of interest due on August 1, 2000, and on the first day of each
month thereafter until all sums due under the note are paid in full. If the note
is not earlier repaid, the entire unpaid principal balance, all accrued and
unpaid interest and any other sums due under the note must be paid in full by
the Company on or before December 31, 2005. In addition, the note provides that
the outstanding balance of the note may be converted into shares of Company
common stock at any time after April 28, 2000 and prior to the payment of the
outstanding balance of the note. The initial conversion rate is one share of
common stock for each $.20 of the outstanding balance of the note so converted,
subject to anti-dilution protection. The line of credit is secured by a second
lien position on all of the assets of QCC, and by a pledge of all of the issued
and outstanding common shares of QCC. In addition, EBS guaranteed the
performance of the Company and QCC under the note.
In connection with the agreement to establish the line of credit,
Waterside Capital Corporation and the Company agreed to cancel the 1,500 shares
of Series C Preferred Stock and the 700 shares of Series D Preferred Stock of
the Company owned by Waterside, constituting all outstanding shares of each such
class, and to issue to Waterside in exchange therefor 2,200 shares of a new
class of preferred stock designated Series E Convertible Redeemable Preferred
Stock. The Series E Preferred Stock has substantially the same rights and
preferences as the cancelled shares of Series C Preferred Stock and Series D
Preferred Stock except that the shares of Series E Preferred Stock are
convertible into shares of Company common stock, subject to certain limitations,
at the rate of 5,000 shares of common stock for each converted share of Series E
Preferred Stock. In addition, cancellation of the shares of Series D Preferred
Stock terminated the right of Waterside to cause Mr. Fischer to have repurchase
such shares in the event the Company was unable to do so. The accrued and unpaid
dividends due to Waterside on the canceled shares of Series C Preferred Stock
and Series D Preferred Stock, as well as any accrued and unpaid dividends that
may become due to Waterside on the Series E Preferred Stock, are also
convertible into shares of common stock at the rate of one share of Common Stock
for each $.20 of accrued and unpaid dividends so converted. In addition, the
Company granted to Waterside Common Stock purchase warrants to purchase 30,000
shares of Common Stock for $.20 per share. The stock purchase warrants are
exercisable for a period of 10 years from the date of issuance. In connection
with the transaction, the Company agreed to register for resale with the
Securities and Exchange Commission all of the shares of restricted common stock
owned by Waterside as of the date of the agreement and all shares of common
stock issuable upon conversion of the Series E Preferred Stock, conversion of
the accrued and unpaid dividends on the Series E Preferred Stock, conversion of
the note and the exercise of the common stock purchase warrants.
On March 14, 2000, Harold S. Fischer's son made a bridge loan to the
Company in the amount of $75,000. The loan is evidenced by a promissory note
bearing interest at the annual rate of ten percent (10%) until all sums due
38
<PAGE>
under this note are paid in full. If not sooner paid, the entire unpaid
principal balance, all accrued and unpaid interest and any other sums due under
the note are due and payable on the earlier to occur of September 14, 2000 or
any event of default of the terms of the note. Among the events of default that
trigger repayment of the note is the removal of Harold S. Fischer from the
position of President or Chief Executive Officer of the Company or as a director
of the Company.
39
<PAGE>
ITEM 13. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
3.1* Certificate of Incorporation
3.2* Bylaws
10.1** Series D Convertible Preferred Stock Purchase Agreement dated as
of June 30, 1999 by and between the Company and Waterside Capital
Corporation.
10.2* Certificate of Ownership and Merger between @ebs, inc. and
Electronic Business Services, Inc.
10.3* Articles of Merger between @ebs, inc. and Electronic Business
Services, Inc.
10.4*** Joint Product Sales and Marketing Agreement dated December 23,
1999 between QuickCREDIT Corp. and BrandDirect Marketing, Inc.
16.1**** Letter regarding change in certifying accountants dated February
21, 2000
23.1 Consent of Mazaars & Guerard, LLP 27.1 Financial Data Schedule
23.2 Consent of Mazaars & Guerard, LLP
* Incorporated by reference to the Current Report on Form 8-K filed with the
Commission on October 25, 1999.
**Incorporated by reference to the Current Report on Form 8-K filed with the
Commission on July 15, 1999.
***Incorporated by reference to the Current Report on form 8-K filed with the
Commission on December 23, 1999.
***Incorporated by reference to the Current Report on form 8-K filed with the
Commission on February 22, 2000.
(b) Reports on Form 8-K
none.
40
<PAGE>
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
PAGE
NUMBER
INDEPENDENT AUDITORS REPORTS.......................................F-2a and F-2b
CONSOLIDATED BALANCE SHEET...................................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS........................................F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY...............................F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS.....................................F-6, 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...........................F-8 to F-22
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
February 23, 2000 and April 10,
2000 as to Notes 7a, 8b, 8c and 9d
Stockholders and Directors
Electronic Business Services, Inc.
We have audited the accompanying balance sheet of Electronic Business Services,
Inc. as of December 31, 1999, and the related statements of operations,
stockholders' (deficit) and cash flows for the year ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audit the financial statements referred to above
present fairly, in all material respects, the financial position of Electronic
Business Services, Inc. as of December 31, 1999, and the results of its
operations and its cash flows for the year ended in conformity with generally
accepted accounting principles.
The following financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has suffered from recurring losses
from operations, including a net loss of approximately $2,100,000 for the year
ended December 31, 1999, and has both a working capital and stockholders' equity
deficiency as of December 31, 1999 as well as the Company is in default of
several debt obligations. These factors raise substantial doubt the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
RADIN, GLASS & CO., LLP
Certified Public Accountants
New York, New York
F-2a
<PAGE>
INDEPENDENT AUDITOR'S REPORT
March 26, 1999
Stockholders and Directors
Electronic Business Services, Inc.
We have audited the accompanying balance sheet of Electronic Business Services,
Inc. as of December 31, 1998, and the related statements of operations,
stockholders' (deficit) and cash flows for the year ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audit the financial statements referred to above
present fairly, in all material respects, the financial position of Electronic
Business Services, Inc. as of December 31, 1998, and the results of its
operations and its cash flows for the year ended in conformity with generally
accepted accounting principles.
MAZARS & GUERARD, LLP
Certified Public Accountants
New York, New York
F-2b
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
For the Years Ended
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 117,667 $ 229,423
Accounts receivable, net of allowance of $104,931 512,265 807,241
Other current assets 13,177 46,177
----------- -----------
TOTAL CURRENT ASSETS 643,109 1,082,841
LEASEHOLD IMPROVEMENTS & EQUIPMENT, net of
accumulated depreciation of $857,268 409,198 287,732
SOFTWARE, net of accumulated depreciation and amortization
of $1,128,491 1,039,761 335,545
GOODWILL, net of accumulated amortization of $304,222 1,888,999 1,998,668
OTHER ASSETS 159,387 189,620
----------- -----------
$ 4,140,454 $ 3,894,406
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,648,423 $ 1,121,709
Accrued expenses 545,074
Deferred revenue 326,561 303,420
Current portion - related party payable 306,000 50,000
Notes payable 476,143 350,000
Current portion - puts payable 630,000 0
----------- -----------
TOTAL CURRENT LIABILITIES 3,932,201 1,825,129
LONG TERM DEBT - RELATED PARTY 257,500 1,900,000
LONG TERM DEBT - PUTS PAYABLE 600,000 1,485,000
PREFERRED STOCK, Class C $1,000 par value, 12.5% cumulative
1,500 shares issued, redemption value $1,500,000 1,013,612 --
PREFERRED STOCK, Class D $1,000 par value, 12.5% cumulative
700 shares issued, redemption value $700,000 556,630 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, authorized 50,000,000 issued
and 14,004,144 outstanding 14,004 13,012
Additional paid in capital 6,850,105 5,919,416
Accumulated deficit (7,825,999) (5,721,751)
Common stock subject to put (1,230,000) (1,485,000)
Deferred compensation (27,600) (41,400)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (2,219,489) (1,315,723)
----------- -----------
$ 4,140,454 $ 3,894,406
=========== ===========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
SALES $ 6,486,533 $ 7,608,904
COST OF SALES 3,131,333 3,199,525
------------ ------------
GROSS PROFIT 3,355,200 4,409,379
EXPENSES:
Selling, general and administrative expenses 4,413,017 4,841,283
Product development 848,208 1,368,651
Stock based compensation expense 89,920 637,150
Amortization expense and goodwill write-off 118,534 952,003
Non-recurring expenses associated with acquisitions -- 191,269
Litigation expenses 89,352 547,000
Restructuring expense -- 174,000
------------ ------------
Total expenses 5,559,030 8,711,356
------------ ------------
LOSS FROM OPERATIONS (2,203,830) (4,301,977)
OTHER INCOME AND (EXPENSE):
Gain from lawsuit settlement 182,000 --
Interest expense, net (116,762) (130,616)
Other income 34,346 --
------------ ------------
Total other income and expense 99,584 (130,616)
------------ ------------
LOSS BEFORE INCOME TAX PROVISION (2,104,246) (4,432,593)
PROVISION FOR INCOME TAXES -- 226,000
------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (2,104,246) (4,658,593)
DISCONTINUED OPERATIONS -- (473,771)
------------ ------------
NET LOSS $ (2,104,246) $ (5,132,364)
============ ============
PREFERRED DIVIDENDS 264,684 --
------------ ------------
NET LOSS TO COMMON STOCKHOLDERS $ (2,368,930) $ (5,132,364)
============ ============
LOSS PER SHARE (BASIC):
Loss from continuing operations $ (0.17) $ (0.39)
Loss from discontinued operations -- (0.04)
------------ ------------
NET LOSS $ (0.17) $ (0.43)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN COMPUTATION 13,779,912 11,991,016
------------ ------------
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC BUSINESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS ON CHANGES IN OWNERS' EQUITY
Preferred Stock
Class A Common Stock Additional
---------------------------- ---------------------------- Paid in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 10,000 $ 10,000 9,418,616 $ 9,418 $ 2,865,059
Shares issued for services -- -- 22,642 23 23,978
Shares sold -- -- 876,220 876 1,483,189
Shares issued for option exercises -- -- 570,000 570 190,680
Shares issued for acquisitions -- -- 900,000 901 1,287,503
Shares canceled for discontinued operations -- -- (270,000) (270) (338,850)
Conversion of preferred stock (10,000) (10,000) 1,500,000 1,500 8,500
Shares purchased and retired -- -- (5,500) (6) (10,643)
Cash received on stock subscription -- -- -- -- --
Stock subscription charged to compensation -- -- -- -- --
Warrants issued for services -- -- -- -- 410,000
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ----------- ------------
BALANCE - DECEMBER 31, 1998 -- -- 13,011,978 13,012 5,919,416
Shares and options issued for services -- -- 45,000 45 77,505
Shares sold -- -- 1,386,813 1,387 1,385,427
Shares issued for option exercises -- -- 500,353 500 24,500
Debt converted to shares -- -- 45,000 45 24,955
Shares purchased and put to the Company -- -- (85,000) (85) (254,915)
Preferred dividends accreted and/or paid -- -- -- -- (264,684)
Shares and options retired pursuant to -- -- -- -- --
legal settlement -- -- (900,000) (900) (629,100)
Warrants issued with preferred stock -- -- -- -- 567,000
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ----------- ------------
BALANCE - DECEMBER 31, 1999 -- $ -- 14,004,144 $ 14,004 $ 6,850,104
============ ============ ============ =========== ============
Common
Stock Stock Total
Accumulated Deferred Subscription Subject to Stockholders'
Deficit Compensation Receivable Put Equity
------------ ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 $ (589,387) $ (107,700) $ (526,300) $ -- $ 1,661,090
Shares issued for services -- -- -- -- 24,001
Shares sold -- -- -- -- 1,484,065
Shares issued for option exercises -- -- -- -- 191,250
Shares issued for acquisitions -- -- -- (1,485,000) (196,596)
Shares canceled for discontinued operations -- -- -- -- (339,120)
Conversion of preferred stock -- -- -- -- --
Shares purchased and retired -- -- -- -- (10,649)
Cash received on stock subscription -- -- 501,300 -- 501,300
Stock subscription charged to compensation -- -- 25,000 -- 25,000
Warrants issued for services -- (50,000) -- -- 360,000
Amortization of deferred compensation -- 116,300 -- -- 116,300
Net loss (5,132,364) -- -- -- (5,132,364)
------------ ------------ ---------- ------------ -----------
BALANCE - DECEMBER 31, 1998 $ (5,721,751) $ (41,400) $ -- $ (1,485,000) $(1,315,723)
Shares and options issued for services -- -- -- -- 77,550
Shares sold -- -- -- -- 1,386,814
Shares issued for option exercises -- -- -- -- 25,000
Debt converted to shares -- -- -- -- 25,000
Shares purchased and put to the Company -- -- -- 255,000 --
Preferred dividends accreted and/or paid -- -- -- -- (264,684)
Shares and options retired pursuant to -- -- -- -- --
legal settlement -- -- -- -- (630,000)
Warrants issued with preferred stock -- -- -- -- 567,000
Amortization of deferred compensation -- 13,800 -- -- 13,800
Net loss (2,104,246) -- -- -- (2,104,246)
------------ ------------ ---------- ------------ -----------
BALANCE - DECEMBER 31, 1999 $ (7,825,997) $ (27,600) $ -- $ (1,230,000) $(2,219,489)
============ ============ ========== ============ ===========
See notes to consolidated financial statements
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,104,246) $(5,132,364)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 150,708 156,981
Amortization 123,469 952,003
Stock based compensation 89,920 637,150
Accounts receivable 294,976 (28,686)
Other current assets 33,000 (7,688)
Deferred tax asset -- 229,000
Accounts payable and accrued expenses 1,071,788 717,455
Deferred tax liability -- (3,000)
Deferred revenue 23,141 (87,505)
----------- -----------
NET CASH USED BY OPERATIONS (317,245) (2,566,654)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions -- (261,682)
Other assets (45,294) (17,992)
Development & purchase of software (814,874) (194,706)
Purchase of leasehold improvements & equipment (198,884) (95,518)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (1,059,052) (569,898)
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from sale of common stock 1,386,813 1,484,065
Proceeds from option exercises 25,000 191,250
Cost of purchasing and retiring stock (255,000) (10,649)
Preferred dividends paid and accrued (184,615) --
Purchase of common stock per settlement (630,000) --
Debt converted to shares 25,000 --
Proceeds from sale of preferred stock 632,700 --
Cash received for stock subscription -- 526,300
Funds provided by new financing 748,000 1,500,000
Repayment of debt (483,357) (850,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,264,541 $ 2,840,966
----------- -----------
NET DECREASE IN CASH (111,756) (295,586)
CASH, beginning of the period 229,423 525,009
----------- -----------
CASH, end of the period $ 117,667 $ 229,423
=========== ===========
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 134,872 $ 154,775
============ ============
Taxes $ -- $ --
============ ============
Non cash financing and investing activities:
Issuance of common stock in connection with acquisitions $ -- $ 949,284
============ ============
Issuance of debt in connection with acquisitions $ -- $ 100,000
============ ============
Accretion of preferred stock discount $ 80,069 $ --
============ ============
Issuance of options and warrants for services $ 77,550 $ 410,000
============ ============
Issuance of warrants for debt discount $ 567,000 --
============ ============
Debt converted to preferred stock $ 1,500,000 $ --
============ ============
Debt converted to common stock $ 25,000 $ --
============ ============
</TABLE>
F-7
<PAGE>
ELECTRONIC BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED DECEMBER 31, 1999
1. BUSINESS
Electronic Business Services, Inc. and Subsidiaries (the "Company"),
formerly known as @ebs, inc, or Triangle Imaging Group, Inc., was
incorporated under the laws of the State of Florida on December 12, 1984. On
February 27, 1998 the Company formed QuickCredit Corp. ("QCC"), a Florida
corporation, for the purpose of acquiring and developing credit reporting
agencies. A separate subsidiary Engineered Business Systems, Inc. ("EBS")
designs, develops and sells windows based software systems for both the
mortgage quality control and the credit reporting industries. Additionally,
the outsourcing division processes quality control files for mortgage banks.
QCC processes credit reports for the retail residential mortgage industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
These financial statements have been prepared assuming the Company will
continue as going concern. The Company has suffered recurring losses
amounting to $2 million and $5 million for the last two years. The Company
is in default of several of its debt obligations. See Notes 7 and 8. The
Company intends to raise additional financing through debt or equity in the
near future to enable the Company to continue operations for at least one
year.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All material intercompany transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents highly liquid temporary
investments with an original maturity of three months or less when
purchased.
EQUIPMENT
Equipment is stated at cost and is depreciated over the estimated useful
lives of the assets using various accelerated methods, which approximates
economic depreciation.
F-8
<PAGE>
GOODWILL
Goodwill resulting from acquisitions represents the excess of the purchase
price plus the acquisition costs over the fair value of the net assets of
the acquired companies. Goodwill is amortized on a straight line basis over
a period of 20 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through projected
undiscounted future cash flows of the acquired companies.
REVENUE RECOGNITION
Revenue from software sales is generally recognized upon execution of a
sales contract, the delivery of the software and completion of the major
portion of the contract requirement.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. These costs
primarily consist of fees paid for the development of the Company's
software. Research and development costs for the year ended December 31,
1999 and 1998 were approximately $839,000 and $1,032,000, respectively.
ACCOUNTING ESTIMATES
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, receivables,
and accrued expenses approximate fair value based on the short-term maturity
of these instruments.
STOCK BASED COMPENSATION
The Company accounts for stock transactions in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and has adopted the
disclosure-only option under SFAS No. 123, as of December 31, 1995.
ACCOUNTING OF LONG LIVED-ASSETS
The Company reviews long-lived assets, certain identifiable assets and any
goodwill related to those assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts
may not be recoverable. As of December 31, 1999, the Company's management
has not identified any material impairment of goodwill.
F-9
<PAGE>
EARNINGS (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("FAS No. 128), which defines the presentation of
"Basic" and (where applicable)"Diluted" earnings per share. Generally,
Basic earnings per share are computed on only the weighted average number of
common shares actually outstanding during the period, and the Diluted
computation considers potential shares issuable upon exercise or conversion
of other outstanding instruments where dilution would result.
SOFTWARE DEVELOPMENT COSTS
The Company has capitalized internally developed software costs included in
Software, which totaled $740,000 and $335,545 for the years ended December
31, 1999 and 1998, respectively. The capitalization of such costs is in
accordance with SFAS No. 86 and SOP 98-1. Amortization is computed on an
individual product basis ranging from 36 to 60 months.
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax
credit carryforwards.
CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable.
Concentrations of credit risk with respect to trade receivables include
concentrations of trade account from software product users.
RECLASSIFICATIONS
The Company has reclassified certain expenses in the prior year financial
statements to conform with the current year presentation of such expenses.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Investments and Hedging Activities Income", which requires the recording of
F-10
<PAGE>
all derivative instruments as assets or liabilities measured at fair value.
Among other disclosures, SFAS No. 133 requires that all derivatives be
recognized and measured at fair value regardless of the purpose or intent of
holding the derivative.
SFAS No. 133 is effective for financial statements for years beginning after
June 15, 2000. The Company has no derivative investments and does not
participate in hedging activities; therefore, its financial position,
results of operations and disclosures will be unaffected by it.
3. EQUIPMENT
Equipment at December 31, 1999 consisted of the following:
ESTIMATED
USEFUL LIVES AMOUNT
------------- -------------
Computer hardware 5 - 7 $ 919,223
Office furniture 7 70,960
Office equipment 5 - 7 124,307
Leaseholds improvements 5 151,976
-------------
1,266,466
Less: Accumulated depreciation (857,268)
-------------
$ 409,198
=============
4. DEFERRED REVENUE
At December 31, 1999, deferred revenue of $315,817 represents the unearned
portion of sales related to software maintenance agreements. Deferred
revenue is recognized as income on a straight - line basis over the service
contract terms which are generally for renewable twelve month periods.
5. ADVANCES FROM FACTORS
In December 1999, the Company entered into a Purchase and Sale Agreement
("PSA") with a commercial factor which advanced the Company 75% of Quick
Credit Corp's receivables, as defined. The factor maintained a security
interest in the Company's accounts receivable and advanced monies on a
non-recourse basis. Interest rates ranged from 2% for invoices outstanding
fifteen days to 14% for those outstanding over ninety days. Under the PSA,
F-11
<PAGE>
the factor reserved the right to charge-back purchased accounts pursuant to
certain terms of defaults within the PSA agreement, at the receivable amount
net of unearned interest. The terms of the factoring agreement does not
allow the Company to maintain effective control over the receivables and
therefore the agreement is recorded as a sale of the receivables for the
amount advanced in accordance with Statement of Financial Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The total amount of advances outstanding
under the agreement at December 31, 1999 was $59,532. Discounts on the
factoring of receivables recorded as interest expense amounted to $19,409
for the year ended December 31, 1999
6. LONG TERM - RELATED PARTY PAYABLE
a. Amounts due to former officer are non-interest bearing payments due in
the amount of $13,000 per month until June 2002. Such amounts are due
pursuant to the litigation settlement agreement dated April 29, 1999,
which required the former officer and two individuals to return 900,000
shares of common stock to the Company and forfeit 2,200,000 options to
purchase common stock at prices ranging from $.05 to $1.875. The Company
is required to make 36 monthly payments of $13,000 or $468,000 to the
former officer. The Company recorded a $182,000 gain on the settlement
of such litigation between the equity received and the amounts recorded
as a payable to the former officer and two individuals.
b. A stockholder amde two loans to the Company for $50,000 and $100,000 due
on demand bearing interest at 8% and 12% per annum, respectively.
7. NOTES PAYABLE
a. On December 2, 1996 in connection with the acquisition of EBS, the
Company entered into a $1,600,000 promissory note with the former
stockholders of EBS. The note presently bears interest at a rate of 8%
per annum with the interest rate determined annually, at a rate per
annum equal to the Prime Rate less one quarter percent, with a minimum
and maximum rate of 8% and 9% per annum, respectively. Payments of
interest only were due and payable on the first day of January,
February, March and April 1997, thereafter principal is payable in equal
installments of $25,000 each, together with interest, commencing in May
1997 through January 2000 when all outstanding principal and interest is
due. In January 2000, Company renegotiated the payment of such balance
with a new promissory note of $400,000, bearing interest at 21% per
annum, payable $50,000 per month commencing February 1, 2000 including
interest until September 1, 2000 at which date all accrued and unpaid
interest shall be due and payable and 200,000 warrants to purchase
common stock at $40 per share for period of 5 years. These warrants were
valued at $40,480 and will be amortized over the nine months as interest
expense. The Company has defaulted on the March and April payments due
under this agreement.
F-12
<PAGE>
The note is secured by a Stock Pledge Agreement and a Security
Agreement. Under the Stock Pledge Agreement, the Company agreed to
pledge all of its stock of EBS as security for the note. Additionally,
under the Security Agreement, the note is collateralized by all assets
of the Company. The Company covenants and agrees to use not less than
twenty-five (25) percent of the net proceeds from the sale by the
Company of the Company's common stock or other securities in any private
placement or public offering occurring after the date of the note
agreement to pay the indebtedness evidenced by the Note. Pursuant to
this agreement the Company paid $275,000 during the year ended December
31, 1999.
b. In May 1998, the Company acquired all of the outstanding capital stock
of Credit Bureau Services, Inc., EJG Services, Inc., and Florida Credit
Bureau, Inc. In connection with these acquisitions, the Company entered
into notes payable for $100,000. The notes were fully paid as of
December 31, 1999. During 1999, $25,000 was converted into 45,000 shares
of common stock.
8. COMMON STOCK SUBJECT TO PUTS
a. In connection with the 1998 acquisitions of Credit Bureau Services, Inc.
("CBS"), EJG Services, Inc. ("EJG") and Florida Credit Bureau, Inc.
("FCB"), 495,000 shares of common stock were issued subject to the
seller's ability to require the Company to repurchase such shares for a
one to three year period for $1,485,000. The common stock subject to the
puts allows the holder of these puts to require the Company to purchase
their common stock during the following periods of time; (a) 50,000
shares of common stock for $150,000 during the period of May 1999 to May
2000 relating to the sale of FCB, (b) 245,000 shares of common stock for
$735,000 during the period May 1999 to May 2001 relating to the sale of
CBS and (c) 200,000 shares of common stock for $600,000 during the
period of January 1, 2001 to January 1, 2002 relating to the sale of
EJG.
b. The sellers of FCB have exercised their right to put the common stock to
the Company. The Company paid $51,000 for 10,000 shares of the common
stock and negotiated a $100,000 note payable plus interest payable
$17,275.32 in six installments through February 2001 for 20,000 of the
remaining 40,000 shares put to the Company. The seller of FCB will be
entitled to retain up to 20,000 or 30,000 shares common stock depending
on whether the Company repays the note payable timely. The Company is
currently in default under the terms of the note payable and has paid
only 3 of the required installments. The sellers of FCB have initiated a
lawsuit against the Company to be paid the remaining amounts due.
c. The Company has paid to the sellers of CBS $105,000 for 35,000 shares of
common stock put to the Company during 1999. The Company is currently in
default of the terms of the put arrangement with the sellers of CBS. Two
additional installments are due and outstanding totaling $105,000 as of
February 2000.
F-13
<PAGE>
9. PREFERRED STOCK.
a. In October 1998, the Company entered into a financing and investment
agreement ("the Agreement") with an investor ("Investor"). Under the
Agreement the Investor agreed to purchase, for $1,500,000, 1,500 shares
of a new class of preferred stock of the Company to be classified as
Series C Redeemable Preferred Stock "Series C Preferred Stock".
At the time of the Agreement the Company, under Florida law, was not
allowed to issue preferred stock. The Company and the Investor have
agreed to enter into the Agreement on the basis that the Company will
take all measures practicable to authorize and issue the preferred
stock. As security for the Investor prior to the issuance of the
preferred stock, the Company will execute a promissory note for the full
purchase price of the preferred stock. The Company issued the Series C
Preferred Stock in June 1999.
In connection with the Agreement, as amended pursuant to a lawsuit by
the Investor, the Investor and the Company agreed to amend the exercise
price of a warrant to purchase 500,000 shares of the outstanding common
stock on the date of exercise on a fully diluted basis, which was
exercised in June 1999. The exercise price was $.05 per share as
amended. These warrants were valued at $475,000 and have been recorded
as a discount to the preferred stock. The total discount recorded will
be accreted over the remaining 51 months of the term of the put to the
Company of the Series C Preferred Stock.
At any time after the earlier of a change in control (as defined) or the
date which is five years after the issuance of the preferred stock, the
Investor has the right to require the Company to redeem all of the
shares of preferred stock at a redemption price of $1,000 per share.
The terms of the Series C Preferred Stock are as follows: (i) total
number of Series C Preferred Stock issuable will be 1,500 with a
liquidation value of $1,000 per share, (ii) such Series C Preferred
Stock will be cumulative and bear dividends at a rate of $125 per share
or 12.5% accruing quarterly, (iii) unpaid dividends will accrue interest
at 12.5% compounded annually, (iv) certain capital transactions of the
Company will require consent of at least 66 2/3% of the Series C
Preferred Stockholders and (v) the Series C Preferred Stockholders have
the right to elect one board member at all times.
b. In June 1999, the Company sold 700 shares of Series D Convertible
Redeemable Preferred Stock "Series D Preferred Stock", with a per share
$1,000 stated value, accruing dividends at 12.5% payable quarterly for
$700,000. In connection with the sale of such Series D Preferred Stock,
the Company issued 80,000 warrants to purchase common stock at $.01, as
amended. These warrants vest over 3 years and were valued at $92,000 and
recorded as a discount to the Series D Preferred Stock to be accreted
over a period of five years. The redemption and general terms of the
Series D Preferred Stock are similar to the Series C Preferred Stock. In
addition the Series D Preferred Stock is convertible at the option of
F-14
<PAGE>
the holder for a period of ten years into common stock at a rate of one
share of Series D Preferred Stock for 870 shares of common stock and can
be put to the President personally should the Company have insufficient
funds to repay the Series D Preferred Stock.
c. In January 2000, the Company obtained a $500,000 line of credit accruing
interest at 12.5% payable August 1, 2000 and payable monthly thereafter.
Principal is due on demand with the line of credit expiring on December
31, 2005. The line of credit has cross default provisions relating to
default arising from the Series C and D Preferred Stock. Amounts
outstanding on the line of credit after April 28, 2000 are convertible
into common stock at a rate of $.20 per share for amounts outstanding
under the line of credit. There were 30,000 warrants issued in
connection with the line of credit, exercisable at $.20 per share, for a
period of ten years. These warrants have been valued at $15,000 and will
be amortized over a period of five years, the term of the credit line.
Under the terms of the line of credit, if there is a default pursuant to
the terms of the Series C Preferred Stock, Series D Preferred Stock or
the line of credit, the holders are provided the option to convert the
stated value of their Series C and D Preferred Stock holdings and the
line of credit to a Series E Convertible Redeemable Preferred Stock "
Series E Preferred Stock" under certain terms and conditions, which is
basically the raising of new equity funds of $3,500,000 by June 26,
2000. The stated value of the Series E Preferred Stock and accrued
dividends are convertible into common stock at a rate of $.20 per share
of common stock for the total stated value of the Series E Preferred
Stock and accrued dividends. Based on the stated value of the Series C
and D Preferred Stock and the full line of credit outstanding of
$2,700,000 the Series E Preferred Stock is convertible into 13,500,000
shares of common stock of the Company.
d. The Company is in default of the terms of the Series C and D Preferred
Stock due to the nonpayment of the preferred dividends due April 1,
2000, as amended in the amount of $210,891. Such dividends include the
deferred dividends accrued from October 15, 1999.
10. STOCKHOLDER'S EQUITY
a. In January 1997, the Company issued 500,000 shares of common stock for
consulting services. The stock was valued at $69,000 and is being
amortized over five years resulting in an annual non-cash charge to
operations of $13,800. The remaining unamortized portion of deferred
compensation as of December 31, 1999 was $27,600.
F-15
<PAGE>
b. During 1998, several individuals exercised stock options resulting in
the issuance of 495,000 shares of common stock and the Company receiving
proceeds of $144,375.
c. During 1998, the Company made several acquisitions which resulted in the
issuance of 900,000 shares of common stock. These shares were valued at
their fair market value at the time of negotiations. In September 1998,
the Company rescinded one of the acquired companies and discontinued its
operations resulting in the cancellation of 270,000 shares of common
stock.
d. In April 1998, 22,642 shares of common stock were issued for services. A
compensation charge to expense of $24,000 was recorded in 1998.
e. In March 1998, the Company repurchased 5,500 shares of common stock on
the open market for $10,643. Such shares have been retired and
accordingly, the costs have been charged against paid-in-capital.
f. During 1999 and 1998, the Company sold 1,386,813 and 876,220 shares of
common stock for a total value of $1,386,813 and $1,484,065,
respectively. In addition the Company issued 500,000 options to purchase
common stock for a period of five years at $1.00 per share, to financial
consultants for their assistance in raising such capital for 1999. These
options were valued at $253,000 and were recorded as a cost of raising
such capital.
g. During 1999, the Company issued 45,000 shares of common stock for the
conversion of $25,000 of indebtedness.
h. During 1999, the Company issued 500,000 and 80,000 warrants to purchase
common stock at $.05 and $.01 a share pursuant to the amended agreements
for the sale of Series C and D Preferred Stock, respectivley. The
500,000 warrants issued in connection with the Series C Preferred Stock,
as amended, were exercised in June 1999.
i. Pursuant to a litigation settlement agreement involving a former officer
of the Company and certain other shareholders the Company reclaimed
900,000 shares of common stock and the cancelled 2,200,000 options to
purchase common stock ranging in prices to purchase common stock from
$.05 to $1.875. (See Note 6).
j. Pursuant to the put agreements in Note 8 above the Company repurchased
45,000 shares of common stock for $156,000 during 1999.
k. The Company issued 10,000 shares of common stock to an employee pursuant
to a bonus contractual arrangement during 1999. These shares were valued
at $10,000 and expensed as compensation during 1999.
F-16
<PAGE>
11. WRITE-OFF OF GOODWILL
Goodwill arose in connection with the acquisitions of EBS, CBS, FCB and FJG.
The Goodwill is being amortized on a straight line basis over 20 years. In
1998, the Company, under SFAS No. 121, " Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed ", evaluated the
recoverability of goodwill of CBS and EJG by determining whether
amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted future cash flows. As a result of
such evaluation, the Company recorded a charge of $850,968 against goodwill
for 1998.
12. DISCONTINUED OPERATIONS
On May 29, 1998, the Company acquired 100% of the stock of Trimax Systems
Corp. "Trimax" and Multitask Corp. "Multitask" for 270,000 and 135,000
shares of common stock, respectively. The total purchase price including
acquisition costs, was $565,133, which was recorded as goodwill. In
September and December 1998, the Company decided to discontinue the
operations of Trimax and Multitask, respectively. The 270,000 shares of
common stock issued in connection with the acquisition of Trimax were
canceled. The remaining goodwill, advances to and costs incurred relating to
these acquisitions were written off and shown separately as discontinued
operations.
13. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS No. 109 additionally requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax
assets. At December 31, 1999, the Company had net deferred tax assets of
approximately $2,400,000. The Company has established a valuation allowance
for the full amount of such deferred tax assets. The following table gives
the Company's deferred tax assets and liabilities December 31, 1999:
F-17
<PAGE>
The provision for income taxes (benefits) differs from the amount
computed by applying the statutory federal income tax rate to income (loss)
before income taxes as follows:
Year ended December 31,
-------------------------
1999 1998
---------- ------------
Income tax (benefit) computed at statutory rate $ (714,000) $ (1,800,000)
State tax -- --
Effect of permanent differences -- (425,000)
Tax benefit not recognized 714,000 2,225,000
Valuation adjustment -- 226,000
---------- ------------
Provision for income taxes (benefit) $ -- $ 226,000
========== ============
The Company has net operating loss carryforwards for tax purposes totaling
approximately $7,000,000 at December 31, 999 expiring in the years 2005 to
2015. Substantially all of the carryforwards are subject to limitations on
annual utilization because there are "equity structure shifts" or "owner
shifts" involving 5% stockholders (as these terms are defined in Section 382
of the Internal Revenue Code), which have resulted in amore that 50% change
in ownership. The annual limitation is based on the value of EBS as of the
date of the ownership change multiplied by the applicable Federal Long Term
Tax Exempt Bond Rate.
14. COMMITMENTS
a. The Company leases office space under a non-cancelable lease expiring in
February 2009. The future minimum rent payments under this lease for the
next five years are as follows:
2000 $ 251,338
2001 251,338
2002 251,338
2003 251,338
2004 281,498
Thereafter 1,172,908
F-18
<PAGE>
Rent expense was $268,802 for the year ended December 31, 1999 and
$173,395 for the year ended December 31, 1998.
b. The Company has an employment agreement with one officer of the Company.
The agreement expires in January 2000. The agreement also provides for
incentive bonuses based on profit criteria and the payment of various
expenses. In addition, the agreement entitles the officer to receive 10%
of the outstanding stock of EBS.
The President's options to purchase 10% of the shares of EBS have been
valued at $136,850. Such amount has been recorded as deferred
compensation and is being amortized over 5 years. The current year's
non-cash imputed compensation expense as a result of this amortization
was $27,380.
On April 14, 1998, the employment agreement was amended to grant options
to purchase 10% of QCC for $10. No compensation has been recorded since
QCC was merely a shell company in April 1998.
15. STOCK OPTIONS
In September 1997, the Company adopted two stock option plans authorizing
the issuance of options covering 900,000 share of the Company's common
stock. Officers and Directors are eligible to participate in the Officers
and Directors Stock Option Plan covering 600,000 share while key employees
are eligible to participate in the Employee Stock Option Plan covering
300,000 shares. During 1998, the Company amended such Plans to increase the
number of options issuable under each plan to be 350,000 for the Employee
Stock Options Plan and 2,100,000 for the Officers and Directors Stock Option
Plan. Participants receive incentive stock options pursuant to the Plan.
Options granted under the Employee Stock Option Plan are exercisable for a
period of not more than ten years from the inception of the Plan. Options
granted under the Officers and Directors Stock Option Plan are exercisable
for a period of not more than five years from the inception of the Plan.
Selection of participants, allotment of shares, determination of exercise
price and other conditions of the granting of options will be determined by
the Company. Additionally, the Plan provides that no options may be issued
at an exercise price which is less than the fair market value of the
Company's common stock on the date of grant.
F-19
<PAGE>
The Company has outstanding stock options as follows:
Plan Options Non-Plan Options
-------------------- -------------------
Outstanding at December 31, 1997 680,000 $. 875 2,850,000 $ 1.36
Options Exercised (20,000) $. 875 (550,000) $ .345
OPTIONS CANCELLED (1,190,000) $ 2.25
Options Expired -- -- (200,000) $ .20
Options Granted 2,076,750 $. 689 2,000 $ 4.25
----------- ------ ---------- ------
Outstanding at December 31, 1998 2,736,750 $. 751 912,000 $ .984
Options Exercised (353) $ .875
OPTIONS CANCELLED (2,738,397) $ .751 (850,000) $1.574
Options Expired (207,000) $1.099 (60,000) $ .875
Options Granted 2,771,000 $1.248 805,000 $ .99
----------- ------ ---------- ------
Outstanding at December 31, 1999 2,562,000 $ .638 807,000 $1.162
=========== ====== ========== ======
At December 31, 1999, all of the 807,000 Non-Plan options and 2,562,000 Plan
options were immediately exercisable.
On March 10, 1999, the Board of Directors of the Company adopted a 1999
Incentive Stock Plan, ("the 1999 Plan"), whereby 4,000,000 shares of common
stock have been reserved for issuance under the 1999 Plan. Stock options
issued under the 1999 Plan are also expected to have limited stock
appreciation rights, "LSAR". A LSAR entitles the holder to receive within 60
days following a change in control an amount equal to the difference between
the exercise price of the stock option and the market value of the common
stock on the effective date of the change in control.
16. ACCOUNTING FOR EMPLOYEE STOCK OPTIONS
In fiscal 1996, the Company adopted the disclosure provisions SFAS No. 123,
"Accounting for Stock-Based Compensation". For disclosure purposes, the fair
value of options is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used
for stock options granted during the years ended December 31, 1999 and 1998:
annual dividends of $0; expected volatility of 50%; risk-free interest rate
of 7% and expected life of five years. If the Company had recognized
compensation cost for stock options in accordance with SFAS No. 123, the
Company's proforma net income (loss) and net income (loss) per share would
have been $(3,408,659) and $(.25) per share for the fiscal year ended
December 31, 1999 and ($5,726,003) and ($.48) per share for the fiscal year
ended December 31, 1998.
F-20
<PAGE>
17. SEGMENT INFORMATION
The Company's two reportable segments are principally recorded by each
subsidiary's records (credit reporting "QCC" and software sales and
maintenance "EBS"). The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. Segment
information for the years ended December 31, 1999 and 1998 was as follows:
EBS QCC OTHER TOTAL
--------------------------------------------
1999 (in thousands)
--------------------------------------------
Sales from external customers $ 5,170 $ 1,317 $ -- $ 6,487
Gross margin 3,068 288 -- 3,356
Operating loss (701) (567) (836) (2,104)
Depreciation and amortization 113 18 139 270
DISCONTINUED OPERATIONS -- -- -- --
Total assets 953 2,270 917 4,140
Capital expenditures $ 174 $ 805 $ 128 $ 1,107
1998 (in thousands)
--------------------------------------------
Sales from external customers $ 6,059 $ 1,550 $ -- $ 7,609
Gross margin 3.844 565 -- 4,409
Operating loss (2,010) (238) (2,411) (4,659)
Depreciation and amortization 140 17 -- 157
DISCONTINUED OPERATIONS -- -- 474 474
Total assets 1,161 331 2,402 3,894
Capital expenditures $ 965 $ 52 $ 96 $ 1,113
18. LEGAL PROCEEDINGS
a. The Company is subject to litigation from time to time arising in the
ordinary course of its business. The Company does not believe that any
such litigation is likely, individually or in aggregate, to have a
material adverse effect on the financial conditions of the Company.
b. During 1998 and 1999, the Company was involved in two significant
lawsuits both of which were settled in early 1999 (See Note 6 for
settlement with a former officer and Note 9 for amended terms of Series
C Preferred Stock).
c. On March 23, 1999, QCC and Interfinancial Services entered into a Joint
Product Sales and Marketing Agreement pursuant to which QCC was
obligated to develop and provide two new consumer products, a credit
F-21
<PAGE>
monitoring product and a card registration product, and Interfinancial
Services was to market and sell such products. On November 24, 1999, QCC
terminated its agreement with Interfinancial Services Corp. due to the
alleged failure of Interfinancial Services Corp. to perform its material
obligations under such contract despite full and timely performance by
QCC. Particularly, Interfinancial Services, Corp. was obligated under
the agreement to, among other things, design and prepare certain
marketing and sales materials, to establish a telemarketing sales
effort, to undertake general marketing of the products and to introduce
and market the products to Interfinancial Services Corp.'s institutional
clients. QCC currently believes the amount of damages to which it is
entitled under the agreement is in excess of $1.3 million. QCC demanded
arbitration in accordance with the terms of the agreement.
F-22
<PAGE>
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.
Dated: Fort Lauderdale, Florida
April 14, 2000
ELECTRONIC BUSINESS SERVICES, INC.
By: /s/ HAROLD S. FISCHER
--------------------------
Harold S. Fischer
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Harold S. Fischer Chief Executive Officer, April 14, 2000
- - ----------------------- President and Director
Harold S. Fischer
/s/ Gregory J. Seminack Chief Financial Officer April 14, 2000
- - ----------------------- (Chief Accounting Officer)
Gregory J. Seminack
/s/ Charles D. Winslow Chairman of the Board April 14, 2000
- - -----------------------
Charles D. Winslow
Director April __, 2000
- - -----------------------
J. Alan Lindauer
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report dated March 26, 1999, which
is incorporated in this Form 10-KSB filing, commission file number 000-25213, of
Electronic Business Services, Inc. formerly known as Triangle Imaging Group,
Inc.
Mazars & Guerard, LLP
April 14, 2000
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report dated March 26, 1999, which
is incorporated in this Form 10-KSB filing, commission file number 000-25213, of
Electronic Business Services, Inc. formerly known as Triangle Imaging Group,
Inc.
Mazars & Guerard, LLP
April 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000764763
<NAME> ELECTRONIC BUSINESS SERVICES, INC.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 117,667
<SECURITIES> 0
<RECEIVABLES> 617,196
<ALLOWANCES> 104,931
<INVENTORY> 0
<CURRENT-ASSETS> 643,109
<PP&E> 1,266,466
<DEPRECIATION> 857,268
<TOTAL-ASSETS> 4,140,454
<CURRENT-LIABILITIES> 3,932,201
<BONDS> 0
0
1,570,242
<COMMON> 14,004
<OTHER-SE> (2,233,494)
<TOTAL-LIABILITY-AND-EQUITY> 4,140,454
<SALES> 6,486,533
<TOTAL-REVENUES> 6,486,533
<CGS> 3,131,333
<TOTAL-COSTS> 3,131,333
<OTHER-EXPENSES> 5,559,030
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,762
<INCOME-PRETAX> (2,104,246)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,104,246)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,104,246)
<EPS-BASIC> (0.17)
<EPS-DILUTED> 0
</TABLE>
