U.S. 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
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ......... to ...............
Commission File No. 33-42904
INTELLIGENT DECISION SYSTEMS, INC.
(Successor to Resource Finance Group, Ltd.)
(Name of small business issuer in its charter)
DELAWARE 38-3286394
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Weyhill Building, Suite 400
2025 East Beltline Avenue, S.E.
Grand Rapids, Michigan 49546 616-285-5830
(Address of principal executive offices) (Issuer's Telephone No.)
Securities registered under Section 12(b) of the Exchange Act:
Securities registered
pursuant to Section 12(g) of the Exchange Act: Common Stock, $.001 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 [ ].
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [x]
Issuer's revenues for its most recent fiscal year were $1,919,831.
As of September 26, 1997, a total of 14,748,196 shares of common stock were
outstanding. The aggregate market value of the shares of common stock of the
registrant held by non-affiliates, (based upon the closing price of the
registrants common stock on September 26, 1997 of $.50 per share) was
approximately $7,374,098.
Transitional Small Business Disclosure Format: Yes [ ] No [x]
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PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB, including all documents incorporated by reference, includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. All statements other than statements of
historical facts included in this Form 10-KSB (and in documents incorporated by
reference), including without limitation, statements under "Legal Proceedings"
and "Management's Discussion and Analysis or Plan of Operation" regarding the
Company's financial position, business strategy and plans and objectives of
management of the Company for future operations, are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this section.
Item 1. - Description of Business
Company Development
Intelligent Decision Systems, Inc. ("IDSI" or the Company") is a holding
corporation formed under the laws of Delaware in June 1995. The Company's
primary operations, the development and marketing of its Vision and Focus
Systems and the leasing of these systems, are conducted through its wholly owned
subsidiaries, Digital Sciences, Inc., a Delaware corporation formerly known as
DSI Acquisition Corp. ("DSI"), and Neptune Technology Leasing Corp. ("Neptune")
respectively. Both the Company and DSI were formed in June 1995 in connection
with the merger (the "Merger") of Resource Finance Group, Ltd. ("RFG") and
Digital Sciences, Inc., a Nevada corporation ("Old DSI"). Under the terms of the
Merger, which was effective on April 1, 1996, (i) Old DSI merged with and into
DSI, and (ii) RFG merged with and into the Company. Also on April 1, 1996, the
Company issued 7,314,636 shares of Common Stock in exchange for all of the
outstanding capital stock of Old DSI. These shares were registered on a Form S-4
Registration Statement that was declared effective by the Commission in
February, 1996.
In May, 1994, DSI entered into an agreement with RFG to sell its intellectual
property "Screenware" for 1 million shares of RFG's common stock. Under this
agreement, RFG retained voting rights over those shares for a two year period.
RFG then licensed Screenware to DSI for 99 years, but retained the right to 30%
of all revenues from projects performed using Screenware that were arranged by
RFG, and 5% of all revenues derived from any other use of Screenware.
In August, 1994, DSI entered into an agreement (the "Consortium Agreement") with
RFG and National Purchasing Corporation ("NPC") that provided for the
development and distribution of computerized business systems designed
specifically for the long term health care industry. Nursing homes form the
greater part of that market segment.
During January through March, 1995, DSI issued debt securities with warrants to
private qualified investors. The face amount of the debt securities totaled
approximately $1.5 million. Warrants for approximately 1.5 million shares were
granted, all of which were exercised or expired as of July 31, 1996. The debt
was fully repaid by June 30, 1996.
In August, 1995, DSI and RFG entered into a Joint Operating Agreement pursuant
to which RFG and Digital Sciences, Inc. would cooperate in sharing the costs of
certain operational matters. Under the Joint Operating Agreement, RFG provided
Digital Sciences, Inc. with accounting, financial reporting, payroll and
administrative services and programmers on a subcontracted basis and Digital
Sciences, Inc. provided RFG with funds adequate to cover the costs of
maintaining RFG's corporate, legal, financial, accounting and administrative
capabilities. The Joint Operating Agreement was terminated as of April 1, 1996,
effective the date of the merger of Digital Sciences, Inc. with DSI and RFG's
successor corporation, IDSI.
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On June 28, 1996, IDSI purchased substantially all the assets of The Neptune
Group, Inc. ("TNG") and those of its subsidiaries. The assets purchased
consisted of primarily cash, accounts receivable and notes receivable, the total
value of which was approximately $1.73 million. IDSI issued 750,000 restricted
shares of common stock to TNG for those assets and assumed certain liabilities,
which totaled approximately $0.46 million. IDSI agreed to file a registration
statement covering the stock issued to TNG by September 30, 1996, and TNG agreed
not to sell those shares for a period of one year plus one day after the closing
date of the transaction. IDSI created Neptune Technology Leasing Corp.,
("Neptune") a Michigan corporation and wholly owned subsidiary of IDSI.
On June 28, 1996, IDSI privately placed 1,631 shares of its Series A Convertible
Preferred Stock at a per share price of $1,000 for net proceeds of $1,500,520.
The preferred shares were convertible into common shares of IDSI after the
following dates: one-third on or after August 17, 1996, an additional one-third
on or after September 11, 1996 and the final one-third on or after October 6,
1996. These shares were convertible at 78% of the average market price of IDSI
common stock for the five days immediately prior to conversion. All shares were
converted by October 21, 1996.
On October 29, 1996 the Company finalized a consulting agreement with James N.
Lane, R. Wayne Fritzsche and Anthony Kamin. Lane, Fritzsche and Kamin would
advise the Company on strategic planning, licensing, technical issues, identify
strategic alliances/partners and assist in the development of business
opportunities. As consideration for the services, the Company granted each of
the above individuals stock options to purchase 650,000 shares of common stock
of the Company at an exercise price of $1.25 per share. The Company also agreed
to appoint two of the above individuals (or their designee) to two seats on the
board of directors of the Company, subject to certain conditions and
limitations.
On December 11, 1996 IDS increased the size of its Board of Directors from five
to seven directors and appointed R. Wayne Fritzsche to fill one of the two newly
created directorships.
In April of 1997 DSI reached an agreement with BancPro, Inc. (through its wholly
owned subsidiary, MediPro, Inc.) to provide health care receivable financing to
users of Vision and Focus computing systems. MediPro will provide the funds for
healthcare receivable financing and DSI will facilitate the flow of electronic
funds and the related management information through its Virtual Service
Organization software and network.
In April of 1997 DSI signed a letter of intent with Pioneer EyeCare, Inc.
("Pioneer"). Pioneer is a Physician Practice Management Corporation that intends
to acquire, as well as offer management services to its association of over 200
independent eye care providers. The arrangement, when completed, will allow
Pioneer to implement their electronic information strategy across its entire
network utilizing DSI's Focus system and technology.
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On May 13, 1997 DSI reached an agreement with Sound Solutions, Inc. ("SSI"). DSI
was given exclusive rights to market and sell SSI's Eye Care Information Center
which is a touch screen computer program for use by customers in eye care
practices. DSI must sell 50 units by September 30, 1997 or they could incur a
liability of up to $250,000 less credits for units sold.
On June 1, 1997, Neptune signed an agreement with DVI Financial Services ("DVI")
which restructured a claim that DVI had against TNG. Neptune is required to pay
DVI an amount between $240,000 and $400,000 depending upon the amount of leases
that are purchased by DVI. DVI was granted exclusive rights to purchase Vision
and Focus systems leases and will withhold $300 per Vision or Focus system lease
purchased by DVI. DVI will withhold a .5% to 1% of the original cost of non DSI
systems purchased by DVI. A minimum payment to DVI of $60,000 (which includes
amounts previously withheld by DVI) will be due from Neptune on May 31, 1998,
May 31, 1999, May 31, 2000, May 31, 2001. As part of the agreement, Neptune
received financing rates which were more favorable than the rates that they
previously had.
On June 5, 1997 R. Wayne Fritzsche resigned from the Company's Board of
Directors. Mr. Fritzsche's resignation was for reasons unrelated to IDSI
activities. Mr. Fritzsche also resigned as a consultant under his consulting
agreement with the Company and subsequently cancelled his stock options to
purchase 650,000 shares of common stock of the Company at an exercise price of
$1.25 per share.
Products and Services
VISION -- IDSI is engaged in the development, through its wholly owned
subsidiary, Digital Sciences, Inc., of the Vision computer system ("Vision") in
conjunction with NPC. Effective July 13, 1994, Digital Sciences, Inc., RFG and
NPC entered into a 12 year agreement to jointly develop, market and license an
interactive, multimedia computerized business and care management computer
system for long term healthcare facilities, specifically nursing homes. Under
this agreement, the software developed is owned by HPSI Online, Inc., a
California corporation and a wholly owned subsidiary of NPC (also referred to as
"HPSI"). NPC and IDSI each have equal representation on the Board for HPSI
Online, Inc. The agreement states that the system is to be capable of electronic
order processing through an on-line network between HPSI, HPSI members and
vendors/suppliers as well as multimedia cataloging and advertising of
vendor/supplier products. The agreement requires IDSI, as successor to RFG and
DSI, to assemble the computer hardware and multimedia applications and to
produce the software. HPSI is required to market and license the system. The
agreement requires that certain revenues from the sales of the computer systems
and software will be divided between IDSI and HPSI on a 2/3:1/3 basis,
respectively. The software development necessary for the introduction of the
Vision system for HPSI's long-term care facility clients has been available for
sale/lease since November, 1996.
There are over 20,000 long term health care facilities operating in the United
States. Of these, more than one-third are not yet computerized to any
significant degree. Electronic data gathering and reporting have been mandated
by the Health Care Financing Administration, a governmental agency responsible
for the oversight of Medicare and Medicaid payments. This mandate has created
demand for sophisticated computing systems for the industry.
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FOCUS -- Focus is DSI's comprehensive medical information management computer
system that was designed specifically for use in physician's offices. Focus is
marketed, sold or leased through DSI's own direct sales capability. Focus is a
significantly enhanced and updated version of DSI's earlier physician's office
system named DSI/MED. Due to its flexible architecture and open systems
environment and its capacity to assimilate program changes, Focus is marketed to
large groups of physicians. Due to strong forces such as managed care and
changes in government entitlement programs such as Medicare and Medicaid,
physicians are consolidating their practices into associations, corporations,
partnerships, joint ventures and other collective efforts. Over 680,000
physicians practice in the U.S. and well over 16,000 group physician
organizations are in operation.
LEASING -- IDSI also provides lease financing to medical equipment and computer
users in the health care industry through its wholly owned subsidiary, Neptune.
Neptune owns lease agreements for its own account and also performs lease
brokering services for large financing companies.
Distribution
Under the terms of the Consortium agreement, NPC acting through its dba HPSI, is
responsible for the selling and distribution of the Vision system. HPSI purports
to be one of largest buying cooperatives in the United States doing business
with the long term non-acute health care providers, representing approximately
3,000 long term care facilities and hospitals, among others. HPSI employs
approximately 40 sales representative across the United States and has
represented to IDSI that it enjoys long standing relationships with state and
regional health care associations and organizations.
In late 1996, DSI began to develop its own direct sales capability which now
consists of four individuals. Because the Company has targeted the large group
practice market, executive-level sales professionals are critical to the
Company's efforts. Focus installations tend to be "big-ticket" decisions and are
best facilitated through the intensive personal involvement of members of the
Company's own direct sales team.
Competition
VISION -- Software systems competing with Vision include those developed by Care
Computer Systems, Achieve Healthcare Information Systems, Communications
Software, American Healthtech, Accu-Med Services, Add-On Health Systems, Health
Outcomes Management and Keane. All of these firms are considerably larger than
the Company in terms of sales, employment and financial resources and have been
established for a longer period than the Company.
FOCUS -- Software systems competing with Focus include those developed by CyCare
Systems, IDX Systems, Medic Computer Systems, Physicians' Computer Network,
Quality Systems and Reynolds & Reynolds. All of these firms are also
considerably larger than the Company in terms of sales, employment and financial
resources and have been established for a longer period than the Company.
BASIS -- In the rapidly changing health care environment, companies are
competing on the basis of their installed base, the adaptability and "openness"
of their product and on the simplicity of its use, including the effectiveness
of their training and technical support, and their financial resources. Given
elements of product suitability are conformance with HCFA, state and local data
gathering and reporting requirements, affordability and availability.
Sources of Raw Materials
Computer components, including personal computer hardware and operating systems
software, represent a majority of the Company's source materials. Relative to
its anticipated needs, supplies of these components are plentiful and
historically inexpensive. Many established distributors make available the
components included in the Company's bundled computer systems. The Company's
major vendors are Tech Data and IBM for computer system components, installation
and maintenance. Recent working capital shortages have created payment problems
with these vendors, as well as with other, less critical suppliers.
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Major Customers
Although many large nursing home chains exist, most long term care facilities
are owned by organizations comprised of less than 50 facilities. One dominant
chain owns over 700 such homes, and the top five chains operate 7.6% of long
term care facilities nationwide. No one customer is using more than 10% of
Vision system units currently in operation.
HPSI Online will be the corporation responsible for collecting ancillary
revenues that may arise from the Vision project and for disbursing these
revenues to the Consortium members. As such, it could become a major customer of
the Company. The ultimate users of the Vision systems are expected to be less
concentrated. While the Company does not own any share of HPSI Online, by
contract it has the right to choose one-half of the Board of Directors of HPSI
Online and share in its revenues.
Pioneer EyeCare Corporation and its affiliates comprise the great majority of
Focus systems purchases to date in terms of dollars and number of installations.
This concentration arose as a result of initial installations occurring during
June and July of 1997. Further purchases by Pioneer are expected, but the
Company expects to attract other large physician groups as resources permit.
Trademarks, Licenses and Similar Agreements
The Company has a perpetual, non-exclusive, and nontransferable right and
license (except to grant sublicenses) to the Vision system. The license shall be
exclusive to HPSI's customer class and the Company has no license to the Vision
system with respect to HPSI's customer class.
The Company has an exclusive license to purchase from Visual Information
Services Corp. and to utilize the electronic set top converter box created by
Visual Information Services Corp. which allows a user to interact with
programming transmitted to a television set using the electronic set top
converter box operating system. The use of the licensed product shall be solely
within the health care industry exclusive in North America and non-exclusive for
the rest of the world. The term of the license began on January 1, 1995 and
expires twelve years from that date unless renewed by the parties.
Research and Development
Company expenditures for software and hardware systems development during 1997
and 1996 totaled $775,484 and $1,217,438, respectively.
Effects of Government Regulation
Government regulation has a profound effect on the market segments served by
Vision and Focus. Very often, one-third of health care provider payments are
administered under Medicare or Medicaid entitlement and providers are subject to
a significant amount of regulation and oversight as a result. New regulations
require most long term care facilities to gather and report minimum data set
information electronically and enforcement of these regulations has become
steadily more vigorous. Reductions in projected entitlement program expenditures
are also influencing the manner in which health care providers are organizing
and practicing. Overall, the level and nature of government regulation affecting
the Company's targeted market segments creates a climate for acceptance of
electronic information systems due to an increased need for operational
efficiency and reporting tools that can help the user meet federally mandated
reporting requirements.
Employees and Consultants
The Company employed 43 people at June 30, 1997 of which 4 were located in Grand
Rapids, Michigan, 28 in Draper, Utah, 8 in Wilton, Connecticut and 3 in Ohio.
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Item 2. Description of Property
The Company's corporate headquarters are located in Grand Rapids, Michigan. The
location is used to facilitate the general corporate, administrative, accounting
and legal activities of the Company. The 2,768 sq. ft. facility is leased by the
Company at an annual base rent of $40,407 and the initial lease term expires
March 31, 2000.
The Company's subsidiary, DSI, leases space in Draper, Utah. This location is
used to facilitate software programming, computer integration, customer services
and administrative activities. The 9,180 sq. ft. facility is leased by the
Company at an annual base rent of $105,365 and the initial lease term expires
January 1, 2000.
The Company's subsidiary, The Neptune Group, Inc., occupies a leased premises in
Wilton, Connecticut. This location is used to facilitate the leasing business
and administrative functions of the subsidiary. DSI also occupies space at the
facility, and coordinates its marketing and sales efforts from there. General
leasing and administrative functions are performed there. The 7138 sq. ft.
facility, is leased by the Company at an annual base rent of $101,729 and the
initial lease term expires August 31, 2001.
Facilities rent expense totaled $211,670 for the year ended June 30, 1997. Rents
through the year ended June 30, 1997 for the Michigan location were $38,056, for
the Utah location were $100,971, and for the Connecticut location were $72,643.
Item 3. Legal Proceedings
The Neptune Group, Inc. vs. MKT, Inc. Neptune Technology Leasing Corp., ("New
Neptune") (a Michigan corporation) was formed and became a subsidiary of the
Company in July of 1996 through an asset purchase with The Neptune Group, Inc.
(a Delaware corporation - "Old Neptune"). Intelligent Decision Systems, Inc.
assumed the defense and potential liability from the lawsuit described below
pursuant to the terms of the June 1996 asset purchase agreement with Old
Neptune. The potential liability accrued prior to the Company's purchase of Old
Neptune's assets. Old Neptune is presently involved in litigation with MKT, Inc.
("MKT"), which served as Old Neptune's sales agent between 1989 and 1993 for the
leasing of computer equipment manufactured by Cray Research, Inc. ("Cray"). On
April 8, 1994, Old Neptune filed suit in the United States District Court for
the District of Connecticut, seeking to enforce MKT's contractual obligation to
act solely on Old Neptune's behalf in all Cray related matters. Old Neptune also
sought damages for any breaches and a declaratory judgment stating that it has
fully paid all amounts to which MKT was entitled. The following week, MKT
brought suit in Arizona claiming Old Neptune owed it an additional $744,897 in
commissions, plus interest. Old Neptune moved to dismiss that action in
deference to the Connecticut proceeding. The Arizona court granted Old Neptune's
motion on March 17 1995 and, on June 6, 1996, dismissed the action. The
Connecticut proceeding is currently pending.
On March 29, 1996, Old Neptune amended its Connecticut complaint to include
claims for breach of fiduciary duty, fraud, and unfair trade practices, as well
as for breach of contract based on deposition admissions of Mr. Tress (an
officer of MKT) and other evidence. The amended complaint asserts that MKT
misappropriated to itself certain profitable business with Telenet
Communications Corporation, refused to bring to Old Neptune potential Cray
transactions that would have been profitable to Old Neptune, restructured one
transaction between Cray and Old Neptune solely for its own benefit, contacted
Cray on several occasions voicing dissatisfaction with Old Neptune, and
concealed its breaches and intention not to honor its agreements from Old
Neptune. In addition to a declaratory judgment, the amended complaint seeks
compensatory damages (including lost profits and the commissions it paid to
MKT), punitive damages, and attorney fees.
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On April 10, 1996, MKT served its answer, along with counterclaims for breach of
contract, breach of the implied covenant of good faith and fair dealing, and
unfair trade practices. MKT also named Concord Asset Management, Inc.
("Concord") as a counterclaim defendant on claims of unfair trade practices and
interference with business relationship. MKT asserts that Old Neptune breached
its contract with MKT in meeting with Cray and Concord without Mr. Tress being
present. The counterclaims seek monetary damages (including additional
commissions of $753,419.50), statutory interest, punitive damages, and
attorney's fees.
On May 23, 1997 Old Neptune filed a Motion for Summary Judgment whereby it is
requesting among other things that the Court enter summary judgment dismissing
MKT Inc.'s counterclaims against Old Neptune. The motion has not yet been ruled
upon by the Court.
Without further discovery from MKT and third parties, the Company has no basis
to estimate the possible damages on Old Neptune's claims. The Company also
expresses no opinion on the likely outcome with respect to MKT's counterclaims.
Although management believes the former agent's claim to be without merit,
successful assertion of the claim could have a materially adverse effect on the
financial position, liquidity and operations of the Company.
No other material legal proceedings to which the Company is a party or to which
the property of the Company is subject is pending, and no such material
proceeding is known by management of the Company to be contemplated.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ended June 30,
1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Market Information
The Company's outstanding common shares are quoted (symbol IDSI previously RFGP)
on the OTC (Over-The-Counter) Electronic Bulletin Board operated by the National
Association of Securities Dealers, Inc. The table below sets forth the high and
low bid quotations for the common stock for the last two fiscal years.
High Low
July 1 - Sept. 30, 1995 6.50* 0.00*
Oct. 1 - Dec. 31, 1995 3.00* 0.00*
Jan. 1 - Mar 31, 1996 .50* 0.00*
Apr. 1 - June 30, 1996 3.9375** 2.00**
July 1 - Sept. 30, 1996 3.625** 1.25**
Oct. 1 - Dec. 31, 1996 2.1875** 1.03125**
Jan. 1 - Mar 31, 1997 1.1825** 1.00**
Apr. 1 - June 30, 1997 1.125** .34375**
These prices are based on the Company's research and reflect only inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
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*The above prices represent historical prices for Resource Finance Group, Ltd.
(RFGP) common stock which have been adjusted to reflect the exchange ratio used
in the merger of RFG into IDS whereby each four shares of RFGP common stock
became one share of IDSI common stock.
**The above prices are for IDSI common stock. IDSI common stock began trading on
April 1, 1996.
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Holders
The Company had approximately 1,316 holders of record as of September 22, 1997,
which number does not include shareholders whose shares are held in street or
nominee names.
Dividends
The Company does not expect to pay a cash dividend upon its capital stock in the
foreseeable future. Payment of dividends in the future will depend on the
Company's earnings (if any) and its cash requirements at that time.
Item 6. Management's Discussion and Analysis of Financial Condition or
Plan of Operation.
Upon consummation of the merger of DSI and RFG into IDSI, former DSI
shareholders held approximately 85% of the stock of IDSI. As a result, DSI was
deemed to be the successor for purposes of accounting and financial reporting.
Accordingly, the results of operations for RFG are included for the period
commencing April 1, 1996 only. The results from operations of TNG are included
for the period commencing June 28, 1996. The fiscal year adopted for the
surviving accounting entity continues to end on June 30 of each year.
The Company's core products are Vision (business management system for long term
care facilities), Focus (practice management system for physicians) and related
leasing programs. There are 20,738 such facilities in the United States
according to industry data compilations. Over 40% of these facilities are not
using any form of computerized information processing despite governmental
mandates that now require electronically gathered and reported patient/resident
information.
Vision -- The Vision system for nursing homes was developed pursuant to an
agreement with HPSI. HPSI negotiates supply contracts and provides other
services to approximately 3,000 nursing homes. A subsidiary of HPSI, "HPSI
On-line", is the owner of the Vision system. IDSI receives all of the revenues
derived from the provision of computer hardware, hardware maintenance, software
support and software maintenance. IDSI has the right to designate one-half of
the director positions of the Board of HPSI On-line and to receive 67% of other
revenues that may be generated by HPSI On-line, in particular, possible future
transactions fees for the use of the planned Vision Intranet.
Under the terms of the Agreement, DSI is responsible for the installation of
Vision Systems and for training users of the system. HPSI is responsible for the
marketing and sale of Vision systems pursuant to agreements signed in 1994. HPSI
receives a sales commission for each system installed. HPSI is often involved in
training activities and receives a fee for those activities as well.
A majority of HPSI's members involved in nursing homes are small and mid-sized
nursing home chains (consisting of 10 to 40 nursing homes). The largest nursing
home chain, Beverly Enterprises, which is not currently a member of HPSI,
operates 746 facilities nationally and the top five chains together operate
1,585 homes or about 8% of the total market. The top twenty chains operate 13%
of the total market, however, the most rapidly growing segment of the industry
is comprised of mid-sized nursing home chains with and for whom HPSI is most
active.
Focus -- DSI owns the Focus software product outright and markets the product to
physician groups nationwide through selling activities conducted by its own
direct sales force. Physician groups numbering in the tens of thousands provide
a large target market for the Focus product. Much more competition also exists
in this market as compared to the long term care segment served by Vision. Most
of the competitors of the Company are very large and are well established. Such
companies do not necessarily enjoy an advantage in the area of software
development, but are able to exploit their size advantage in the marketing of
their products, particularly to very small groups of physicians or to one
physician offices.
Accordingly, the Company has targeted larger physician organizations where a
concentrated direct sales effort can offset the marketing presence advantage of
the larger companies. This approach resulted in a relationship with a large and
growing network of ophthalmologists near the end of fiscal 1997.
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In order to pursue the selling strategy, DSI went outside of the Company to
recruit an established marketing and sales professional to lead the effort. In
December 1996, DSI hired Ron L. Greenberg as Vice President of Sales Marketing
for DSI's Medical Sales Division. Mr. Greenberg's primary responsibilities are
to market DSI's Focus system and related transactional services to the medical
community as well as build DSI's sales and sales support infrastructure. Prior
to joining DSI, Mr. Greenberg was the Director of Marketing for Procedural Based
Systems for Allergan, Inc., a major pharmaceutical and medical products
manufacturer with revenues over $1 billion. His previous position was the
Director of Sales Planning and Operations. During his ten years with Allergan,
Mr. Greenberg was directly involved with sales to the physician community on a
regional and national level.
Vision and Focus system users generally sign a 48 or 60 month lease for use of
the system, thereby allowing them to conserve their cash and to match their
expenditures with their monthly receipts. The leases that were provided to users
with acceptable credit ratings were written by Neptune. This type of financing
arrangement is a key part of the marketability of the Vision and Focus system
packages. In most cases, Neptune sells the lease payment streams to third
parties.
To enhance its existing offerings, DSI entered into the following agreements:
In April of 1997 DSI reached an agreement with BancPro, Inc. (through its wholly
owned subsidiary, MediPro, Inc.) to provide health care receivable financing to
users of Vision and Focus computing systems. MediPro will provide the funds for
healthcare receivable financing and DSI will facilitate the flow of electronic
funds and the related management information through its Virtual Service
Organization software and network.
In April of 1997 DSI signed a letter of intent with Pioneer EyeCare, Inc.
("Pioneer"). Pioneer is a Physician Practice Management Corporation that intends
to acquire, as well as offer management services to, its association of over 200
independent eye care providers. The arrangement, when completed, will allow
Pioneer to implement their electronic information strategy across its entire
network utilizing DSI's Focus system and technology.
On May 13, 1997 DSI reached an agreement with Sound Solutions, Inc. ("SSI"). DSI
was given exclusive rights to market and sell SSI's Eye Care Information Center
which is an informational touch screen computer program for use by customers in
eye care practices. DSI must sell 50 units by September 30, 1997 or they could
incur a liability of up to $250,000 less credits for units sold.
HPSI Letter of Intent
Subsequent to June 30, 1997, the Company announced the signing of a letter of
intent to merge with National Purchasing Corporation (d/b/a/ "HPSI") of Irvine,
California.
HPSI is currently operating as a group purchasing organization servicing over
6,000 locations of which the majority are primarily involved in health care,
including long term health care, medical and hospitality facilities. The value
of goods and services purchased through HPSI approximates $1 billion per year.
Over 20,000 long term care facilities alone provide a large target for growth in
HPSI's membership and the value of purchases it facilitates.
Management is pursuing the contemplated merger so that DSI could integrate its
sales channels for improved coordination of its marketing and selling efforts,
so that the Company could access management experienced in the marketing of
products and services to the various health care segments and to promote a more
stable financial position.
Under the terms of the letter of intent, the management of HPSI would succeed
that of IDS upon the successful consummation of the contemplated merger.
IDSI intends to finance the merger via a common stock offering and/or the
issuance of convertible preferred stock to institutional investors. The size of
the offering will be determined after negotiations are concluded.
10
<PAGE>
Results of Operations
An historical summary of sales and gross profit:
<TABLE>
<CAPTION>
All amounts in thousands
1Q 96 2Q 96 3Q 96 4Q 96 1Q 97 2Q 97 3Q 97 4Q 97 1996 1997
----- ----- ----- ----- ----- ----- ----- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales
Vision $ 0 $ 47 $ 154 $ 251 $ 39 $ 303 $ 92 $ 186 $ 452 $ 620
Focus 0 0 0 0 0 29 0 649 0 678
Other DSI 28 90 35 31 28 36 55 144 184 263
Leasing n/a n/a n/a n/a 148 43 45 123 n/a 359
---- --- --- --- --- --- --- ----- --- -----
Total Sales $ 28 $ 137 $ 189 $ 282 $ 215 $ 411 $ 192 $1,102 $ 636 $1,920
==== === === === === === === ===== === =====
Gross Profit
Vision $ 0 $ 23 $ 48 $ 69 $ 12 $ 166 $ 63 $ 71 $ 140 $ 312
Focus 0 0 0 0 0 21 0 476 0 497
Other DSI 28 (10) 10 11 15 7 24 43 39 89
Leasing n/a n/a n/a (324) 11 (80) (68) 6 (324) (131)
---- --- --- --- --- --- --- ----- --- -----
Direct GP $ 28 $ 13 $ 58 $(244) $ 38 $ 114 $ 19 $ 596 $(145) $ 767
Less Customer
Service Costs 62 164 69 103 169 149 160 202 398 680
---- --- --- --- --- --- --- ----- --- -----
Gross Profit $ (34) $(177) $(127) $(347) $(131) $ (35) $(141) $ 394 $(543) $ 87
==== === === === === === === ===== === =====
</TABLE>
Gross profit margins for the years ended June 30,:
1997 1996
--------- ---------
Vision 50 % 31 %
Focus 73 n/a
Other DSI 34 21
Leasing (36) n/a
Aggregate direct GP 40 % (23)%
Vision and Focus utilize many common customer service resources. The Company has
staffed that department in anticipation of a steeper growth curve than has been
realized by DSI.
Gross margins after proration of customer service resource costs (GMACSC):
1997 1996
--------- ---------
Vision (25)% (34)%
Focus 42 n/a
Aggregate 5 % (85)%
Unit information:
Beginning Vision installations 14 0
Installations for the year 19 14
---- ----
Vision installations at end of year 37 14
==== ====
Vision backlog at end of year 1 9
==== ====
Beginning Focus (DSI/Med) installations 5 5
Installations for the year 12 0
---- ----
Focus installations at end of year 17 5
==== ====
Focus backlog at end of year 0 0
==== ====
11
<PAGE>
Sales of Vision systems have fluctuated over the most recent eight quarters.
These variations have adversely impacted business sizing decisions during those
periods. As a result, the optimal level of customer service expenditures had not
been reached by June 30, 1997. Comparison of GMACSC percentages for Vision and
Focus indicate that management's ability to forecast future sales for the Vision
product is limited.
In response to the difficulties, the Company made an investment in the
enhancement of its Focus product and in its own direct sales force for that
product. Initial sales of Focus, particularly in the 4th quarter of 1997, were
significant to total revenues for any previous period in the history of the
Company. Margins were much higher for Focus than for Vision, both before and
after allocation of customer service costs.
Management plans to offer a scaled down version of Vision, which will include
the Minimum Data Set II that is the core of federally mandated electronic
reporting, during the 1998 fiscal year. Management believes that a simpler and
less costly version of Vision will attract more nursing facilities to DSI
products and make it easier for users to start the process of sophisticated
information systems development.
Management expects some shake-out time will be necessary to properly absorb its
new Focus users into planned information system networks, and, therefore expects
no further installations of Focus in the quarter immediately following June 30,
1997. Management expects DSI's installation and set up capabilities to improve,
as a result of experience, such that a smoother, more manageable installation
and sales pattern can be developed.
Total 1997 revenues increased by $1,283,837 or by 202% as compared to 1996. The
increase primarily was due to the introduction of Focus, new leasing revenues
and a 37% increase in Vision sales.
Costs of goods and services increased due to the increase in sales volume and an
increase in customer service costs of $282,950, or 71% over those in 1996. The
increase in customer service costs reflected higher than realized sales
projections for Vision and the introduction of Focus.
Selling expenses increased to $1,350,298 from $468,013 in 1996 due to the
establishment of DSI's direct sales force, including related moving, travel and
personnel costs. Selling expenses also increased due to increase of the
provision for uncollected payments of $158,000.
Administration expenses increased to $1,613,760 from $1,291,698 due to
consulting payments made to the former owners of The Neptune Group, Inc. that
totaled $275,000 for 1997. Subsequent to June 30, 1997, the consultants and the
Company entered into an agreement whereby the consulting agreement, which
expired June 27, 2001 and called for payments aggregating $275,000 per year, was
terminated in consideration for a termination payment of $275,000. That payment
and other amounts owed the consultants were restructured into the form of a
promissory note and security agreement with payments totaling $406,764 over a 42
month period. A security agreement and collateralized promissory note for
$406,764 was executed. The company is also to pay to the former consultants 2%
of the invoice price for all Vision and Focus sales or leases made through a
four year period ending June 30, 2001. The Company has provided for the
foregoing termination as of June 30, 1997.
Research and development expense decreased to $775,484 from $1,217,438 in 1996,
a decrease of 36%. The Company redeployed some employees into customer service
for Vision, which accounted for the increase in customer service costs, and
other reductions were reflective of reduced levels of developmental programming
for the Vision system. Additional development expenses also were incurred to
create Focus from DSI/Med.
Depreciation and amortization expenses increased to $583,069 from $391,031 in
1996 as a full year of amortization of Screenware, the Company's proprietary
program generator, was included versus three months of amortization in 1996.
Interest expense decreased to $25,038 from $247,694 in 1996 as the Company
extinguished $1,490,000 of its private placement debt at June 30, 1996. Interest
expense for 1997 primarily related to capital leases used to finance computers,
equipment and furniture.
12
<PAGE>
Losses from impairment of DSI's investment in RFG, consisting of 1 million
shares, were $375,000 in 1996. The stock of RFG was received in 1994 in exchange
for DSI's proprietary software application generator, "Screenware". The value of
RFG's restricted stock was appraised and recorded at $2.5 million at the time of
the exchange. Subsequently, the market value of RFG's restricted stock,
representing a 50% discount from the low bid quotation of RFG stock on the
Nasdaq Over-The-Counter Electronic Bulletin Board, steadily declined throughout
1995 and 1996.
The net loss for 1997 was $4,032,103 and the net loss for 1996 was $4,488,756.
The cumulative loss from inception was $11,544,584. The net loss per share for
1997 was $0.29 and the net loss per share was $0.53 for 1996. Weighted average
outstanding shares was 14,063,626 for 1997 and was 8,821,991 for 1996.
There was no provision for income taxes in 1997 or in 1996 as losses were
reported. The recoverability of related net operating loss carryovers is
uncertain due to the Company's history of operating losses and no future tax
assets have been recorded.
Liquidity and Capital Resources
The Company experienced operating losses of $4,182,103 during 1997, of which
$807,392 where non-cash charges such as depreciation and amortization. Those
amounts for 1996 were $4,488,756 and $449,781, respectively. Net cash used in
operating activities totaled $3,077,665 for 1997 and $1,933,322 for 1996. The
Company had $3,064,329 in cash and equivalents to start fiscal 1997, and had
$355,009 remaining at the end of the fiscal year, but accounts payable at June
30, 1997 had increased by $417,764 over the balance recorded at June 30, 1996 as
a result of operating losses sustained by the Company and the Company's
diminished cash position. Proceeds from the issuance of common stock were
$739,682 in 1997, primarily from the conversion of Series B warrants that were
granted pursuant to the Company's private placement of debt in 1995. Proceeds
from stock issued during 1996 totaled $4,004,583.
Proceeds from short-term borrowings from related parties decreased to $80,553 in
1997 from $559,658 in 1996. Short-term borrowings from related parties have
increased subsequent to June 30, 1997 in an effort to alleviate some of the
financial pressure on the Company. Such borrowing exceeded $100,000 at September
20, 1997.
The Company is experiencing critical shortages of working capital. Significant
operating losses have continued subsequent to June 30, 1997, and management's
projections indicate that operating losses will continue through December, 1997.
Furthermore, those projections also indicate that approximately $500,000 of
additional capital must be raised even if projected sales and cash receipts are
achieved. The Company has experienced critical working capital deficiencies
since June 30, 1997 and has experienced computer equipment supply difficulties
as a direct result of those deficiencies. Management's projection of operating
results and cash flows for the year ending June 30, 1998 indicates that,
exclusive of an infusion of additional capital, there remains a projected cash
shortfall of approximately $500,000. Therefore, substantial doubt exists
regarding the Company's ability to continue as a going concern.
The Company negotiated a termination of consulting agreement subsequent to June
30, 1997. The terminated agreement required the Company to pay monthly
consulting fees aggregating $275,000 per year for 1997 and the following four
years. To terminate the agreement, the Company restructured its required
termination payment of $275,000 and other amounts then owed to Visys into the
form of a promissory note and security agreement with payments totaling $406,764
over a 42 month period. A security agreement and collateralized promissory note
for $406,764 was executed. The company is also to pay to Visys 2% of the invoice
price for all Vision and Focus sales or leases made through a four year period
ending June 30, 2001. The Company can defer payments on the promissory note
until January, 1998, but such deferrals require the payment of additional
consideration in the form of cash or stock. Assuming the Company defers payments
until January, 1998, $88,788 will become due then, and payments of $9,326 will
be due each month thereafter until December, 2000. The Company has provided for
the foregoing termination as of June 30, 1997.
The Company has a supply agreement that calls for minimum software purchases
from the supplier of $250,000 by September 30, 1997. The Company had purchased
$10,000 of this software as of September 20, 1997. The Company will most likely
default on the remaining commitment unless it is able to negotiate a change in
the terms of the original agreement. Certain disputes regarding other provisions
of the agreement exist between the supplier and the Company.
13
<PAGE>
In June 1996, the Company agreed to assume the defense of a lawsuit with a
former sales agent of The Neptune Group, Inc. and has also acquired the rights
to a counter suit against the same agent. The Neptune Group is seeking damages
against the former sales agent for breach of contract and breach of fiduciary
duty. The former sales agent is seeking commissions of $753,420 plus statutory
interest, punitive damages and attorney's fees. Old Neptune filed a Motion for
Summary Judgment whereby it is requesting among other things that the Court
enter summary judgment dismissing MKT Inc.'s counterclaims against Old Neptune.
The motion has not yet been ruled upon by the Court. Although management
believes the former agent's claim to be without merit, successful assertion of
the claim could have a materially adverse effect on the financial position,
liquidity and operations of the Company.
Security agreements with a related party and with the former consultants, along
with the poor financial condition of the Company, limit the ability of the
Company to seek debt financing. The low market price of the Company's stock also
limits the Company's ability to obtain adequate proceeds from issuances of its
stock
As a consequence of the foregoing, management can provide no assurances
regarding continued viability of the Company.
Management's Plan for Viability
Sales of Vision and Focus systems, along with revenues received by Neptune for
its related and unrelated leasing activities are projected to continue to
increase after January 1, 1998. Management expects sales for the quarter ending
September 30, 1997 to be very low in comparison to recent quarters. As a result,
operational losses expected for that period have created the need for additional
capital totaling $500,000 as indicated by management cash flow projections.
Management is currently negotiating with several parties who have expressed an
interest in entering a line of credit arrangement with the Company. Those
involved in these negotiations have provided such financing arrangements to the
Company within the previous two years. These parties are also beneficial owners
of significant amounts of the Company's common shares.
The Company's viability depends on successful achievement of management's
operating and cash flow projection for the twelve months ending June 30, 1998,
the arrangement of financing to cover the expected shortfall in working capital
and any shortfalls from management's projections, the successful renegotiation
of a supply contract and the successful assertion of its claims against MKT and
successful defense against MKT's counterclaims.
Item 7. Financial Statements.
The financial statements listed in the index found in Item 13(c) are included in
this Report, beginning on Page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Wilber & Townshend, P.C. were previously the principal accountants for
Intelligent Decision Systems, Inc. On December 30, 1996, the Board of Directors
dismissed the firm of Wilber & Townshend, P.C. and approved the engagement of
the firm of Coopers & Lybrand as principal auditor for Intelligent Decision
Systems, Inc.
In connection with the audits of the two fiscal years ended June 30, 1995 and
1996, and the subsequent interim period through December 30, 1996, there were no
disagreements with Wilber & Townshend, P.C. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement, and said firm has not advised the registrant of any
reportable events.
The accountants' report of Wilber & Townshend, P.C. on the consolidated
financial statements of Intelligent Decision Systems, Inc. (successor by merger
with Resource Finance Group, Ltd.) and subsidiaries as of and for the year ended
June 30, 1996 and of Resource Finance Group, Ltd. and subsidiaries for the year
ended June 30, 1995 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
14
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The present directors and executive officers of the Company, their ages,
positions held in the Company and duration as such, are listed below. IDSI's
Board of Directors is presently comprised of five members, five of the seven
seats are filled. IDSI's Certificate of Incorporation provides that, as such
time as the Board of Directors is comprised of three or more members, the Board
of Directors will be divided into three classes of directors, each serving
staggered three-year terms. As a result, approximately one-third of the
directors will be elected at each annual meeting of stockholders or until their
respective successors have been elected and duly qualified, and at least two
annual meetings of stockholders may be required for the stockholders to change a
majority of the directors, regardless of whether a change in the Board of
Directors would be beneficial to IDSI and its stockholders or a majority of
IDSI's stockholders believes that such a change would be desirable.
Officers hold office at the pleasure of the Board Of Directors, absent any
employment agreement, of which three currently exist. There is no arrangement
between any such person or the Company and any third person pursuant to which
such third person was or is to be selected as a director or officer of the
Company. There are no family relationships between any director or executive
officer.
The following individuals are the current directors and executive officers of
the Company:
Name Age Position In Office Since
Mark A. Babin 43 President and Chief 1/12/95 to 8/22/97
Executive Officer;
Chief Financial 1/12/95 to present
Officer and Director
Raymond F. Blue 67 Director 4/01/96 to present
David A. Horowitz 54 President and Chief 8/22/97 to present
Executive Officer;
Chairman of the 4/01/96 to present
Board and Director
Robert B. Hyte 52 Director 4/01/96 to present
James M. Keller, Jr. 38 Secretary, Treasurer 4/15/93 to present
and Director
The following is a brief account of the business experience during at least the
past five years of each director and executive officer named above, indicating
the principal occupation and employment during that period, and the name and
principal business of the organization in which such occupation and employment
were carried out. Of such persons, only Mark A. Babin, David A. Horowitz and
Robert B. Hyte devote full time to the Company's business. James M. Keller and
Raymond F. Blue devote only such time to the Company's business as is asked of
them from time to time.
Mark A. Babin served as President and CEO of the Company from April 1, 1996 to
August 22, 1997. Mr. Babin has served as Chief Financial Officer and Director of
the Company since April 1, 1997. Mr. Babin served as a director of RFG from
January 12, 1995 to March 31, 1996. Mr. Babin served as President, Chief
Executive Officer, Chief Financial Officer and Director of RFG from January 15,
1995 to March 31, 1996, Mr. Babin served as a consultant to assist RFG's Chief
Financial Officer from June 1994 to January 15, 1995. From 1988 to 1994, Mr.
Babin was President of Babin & Company, P.C., a consulting firm assisting
development stage companies in various industries. From 1983-1988, Mr. Babin
served in a number of top financial positions with Airgas, Inc. an $800 million
NYSE listed manufacturing and distribution company. Mr. Babin is a certified
public accountant and a member of the American Institute of Certified Public
Accountants as well as a member of the Michigan Association of Certified Public
Accountants.
15
<PAGE>
David A. Horowitz has served as President and CEO of the Company since August
22, 1997. Mr. Horowitz has served as the Company's Chairman of the Board since
April 1, 1996. Mr. Horowitz has served as President, Chief Executive Officer,
Treasurer and a Director of DSI since April 1, 1996. Mr. Horowitz served as
President, Chief Executive Officer, Treasurer and a Director of Old DSI from
January 1993 to March 31, 1996. From 1989 until 1990, Mr. Horowitz served as
founder and president of International Diagnostic Technologies, a development
stage company involved with immunodiagnostic and toxicology tests. In December
1990, IDT merged with and into Eubix Technologies, Inc. ("Eubix"). Mr. Horowitz
served as President, CEO and a Director of Eubix until June 1992. Mr. Horowitz
was a founder and, from 1987 to 1989, served as President and CEO of Calypte
Biomedical Company in Berkeley, California. Calypte is a developer, manufacturer
and marketer of medical urine based immunodiagnostic tests. From 1985 to 1987,
Mr. Horowitz served as Executive Vice President and a Director of ShareData,
Inc. in Chandler, Arizona. ShareData was in the entertainment/business software
business. Mr. Horowitz was the founder and President of the Electric Book
Company of Westport, Connecticut from 1983 to 1985. Mr. Horowitz filed Chapter
11 personal bankruptcy on October 15, 1992.
Robert B. Hyte has served as Director of the Company since April 1, 1996. Mr.
Hyte has served as Executive Vice President, Secretary, Chief Science Officer
and a Director of DSI since April 1, 1996. Mr. Hyte served as Executive Vice
President, Secretary, Chief Science Officer and a Director of Old DSI from
January 1993 to March 31, 1996. Mr. Hyte is the author of Screenware, a 5th
generation computer programming language used to simplify the development of
computer programs written for the Pick operating system. From 1990 to 1992, Mr.
Hyte was Vice President, Product Development for Partner Systems, Inc., a
computer software company located in Provo, Utah. From 1988 to 1990, Mr. Hyte
served as Pick product manager for Rexon Business Machines, a computer hardware
and software company located in Los Angeles, California. From 1986 to 1988, Mr.
Hyte served as President of Integrated Medical Systems, a company located in
Washington, D.C. which produced health care software. From 1980 to 1986, Mr.
Hyte served as Vice President and General Manager of the Health Care Systems
division of Management Systems Corp., a time sharing company in Salt Lake City,
Utah.
James M. Keller, Jr., has served as Secretary, Treasurer and Director of the
Company since April 1, 1996. Mr. Keller served as Secretary, Treasurer and
Director of RFG from April 15, 1993 to March 31, 1996. Mr. Keller has an
undergraduate degree from the University of Michigan and a law degree from Wayne
State University. He is a partner in the law firm of DeGroot, Keller & Vincent,
Grand Rapids, Michigan, with which he became associated in 1986.
Raymond F. Blue has served as Director of the Company since April 1, 1997. Mr.
Blue served as Director of Old DSI from April 1993 to March 31, 1996. From 1990
until 1993 Mr. Blue was American Airlines' supervisor in charge of aircraft
maintenance, maintenance training, and personnel scheduling.
R. Wayne Fritzsche was appointed to the Board of Directors on December 11, 1996
and effective June 5, 1997, R. Wayne Fritzsche resigned from the Board of
Directors for personal reasons.
On August 22, 1997 Mark A. Babin resigned as Chief Executive Officer and
President of the Company and David A. Horowitz was appointed as President and
Chief Executive Officer. Mark A. Babin retained his position as Chief Financial
Officer.
Section 16(a) Beneficial Ownership Reporting Compliance. Disclosure of
Delinquent Filers in response to Item 405 of Regulation S-B.
None
16
<PAGE>
Item 10. Executive Compensation
Set forth below is information as to the salary paid to the named executive
officer's for each of the registrant's last three completed fiscal years.
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
-------------------------------------------------------------------
Other All
Name Annual Restricted Securities Other
and Compen- Stock underlying LTIP Compen-
Principal Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- ----------------- --------- -------- -------- -------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark A. Babin 7/1/96 to $110,000 --- --- --- --- --- ---
(President & CEO) 6/30/97
Mark A. Babin 7/1/95 to $110,000 $5,000(1) --- --- --- --- ---
(President & CEO) 6/30/96
Mark A. Babin 1/15/95 to $ 48,000 --- --- --- --- --- ---
(President & CEO) 6/30/95
Joseph J. Walsh 7/1/94 to $ 46,300 --- --- --- --- --- ---
(President & CEO) 1/11/95
David A. Horowitz 7/1/96 to $110,000 --- --- --- --- --- ---
(President & CEO 6/30/97
of IDS's sub -DSI)
Robert B. Hyte 7/1/96 to $110,000 $50,000(2) --- --- --- --- ---
(Executive Vice 6/30/97
of IDS's sub -DSI)
</TABLE>
- --------------------------
(1) Mr. Babin's bonus compensation was valued from a non-cash award of
5,000 shares of RFG common stock valued at $1.00 per share from RFG's Employee
Stock Compensation Plan. The share amount and price represent historical prices
for Resource Finance Group, Ltd. common stock which have been adjusted to
reflect the exchange ratio used in the merger of RFG into IDS whereby each four
shares of RFGP common stock became one share of IDSI common stock.
(2) Mr. Hyte's cash bonus compensation was a one-time performance based
compensation award.
- --------------------------
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
- -----------------------------------------------------------------------------------
% of Total
Options/SARs Market
Options/ Granted to Exercise Price on
SAR/s Employees in or Base Date of Expiration
Name Granted(#) Fiscal Year Price($/Sh) Grant($/Sh Date
- ------------------ ----------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Mark A. Babin -0- N/A N/A N/A N/A
David A. Horowitz -0- N/A N/A N/A N/A
Robert B. Hyte -0- N/A N/A N/A N/A
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
- ----------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at 6/30/97(#) at 6/30/97($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized($) Unexercisable Unexercisable
- ----------------- --------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Mark A. Babin -0- N/A 550,000/0 $0/$0 (2)
David A. Horowitz 112,500 $70,312.50 750,000/0 $0/$0 (2)
Robert B. Hyte 128,000 $80,000 750,000/0 $0/$0 (2)
</TABLE>
- --------------
(1) Value of the option shares is based on the mean between the high ask and the
low bid prices supplied by the National Quotations Bureau in the Nasdaq System
and reported by the NASD as of the exercise date - December 30, 1996 ($1.125
minus the exercise price of $.50) The value realized was determined without
consideration of taxes payable as a result of exercise.
(2) Value is based on the mean between the high ask and the low bid prices
supplied by the National Quotations Bureau in the Nasdaq System and reported by
the NASD as of June 30, 1997 (the last trading date during fiscal 1997 -
$.78124) minus the exercise price of $1.00.
- ---------------
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------
Estimated Future Payouts
Under Non-Stock Price-Based Plans
------------------------------------
Performance or
Other Period
Number of Until
Shares, Units or Maturation Threshold Target Maximum
Name Other Rights(#) or Payout ($ or #) ($ or #) ($ or #)
- ---------------- ---------------- ------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Mark A. Babin -0- N/A N/A N/A N/A
David A. Horowitz -0- N/A N/A N/A N/A
Robert B. Hyte -0- N/A N/A N/A N/A
</TABLE>
Directors of the Company do not receive compensation for their services as
directors.
The Company has an employment agreement with Mr. Babin pursuant to which he is
to be employed until July 1, 2000. The agreement provides Mr. Babin with an
annual salary of $110,000 with annual increases of at least $20,000, a company
car, and discretionary bonuses. The employment agreement requires payments to
the executive in the event of employment termination, resignation or death which
could exceed $100,000.
The Company has an employment agreement with Mr. Horowitz pursuant to which he
is to be employed as DSI's President, CEO and Treasurer until January 1, 2000.
The agreement provides Mr. Horowitz with an annual salary of $110,000 with
annual increases of at least $20,000, a company car and discretionary bonuses.
The employment agreement requires payments to the executive in the event of
employment termination, resignation or death which could exceed $100,000.
18
<PAGE>
The Company has an employment agreement with Mr. Hyte pursuant to which he is to
be employed as DSI's Executive Vice President, Chief Science Officer and
Secretary until January 1, 2000. The agreement provides Mr. Hyte with an annual
salary of $110,000 with annual increases of at least $20,000, a company car,
incentive compensation and discretionary bonuses. The employment agreement
requires payments to the executive in the event of employment termination,
resignation or death which could exceed $100,000.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a)(b) Security Ownership. The following table sets forth as of September
22, 1997, the names of persons who own of record, or were known by the Company
to own beneficially, more than five percent of its total issued and outstanding
common stock and the beneficial ownership of all such stock as of that date by
officers and directors of the Company and all such officers and directors as a
group. Except as otherwise noted, each person listed below is the sole
beneficial owner of the shares and has sole investment and voting power of such
shares. No person listed below has any option, warrant or other right to acquire
additional securities of the company, except as may be otherwise noted.
Name and Address Amount & Nature of Percent
of Beneficial Owner(1) Beneficial Owner(2) of Class(3)
Title of Class
Common Stock Mark A. Babin* 571,250(4) 3.7%
Common Stock David A. Horowitz* 879,167(5) 5.7%
Common Stock Robert B. Hyte* 1,050,300(6) 6.8%
Common Stock James M. Keller* 582,500(7) 3.8%
Common Stock Raymond J. Blue* 25,000 0.2%
Common Stock Mid America Venture 1,763,107(8) 11.3%
Capital Fund, Inc.
716 Norwest Midland Bldg.
Minneapolis, MN 55401
Common Stock Charles J. Newman 1,973,817(9) 12.7%
716 Norwest Midland Bldg.
Minneapolis, MN 55401
Common Stock National Purchasing Corp. 900,000(10) 5.8%
1360 Reynolds Ave.,Ste. 101
Irvine CA 92714
Common Stock The Neptune Group, Inc. 750,000 5.1%
(Old Neptune)
1266 Main Street
Stamford, CT 06902
Common Stock AMC Consumer Services, LLC 950,000(11) 6.2%
63 Wall Street, Ste. 2502
New York, NY 10005
Common Stock *All directors and/or 3,083,217(12) 17.8%
officers as group
(5 persons)
- -----------------------------------
(1) Unless otherwise indicated, the address is c/o IDS, 2025 East Beltline
Ave., SE, Suite 400, Grand Rapids, MI 49546.
(2) Includes shares subject to stock options or warrants to purchase IDSI
common stock.
(3) Based on 14,748,196 shares of IDSI common stock.
(4) Includes stock options to purchase 550,000 shares of IDSI common stock.
(5) Includes stock options to purchase 750,000 shares of IDSI common stock.
19
<PAGE>
(6) Includes stock options to purchase 750,000 shares of IDSI common stock.
(7) Includes stock options to purchase 500,000 shares of IDSI common stock.
(8) Includes stock options to purchase 100,000 shares of IDSI common stock,
warrants to purchase 500,000 shares of IDSI common stock and warrants
to purchase 187,500 shares of IDSI common stock
(9) Includes 975,607 shares which are owned by Mid America Venture Capital
Fund, Inc. and 100,000 shares are owned by National Acceptance Corp, (both
are companies in which Mr. Newman is a controlling shareholder -Mr. Newman
disclaims beneficial ownership of said shares), also includes stock
options owned by Mid America Venture Capital Fund, Inc. to purchase
100,000 shares of IDSI Common Stock warrants owned by Mid America
Venture Capital Fund, Inc. to purchase 500,000 shares of IDSI common stock
and warrants owned by Mid America Venture Capital Fund, Inc. to purchase
187,500 shares of IDSI common stock (Mr. Newman disclaims beneficial
ownership of such options and warrants).
(10) Includes stock options to purchase 150,000 shares of IDSI common stock and
stock options to purchase 600,000 shares of IDSI common stock.
(11) Includes a warrant to purchase 600,000 shares of IDSI common stock.
(12) Includes stock options to purchase up to 2,550,000 shares of IDSI common
stock.
- -----------------------------------
Item 12. Certain Relationships and Related Transactions.
On July 22, 1996 the Company awarded a cash bonus of $50,000 to Robert Hyte.
On November 14, 1996, the Company advanced $30,000 to Mid America Venture
Capital Fund, Inc., an affiliate by reason of beneficial stock ownership. The
advance was made to cover possible future expenses relating to consulting
services.
On December 30, 1996, David Horowitz, Chairman and Director of the Company and
also Chief Executive Officer of DSI, exchanged approximately 8 months of his
employment contract with DSI for cash of $56,250 which was returned to the
Company when Mr. Horowitz exercised options for 112,500 shares at $.50 per share
on December 30, 1996. On December 30, 1996, Robert Hyte, a Director of the
Company and also Chairman and Chief Operating Officer of DSI, exchanged
approximately 9 months of his employment contract with DSI for cash of $64,000
which was returned to the Company when Mr. Hyte exercised options for 128,000
shares at $.50 per share on December 30, 1996. The Company retained the related
stock certificates issued from the exercise of the options as security for the
future performance of the contracted services.
On December 31, 1997 the Company granted a Warrant to Mid America Venture
Capital Fund, Inc. to purchase 187,500 shares at $1.125 per share.
On March 1, 1997 the Company authorized the exchange of cash collateral for the
David Horowitz and Robert Hyte stock certificates held as security. On April 1,
1997, Robert Hyte provided $50,000 as cash collateral to the Company, and, in
exchange, the Company released 100,000 of the 128,000 shares which were
previously held as collateral for the performance of duties which were
previously under contract.
On more than one occasion, Mid America loaned money to Company in exchange for a
series of notes totaling $30,553. The notes payable are collateralized by all
assets of the Company, are payable upon demand and bear interest at the rate of
9% per annum.
From a period between May 5, 1996 and June 17, 1997, the Company borrowed money
from Mid America Venture Capital Fund Inc. in the amount of $30,252 at nine
percent interest per annum. The Company has signed promissory notes evidencing
such debt.
There were no other transactions, or series of transactions, for the fiscal year
ended June 30, 1996, nor are there any currently proposed transactions, or
series of transactions, to which the Company is a party, in which the amount
exceeds $60,000.00, and in which to the knowledge of the Company any director,
executive officer, nominee, five percent or greater shareholder, or any member
of the immediate family of any of the foregoing persons, have or will have any
direct or indirect material interest.
20
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits: The following exhibits marked with an asterisk (*) are filed with
this report. Other exhibits have previously been filed with the Securities and
Exchange Commission and are incorporated by reference to another report,
registration statement or form. As to any shareholder of record requesting a
copy of this report, the company will furnish any exhibit indicated in the list
below as filed with report upon payment to the Company of its expenses in
furnishing the information.
2.0 Plan of Acquisition/Merger
2.1 Agreement and Plan of Merger, dated as of April 15, 1995, by and between
Intelligent Decision Systems, Inc. and Resource Finance Group, Ltd. A copy
was filed with the SEC on June 2, 1995 as an exhibit to the Company's Form
S-4 Registration Statement.
2.2 Amended and Restated Agreement and Plan of Merger, dated as of July 14,
1995, by and among Digital Sciences, Inc., Resource Finance Group, Ltd. and
DSI Acquisition Corp. A copy was filed with the SEC on August 14, 1995 as
an exhibit to the Company's amendment no. 1 to the Form S-4 Registration
Statement.
3.0 Articles and Bylaws
3.1 Articles of Incorporation of RFG [1]
3.2 Bylaws of the RFG [1]
3.3 Articles of Incorporation of IDSI [2]
3.4 Bylaws of the IDSI [2]
4.0 Instruments Establishing Rights of Security Holders
4.1 Warrant Agreement between RFG and Corporate Stock Transfer, Inc.
(includes specimen of warrant) [1]
4.2 Specimen common stock certificates of RFG [1]
4.3 Specimen common stock certificates of the Company [2]
10.1 1993 Employee Stock Compensation Plan
10.2 1993 Incentive Stock Option Plan
10.3 1993 Non-Statutory Stock Option Plan
10.4 Agreement between RFG and Crutchfield Corporation dated July 1, 1993
10.5 Trade agreement between RFG and George Enrique Rossi dated July 1, 1993
10.6 Digital Sciences, Inc. contracts
10.7 National Purchasing Corporation contract
10.8 Mark Babin consulting contract
10.9 River Capital, Inc. agreement with commitment letter
10.10 Amended and Restated Joint Operating Agreement. A copy was filed with the
SEC on August 14, 1995 as an exhibit to the Company's amendment no. 1 to
the Form S-4 Registration Statement
10.11 DSI Stock Option Plan for Employees (assumed by IDSI pursuant to the terms
of the Agreement and Plan of Merger dated July 14, 1995) [2]
10.11 Agreement of Sale dated June 27, 1996 between the Company and The Neptune
Group, Inc. A copy was filed with the SEC on July 11, 1996 as an exhibit
to the Company's Form 8-K
21
<PAGE>
10.12 Employment Agreement with Mark A. Babin
10.13 Employment Agreement with David A. Horowitz
10.14 Employment Agreement with Robert B. Hyte
10.15 Employment Agreement with Eugene J. Feher
10.16 Employment Agreement with Jonathan Preiser
10.17 Employment Agreement with Scott J. Preiser
10.18 Fritzsche, Kamin, Lane Consulting Agreement
10.19 Sound Solutions, Inc. Distribution Agreement*
10.20 West America Capital Markets Group, Inc. Services Agreement*
10.21 DVI Financial Services, Inc. Agreement*
16.01 Letter re: Change of Certifying Accountant [3]
21.0 Subsidiaries of the Company*
23.0 Consent of Experts and Counsel
23.01 Consent of Wilber & Townshend P.C.
23.02 Consent of Coopers & Lybrand, LLP
27.0 Financial Data Schedule*
- -------------------------------
[1] Incorporated by reference to Registration Statement on Form S-1 of
Resource Finance Group, Ltd., file no. 33-42904.
[2] Filed as an Exhibit to the Company's Registration Statement on Form S-4,
File No. 33-93058, which was declared effective by the Securities and
Exchange Commission on February 9, 1996 and incorporated herein by
reference.
[3] Filed as an Exhibit to the Company's report on Form 8-K filed with the
Commission on January 3, 1996 reporting a change in the Company's
principal auditors from the firm of Wilber & Townshend, P.C. to the firm
of Coopers & Lybrand and incorporated herein by reference.
- -------------------------------
(b) Reports on Form 8-K filed during the quarter ended June 30, 1997.
None
(c) Financial Statements Index:
INDEPENDENT AUDITORS REPORTS (COOPERS & LYBRAND, LLP)......F-1
INDEPENDENT AUDITORS REPORTS (WILBER & TOWNSHEND, PC)......F-2
CONSOLIDATED BALANCE SHEETS................................F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY............F-5
CONSOLIDATED STATEMENTS OF OPERATIONS......................F-10
CONSOLIDATED STATEMENTS OF CASH FLOWS......................F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................F-13
d) Financial Statement Schedules: See exhibit 27.
22
<PAGE>
SIGNATURES
In accordance with section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this Report on Form 10-KSB to be signed on its
behalf by the undersigned, thereto duly authorized individual.
Date: September 29, 1997 INTELLIGENT DECISION SYSTEMS, INC.
By: /s/ David A. Horowitz
____________________________________
David A. Horowitz, President
In accordance with the Securities Exchange Act of 1934, this Form 10-KSB
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name
Date
Title
/s/ David A. Horowitz
___________________________________
David A. Horowitz
September 29, 1997
President, Chief Executive Officer,
Director
/s/ Mark A. Babin
___________________________________
Mark A. Babin
September 29, 1997
Chief Financial Officer, Director
/s/ James M. Keller, Jr.
___________________________________
James M. Keller, Jr.
September 29, 1997
Secretary, Treasurer, Director
/s/ Robert B. Hyte
___________________________________
Robert B. Hyte
September 29, 1997
Director
/s/ Raymond F. Blue
___________________________________
Raymond F. Blue
September 26, 1997
Director
23
<PAGE>
Board of Directors
Intelligent Decision Systems, Inc.
Grand Rapids, Michigan
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of Intelligent
Decision Systems, Inc. (a Development Stage Company) as of June 30, 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Intelligent Decision Systems, Inc., (a Development Stage Company) as of June 30,
1997 and the consolidated results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Intelligent Decision Systems, Inc. and Subsidiaries (A Development Stage
Company) will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, Intelligent Decision Systems, Inc. and
Subsidiaries has suffered recurring losses from operations; the losses from
operations together with other factors raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/Coopers & Lybrand LLP
Grand Rapids, Michigan
August 27, 1997
F-1
<PAGE>
Board of Directors
Intelligent Decision Systems, Inc.
Grand Rapids, Michigan
Independent Auditors' Report
We have audited the accompanying balance sheets of Intelligent Decision Systems,
Inc. (a Development Stage Company) as of June 30, 1996 and the related
statements of operations, stockholders' equity and cash flows for the year then
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 audits. The financial statements of Digital Sciences,
Inc. (A Development Stage Company) from inception to December 31, 1993 were
audited by other auditors whose report dated April 26, 1994 expressed an
unqualified opinion on those statements.
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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intelligent Decision Systems,
Inc., (a Development Stage Company) as of June 30, 1996 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/Wilber & Townshend
Jenison, Michigan
September 19, 1996
F-2
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
- --------------------------------------------------------------------------------
ASSETS
1997 1996
---------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 355,009 $ 3,064,329
Accounts Receivable
Trade, net of allowance for doubtful
accounts of $16,598 and $8,000,
respectively 123,795 53,253
Net investment in direct
finance leases, current portion 342,205 143,394
Inventories 53,534 146,940
Contractual rights 420,282 251,250
Prepaid expenses 36,740 16,766
--------- ---------
TOTAL CURRENT ASSETS 1,331,565 3,675,932
PROPERTY AND EQUIPMENT, NET 392,412 399,584
OTHER ASSETS
Contractual rights 24,604 194,445
Net investment in direct finance
leases, net of current portion 199,914 105,590
Intellectual property - net of
amortization 1,369,048 1,726,191
Other - net of amortization 157,033 158,736
--------- ---------
$ 3,474,576 $ 6,260,478
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
----------- ------------
CURRENT LIABILITIES
Bank overdraft $ 0 $ 81,044
Notes payable 0 9,000
Related party notes payable 30,553 0
Accounts payable 890,388 470,946
Accrued expenses 702,702 575,033
Long term obligations, current 121,355 44,534
---------- ----------
TOTAL CURRENT LIABILITIES 1,744,998 1,180,557
LONG-TERM OBLIGATIONS, net of current portion 333,338 136,758
COMMITMENTS AND CONTINGENCIES (Note 18) 0 0
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value;
1,000,000 and 3,000,000 shares
authorized; 0 and 1,631 shares
issued and outstanding;
cumulative, 7% payable annually 0 2
Additional paid-in capital 0 1,500,518
Common stock; $.001 and 30,000,000 and
30,000,000 shares authorized;
14,548,196 and 12,323,332
shares issued and outstanding 14,548 12,323
Additional paid in capital 13,076,276 10,942,801
Deficit accumulated during the
development stage (11,694,584) (7,512,481)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,396,240 4,943,163
---------- ----------
$ 3,474,576 $ 6,260,478
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period January 19, 1993 (Date of Inception) to June 30, 1997
- -------------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock Deficit
Accumulated
Additional Additional Less During the Total
Paid-in Paid-in Unearned Development Stockholders'
Shares Amount Capital Shares Amount Capital Compensation Stage Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Date of inception
January 19, 1993 0 $ 0 $ 0 0 $ 0 $ 0 $ 0 $ 0 $ 0
Shares issued for
for equipment
and services 351,000 702 2,392 3,094
Shares issued for cash 210,600 421 64,579 65,000
Shares issued for
technology 202,800 406 4,594 5,000
Stock option granted 4,648 (4,648) 0
Net loss (468,007) (468,007)
------- ----- ------ - - - ----- ------- -------
Balance, June 30, 1993 764,400 $ 1,529 $ 76,213 0 $ 0 $ 0 $(4,648) $ (468,007) $ (394,913)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period January 19, 1993 (Date of Inception) to June 30, 1997 (continued)
- -------------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock Deficit
Accumulated
Additional Additional Less During the Total
Paid-in Paid-in Unearned Development Stockholders'
Shares Amount Capital Shares Amount Capital Compensation Stage Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 764,400 $ 1,529 $ 76,213 0 $ 0 $ 0 $(4,648) $ (468,007) $ (394,913)
Shares issued for
for equipment
and services 291,942 584 145,387 145,971
Shares issued for cash 50,000 100 24,900 25,000
Capital contribution
of equipment and
services 35,000 35,000
Public offering 400,000 800 173,200 174,000
Stock option grant 24,050 24,050
Cancellation of
stock option ( 4,648) 4,648 0
Shares issued for cash 190,977 382 79,618 80,000
Shares issued for
licensing agreement 290,000 580 489,520 490,100
Net income 1,708,968 1,708,968
--------- ----- --------- - - - ----- --------- ---------
Balance, June 30, 1994 1,987,319 $ 3,975 $1,043,240 0 $ 0 $ 0 $ 0 $ 1,240,961 $2,288,176
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period January 19, 1993 (Date of Inception) to June 30, 1997 (continued)
- -------------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock Deficit
Accumulated
Additional Additional Less During the Total
Paid-in Paid-in Unearned Development Stockholders'
Shares Amount Capital Shares Amount Capital Compensation Stage Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 1,987,319 $ 3,975 $1,043,240 0 $ 0 $ 0 $ 0 $ 1,240,961 $2,288,176
Shares issued for cash 879,166 1,758 407,092 408,850
Shares issued for
services 723,371 1,447 360,241 361,688
Shares issued for
retirement of debt 124,250 249 41,726 41,975
Shares issued for cash 714,285 1,429 248,571 250,000
Shares issued for
services 148,500 297 73,953 74,250
Shares issued for cash 1,228,572 2,457 427,543 430,000
Shares issued for
contractual rights 250,000 500 124,500 125,000
Shares issued for
retirement of debt 59,173 117 212,883 213,000
Shares issued for cash 1,050,000 2,100 522,900 525,000
Shares issued for
services 150,000 300 74,700 75,000
Net loss (4,255,386) (4,255,386)
--------- ------ --------- - - - - --------- ---------
Balance, June 30, 1995 7,314,636 $14,629 $3,537,349 0 $ 0 $ 0 $ 0 $(3,014,425) $ 537,553
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period January 19, 1993 (Date of Inception) to June 30, 1997 (continued)
- -------------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock Deficit
Accumulated
Additional Additional Less During the Total
Paid-in Paid-in Unearned Development Stockholders'
Shares Amount Capital Shares Amount Capital Compensation Stage Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 7,314,636 $ 14,629 $ 3,537,349 0 $ 0 $ 0 $ 0 $(3,014,425) $ 537,553
Shares issued for cash 1,428,572 2,857 997,143 1,000,000
Stock options
exercised 138,760 139 138,621 138,760
Shares issued for
purchase of Resource
Finance Group, Ltd. 1,590,850 1,591 2,266,836 2,268,427
Reclassification
of par value ( 8,744) 8,744 0
Shares issued for
services 220,860 221 542,469 542,690
Shares issued for
retirement of debt 881,654 882 1,442,718 1,443,600
Shares issued for
purchase of net
assets of Neptune
Group, Inc. 750,000 750 1,480,235 1,480,985
Preferred stock issued
for cash 1,631 2 1,500,518 1,500,520
Dissenting shares
cancelled ( 2,000) ( 2) ( 2,860) ( 2,862)
Stock options granted 531,546 531,546
Unrealized loss
on marketable
securities ( 9,300) ( 9,300)
Net loss (4,488,756) (4,488,756)
---------- ------ ---------- ----- - --------- - --------- ---------
Balance, June 30,
1996 12,323,332 12,323 $10,942,801 1,631 $ 2 $ 1,500,518 $ 0 $(7,512,481) $4,943,163
========== ====== ========== ===== = ========= = ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period January 19, 1993 (Date of Inception) to June 30, 1997 (continued)
- -------------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock Deficit
Accumulated
Additional Additional Less During the Total
Paid-in Paid-in Unearned Development Stockholders'
Shares Amount Capital Shares Amount Capital Compensation Stage Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30,
1996 12,323,332 12,323 $10,942,801 1,631 $ 2 $ 1,500,518 $ 0 $ (7,512,481) $4,943,163
Exercise of
warrants and options 843,266 843 738,839 739,682
Conversion of
preferred stock 1,359,633 1,360 1,499,160 (1,631) (2) (1,500,518) 0
Shares issued for
services 54,000 54 57,259 57,313
Cancel shares
issued for services (32,035) (32) (97,406) (97,438)
Stock options
issued for services 77,080 77,080
Stock options
issued for rights 66,847 66,847
Post-closing purchase
price adjustments
- Neptune acquisition (208,304) (208,304)
Net loss (4,182,103) (4,182,103)
---------- ------ ---------- ----- - --------- - ---------- ----------
Balance, June 30,
1997 14,548,196 14,548 $13,076,276 0 $ 0 $ 0 $ 0 $(11,694,584) $ 1,396,240
========== ====== ========== ===== = ========= = ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1997 and 1996
and Cumulative Amounts from
January 19, 1993 (Date of Inception) through June 30, 1997
- -------------------------------------------------------------------------------------------------------------------
Cumulative
Amounts from
1997 1996 Inception
----------- ------------ -------------
<S> <C> <C> <C>
NET REVENUES $ 1,919,831 $ 635,994 $ 2,984,616
COSTS OF GOODS AND SERVICES 1,831,864 1,178,845 3,389,198
--------- --------- ---------
GROSS PROFIT (LOSS) 87,967 (542,851) (404,582)
--------- --------- ---------
EXPENSES
Selling 1,350,298 468,013 2,877,557
Administration 1,613,760 1,291,698 3,951,942
Research & development 775,484 1,217,438 3,348,098
Depreciation and amortization 583,069 391,031 1,072,793
Interest expense 25,038 247,694 358,973
--------- --------- ---------
4,347,649 3,615,874 11,609,363
--------- --------- ---------
OPERATING LOSS (4,259,682) (4,158,725) (12,013,945)
OTHER INCOME (EXPENSE)
Loss from impairment of investment 0 ( 375,000) (2,312,500)
Gain on sale of intellectual property 0 0 2,498,334
Interest income 57,703 2,570 60,273
Miscellaneous income (net) 19,876 42,399 73,254
--------- --------- ---------
NET LOSS (4,182,103) (4,488,756) (11,694,584)
========= ========= =========
Net loss per common share $(0.30) $(0.53)
==== ====
Weighted Average Shares 14,063,626 8,521,991
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(Successor to Resource Finance Group, Ltd.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1996 and 1995
and Cumulative Amounts from
January 19, 1993 (Date of Inception) through June 30, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative
Amounts from
1997 1996 Inception
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net Loss $(4,182,103) (4,488,756) $ (11,694,584)
Non-cash items included in net loss:
Depreciation 171,232 158,048 382,146
Amortization of intangible assets 370,171 232,983 648,981
Amortization of service contracts 265,989 58,750 324,739
Amortization of contract rights 41,666 0 41,666
Compensation from stock option grants 0 0 24,050
Loss (gain) on sale of assets 2,472 (14,005) (11,533)
Bad debt expense 26,798 0 26,798
Legal settlement obligation 0 0 18,715
Services contributed as paid in capital 0 0 22,346
Stock issued for license agreement 0 0 490,100
Stock and stock options issued as payment for services 36,955 774,236 1,462,519
Gain on sale of intellectual property 0 0 (2,498,334)
Loss on impairment of investments 0 375,000 2,321,800
Changes in operating assets and liabilities:
Increase in receivables (97,340) (5,957) (115,665)
Decrease in related party receivables 0 490,068 0
Decrease in taxes receivable 0 7,000 0
(Increase)decrease in inventories 93,406 (110,152) (53,534)
(Increase) decrease in prepaid expenses and rights (259,974) 22,861 (259,974)
Increase (decrease) in bank overdraft (81,044) 81,044 0
Increase in deposits (11,326) (11,310) (22,636)
Increase (decrease) in accounts payable 417,764 85,565 525,680
Increase (decrease) in accrued expenses 127,669 411,303 645,867
--------- --------- ---------
Net cash used in operating activities $(3,077,665) $(1,933,322) (7,720,853)
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(Successor to Resource Finance Group, Ltd.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1997 and 1996
and Cumulative Amounts from
January 19, 1993 (Date of Inception) through June 30, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative
Amounts from
1997 1996 Inception
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from investing activities
Investment in direct finance leases (389,352) (147,614) (536,966)
Acquisition of property and equipment (167,433) (228,777) (529,515)
Proceeds from direct finance leases 96,219 0 96,219
Proceeds from sale of assets 900 3,512 4,412
--------- --------- --------
Net cash used in investing activities (459,666) (372,879) (965,850)
--------- --------- ---------
Cash flows from financing activities
Proceeds from related party short-term borrowings 80,553 559,658 772,711
Proceeds from private placement debt 0 20,000 1,490,000
Proceeds from lease financing 71,769 189,912 261,681
Payments for related party short-term borrowings 0 0 (93,500)
Payments on notes payable (9,000) 0 (9,000)
Payments on long-term debt (7,000) (5,253) (14,963)
Payments on capital leases (47,993) (19,372) (67,365)
Proceeds from issuance of stock 739,682 4,004,593 6,728,148
Payments related to issuance of stock 0 0 (26,000)
--------- --------- ---------
Net cash provided by financing activities 828,011 4,749,538 9,041,712
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (2,709,320) 2,443,337 355,009
Cash at beginning of year 3,064,329 620,992 0
--------- --------- ---------
Cash at end of year $ 355,009 $3,064,329 $ 355,009
========= ========= =========
SUPPLEMENTAL CASH FLOW DATA
Cash paid for interest $ 27,723 $ 162,719
Cash paid for income taxes 0 0
Supplemental schedule of non-cash investing and financing activities
Common stock issued for retirement of debt 0 1,443,600
Common stock issued for contractual rights 66,847 300,000
Transfers of inventory to property and equipment 0 24,611
Exchange of investments for contractual rights 0 135,000
Conversion of preferred stock into common shares 1,500,520
Acquisitions of businesses
Fair value of assets acquired $ 0 $4,134,476
Fair value of liabilities assumed 0 (385,064)
Post closing adjustment of contingencies - Neptune acquisition (208,304) 0
--------- ---------
Common stock issued and as adjusted $ (208,304) $3,749,412
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and operations
Digital Sciences, Inc. ("DSI"), started in 1993, merged with Resource Finance
Group, Ltd. ("RFG") on April 1, 1996 to create Intelligent Decision Systems,
Inc. ("IDSI"). DSI's former shareholders received 85% of the IDSI shares
outstanding upon the consummation of the merger, and DSI became the surviving
entity for accounting purposes and a wholly owned subsidiary of IDSI. On June
28, 1996, IDSI acquired substantially all of the assets of The Neptune Group,
Inc. ("TNG") in exchange for 750,000 shares of its stock and the assumption of
certain liabilities. TNG became Neptune Technology Leasing Corp. ("NTLC"), a
wholly owned subsidiary of IDSI.
The Company's operations include the development, marketing and leasing of
computer systems, including the Vision and Focus software/hardware systems. Both
systems are comprehensive business and health care management systems, with
Vision serving the long term care segment and Focus serving the needs of
physicians. The Company provides leases to most users of its systems, and major
portions of many of these leases are subsequently sold to third parties.
Principles of Consolidation
The consolidated financial statements include the accounts of Intelligent
Decision Systems, Inc. and its subsidiaries, Digital Sciences, Inc. and Neptune
Technology Leasing Corp., all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
Cash and cash equivalents
The company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. Inventories consist of purchased computer
hardware components for use in the construction of Vision and Focus computer
systems. These systems are assembled and shipped to order and there are no
finished goods or work in process.
Property and Equipment
Property and equipment are recorded at cost less depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of such
assets, generally from two to ten years. Upon sale or retirement, the cost and
related accumulated depreciation are eliminated from the respective accounts and
the resulting gain or loss is included in the results from operations.
Maintenance and repairs that do not extend the lives of the assets are expensed
as incurred.
F-13
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued
Intangible assets and amortization
Intangible assets are recorded at cost and amortized using the straight-line
method over their estimated useful lives. Asset lives are assigned in accordance
with the following schedule:
Software-internal use 2 to 5 years Intellectual property 7 years
Goodwill 15 years Organization costs 5 years
The intellectual property acquired by the Company is used to create new software
products, and is designed to increase the pace of such development. It can also
be resold as a separate unit of software. The intellectual property attained
technological feasibility prior to its purchase, and has been used to develop
other software products that also have attained technological feasibility which
have been sold to independent users.
As of each balance sheet date, management assesses the recoverability of
intangible assets by comparing the amount of estimated future revenues to be
generated from the assets acquired or, in the case of goodwill, the business
acquired, less the related future costs of maintenance and customer support, to
the unamortized costs for each intangible asset to determine whether any
impairment has occurred, and if so, unamortized costs are written down to their
net realizable value and the resulting adjustment is charged to amortization
expense for the period presented. Once an impairment has been recorded, its
recorded unamortized balance is not increased.
Revenue Recognition
Revenues from the sale of Vision and Focus computer systems are recorded upon
acknowledgment of acceptance of the system by the customer and costs of goods
sold for the hardware included are recorded as specifically identified. Revenue
from the sale of all other computer systems and software are recorded upon
shipment. Related future maintenance and support costs are estimated and charged
to expense when the related revenue is recognized.
Income taxes
Deferred income taxes are recognized, to the extent recoverable, for the
temporary difference between the tax bases of assets and liabilities and their
financial reporting amounts. The income tax provision is the tax
payable/recoverable for the year and the change during the year in net deferred
tax assets and liabilities.
Loss Per Share
Loss per share amounts are determined by dividing the net loss by the weighted
average number of shares outstanding, exclusive of warrants and options in view
of the fact that inclusion of these items would be anti-dilutive. Loss per share
is retroactively adjusted for stock splits and dividends.
Recent Pronouncements
Stock-Based Compensation: In 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Under the provisions of SFAS 123, companies can elect to account for
stock-based compensation plans for employees using a fair-value-based method or
continue measuring compensation expense for those plans using the intrinsic
value method prescribed in APB 25. SFAS 123 requires that companies electing to
continue using the intrinsic value method must make pro forma disclosures of net
income and earnings per share as if the fair-value-based method of accounting
had been applied. The Company continues to use the intrinsic value method in its
accounting for stock-based compensation for employees, but uses a
fair-value-based method for stock-based compensation involving entities not
deemed to be employees, for purposes of applying SFAS 123.
F-14
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued
Earnings Per Share: In February of 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share". This Statement simplifies the standards for computing earnings per
share, replacing the presentation of primary earnings per share with a
presentation of basic earnings per share. SFAS 128 also requires dual
presentation of basic and diluted earnings per share on the face of the
statement of operations for all entities with complex capital structures. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed similarly to fully diluted
earnings per share pursuant to APB 15 "Earnings Per Share", which is superseded
by this Statement. This Statement is effective for financial statements issued
for periods ending after December 15, 1997, with early application being
prohibited. There would be no impact on net loss per share amounts for 1997 and
1996 as losses were incurred and all common stock equivalents and convertible
securities would be dilutive.
Reclassification
Certain reclassifications have been reflected in the previous year amounts to
conform with the presentation of corresponding amounts in the current period.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern.
The Company experienced operating losses of $4,182,103 during 1997, of which
$807,392 where non-cash charges such as depreciation and amortization. Those
amounts for 1996 were $4,488,756 and $449,781, respectively. Net cash used in
operating activities totaled $3,077,665 for 1997 and $1,933,322 for 1996. The
Company had $3,064,329 in cash and equivalents to start fiscal 1997, and had
$355,009 remaining at the end of the fiscal year, but accounts payable at June
30, 1997 had increased by $417,764 over the balance recorded at June 30, 1996 as
a result of operating losses sustained by the Company and the Company's
diminished cash position. Proceeds from the issuance of common stock were
$739,682 in 1997, primarily from the conversion of Series B warrants that were
granted pursuant to the Company's private placement of debt in 1995. Proceeds
from stock issued during 1996 totaled $4,004,583.
Proceeds from short-term borrowings from related parties decreased to $80,553 in
1997 from $559,658 in 1996. Short-term borrowings from related parties have
increased subsequent to June 30, 1997 in an effort to alleviate some of the
financial pressure on the Company. Such borrowing exceeded $100,000 at September
20, 1997.
The Company is experiencing critical shortages of working capital. Significant
operating losses have continued subsequent to June 30, 1997, and management's
projections indicate that operating losses will continue through December, 1997.
Furthermore, those projections also indicate that approximately $500,000 of
additional capital must be raised even if projected sales and cash receipts are
achieved. The Company has experienced critical working capital deficiencies
since June 30, 1997 and has experienced computer equipment supply difficulties
as a direct result of those deficiencies. Management's projection of operating
results and cash flows for the year ending June 30, 1998 indicates that,
exclusive of an infusion of additional capital, there remains a projected cash
shortfall of approximately $500,000. Therefore, substantial doubt exists
regarding the Company's ability to continue as a going concern.
The Company has a supply agreement that calls for minimum software purchases
from the supplier of $250,000 by September 30, 1997. The Company had purchased
$10,000 of this software as of September 20, 1997. The Company will most likely
default on the remaining commitment unless it is able to negotiate a change in
the terms of the original agreement. Certain disputes regarding other provisions
of the agreement exist between the supplier and the Company.
F-15
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN - continued
In June 1996, the Company agreed to assume the defense of a lawsuit with a
former sales agent of The Neptune Group, Inc. and has also acquired the rights
to a counter suit against the same agent. The Neptune Group is seeking damages
against the former sales agent for breach of contract and breach of fiduciary
duty. The former sales agent is seeking commissions of $753,420 plus statutory
interest, punitive damages and attorney's fees. Old Neptune filed a Motion for
Summary Judgment whereby it is requesting among other things that the Court
enter summary judgment dismissing MKT Inc.'s counterclaims against Old Neptune.
The motion has not yet been ruled upon by the Court. Although management
believes the former agent's claim to be without merit, successful assertion of
the claim could have a materially adverse effect on the financial position,
liquidity and operations of the Company.
Security agreements with a related party and with the former consultants, along
with the poor financial condition of the Company, limit the ability of the
Company to seek debt financing. The low market price of the Company's stock also
limits the Company's ability to obtain adequate proceeds from issuances of its
stock
As a consequence of the foregoing, management can provide no assurances
regarding continued viability of the Company.
Currently, management is seeking a limited line of credit facility and is in
negotiations with several private parties who have expressed an interest in
providing such an arrangement and who have provided such financing to the
Company in the past. Management plans to reduce operating expenses to the extent
necessary to make up any shortfall in additional capital or projected revenues.
NOTE 3 - NET INVESTMENTS IN DIRECT FINANCE LEASES
The Company's leasing operations consist primarily of the leasing Vision and
Focus systems to end users. Some leases are written for equipment not sold by
the Company. Although significant portions of most of these leases are sold,
certain leases are retained and certain leases are in the process of being sold.
These leases are reported as net investment in direct finance leases. The
following lists the components of net investment in direct finance leases:
1997 1996
---- ----
Total minimum lease payments
to be received $ 358,568 $ 193,525
Estimated residual values
of leased property 9,132 9,132
Less unearned income (73,958) (50,817)
------- -------
Net investment in direct finance leases 293,742 151,840
Net investment in leases held for resale 248,377 97,144
------- -------
Total $ 542,119 $ 248,984
======= =======
Current portion $ 342,205 $ 143,394
Non-current portion 199,914 105,590
------- -------
$ 542,119 $ 248,984
======= =======
Future minimum lease payments receivable for leases not held for resale:
1998 $109,554
1999 83,244
2000 50,068
2001 11,030
2002 0
-------
$253,896
=======
F-16
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 4 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The company is a party to off-balance sheet risk in the normal course of
business by selling leases to third party financing services with recourse. The
Company's policy is to retain collateral rights to the assets underlying those
leases including the right to re-market those assets.
During 1997 and 1996 the Company sold leases with recourse which aggregated
$790,000 and $290,000, respectively. The terms of the leases sold were generally
forty eight months and were discounted at imputed interest rates ranging from
7.75% to 11.5% per annum. At June 30, 1997 and June 30, 1996, future lease
receipts that were sold by the Company subject to recourse at present value
totaled $ 647,000 and $267,000, respectively. Undiscounted future lease receipts
subject to recourse, sold at discounts ranging from 9.5% to 11.5% per annum,
totaled $927,910 at June 30, 1997 and $369,386 at June 30, 1996. Allowances of
$74,153 at June 30, 1997, and $0 at June 30, 1996, are included in accrued
expenses to provide for future minimum lease payments which may become
uncollectible and payable by the Company due to recourse.
NOTE 5 - CONTRACTUAL RIGHTS
In February 1995, DSI issued 250,000 shares of restricted common stock at $.50
per share to Visual Information Services, Corporation (Viscorp) in exchange for
an exclusive license to purchase and use certain technology in the United States
and Canada for a period of ten years. The amortization period is 36 months. On
March 27, 1996 DSI entered into an agreement with a related party to exchange
675,000 shares of stock in Resource Finance Group, Ltd. for one year of
consulting services valued at $135,000. On May 5, 1996, IDSI issued 150,000
shares of stock valued at $300,000 to a consultant in exchange for services to
be performed over a 24 month period. On September 30, 1996, IDSI granted an
option to purchase 100,000 shares of IDSI common stock at $2.25 per share to a
consultant in exchange for two years of consulting services valued at $25,000.
On March 5, 1997 IDSI granted an option to purchase 100,000 shares of IDSI
common stock at $3.00 per share to two consultants in exchange for one year of
consulting services valued at $20,000. On May 10, 1997 IDSI granted an option to
purchase 50,000 shares of IDSI common stock at $.75 per share, which was valued
at $21,843, to a supplier in exchange for exclusive marketing rights to a
product.
A summary of contractual rights:
1997 1996
---- ----
License from Viscorp $ 27,778 $ 69,445
Agreement with related party 0 101,250
Agreement with consultant 125,000 275,000
Agreement with consultant 15,622 0
Agreement with consultants 15,000 0
Agreement with supplier 261,486 0
------- -------
Total contractual rights $ 444,886 $ 445,695
======= =======
Current portion $ 420,282 $ 251,250
Non-current portion 24,604 194,445
------- -------
$ 444,486 $ 445,695
======= =======
F-17
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES CONSOLIDATED TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment comprised of the following at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Capital Lease Other Total
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Leasehold improvements $ 2,888 $ 2,888 $ 78,324 $ 5,850 $ 81,212 $ 8,738
Furniture and fixtures 94,571 94,571 53,339 32,717 147,910 127,288
Office equipment 55,947 55,947 55,115 24,350 111,062 80,297
Production equipment 0 0 2,082 2,082 2,082 2,082
Computer Equipment 171,730 171,730 272,198 234,528 443,928 406,258
------- ------- ------- ------- ------- -------
$325,136 $325,136 $461,058 $299,527 786,194 624,663
Less accumulated
depreciation (171,117) (49,069) (222,665) (176,010) (393,782) (225,079)
------- ------- ------- ------- ------- -------
$154,019 $276,067 $238,393 $123,517 $392,412 $399,584
======= ======= ======= ======= ======= =======
</TABLE>
Depreciation expense for 1996 and 1995 was $173,704 and $158,049, respectively.
NOTE 7 - INTELLECTUAL PROPERTY AND AMORTIZATION
Intellectual property represents the unamortized recorded amount for
"Screenware," a proprietary programming tool for use in developing the Vision,
Focus and future applications. Amortization expense for 1997 and 1996 was
$357,143 and $89,286, respectively.
NOTE 8 - NOTES PAYABLE
The related party notes payable totaling $30,553 are collateralized by all
assets of the Company, are payable upon demand and bear interest at the rate of
9% per annum. The uncollateralized note of $9,000 was payable on demand to an
individual and bore interest at the rate of 20% per annum.
F-18
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 9 - LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following at June 30:
1997 1996
---- ----
Settlement obligations payable in monthly
installments of $786 including interest
at an effective rate of 22.7% per annum,
until October, 1997. $ 3,105 $ 10,752
Obligations under capital leases with
monthly payments aggregating $5,395
including interest at effective rates
ranging from 15.8% to 21.8%. The lease
obligations are collateralized by the
specific equipment under each lease. 201,935 170,540
Settlement obligations payable annually
in installments of no less than $60,000
including interest at an effective rate
of 11% per annum, until June, 2001 199,623 0
Obligation to repay funds received from
a director. The balance plus interest
accruing at a rate of 5% per annum, will
be repaid in equal, bi-monthly
installments from July, 1999 to December,
1999 50,000 0
------- -------
$ 454,663 $ 181,292
Less current portion (121,355) (44,534)
------- -------
$ 333,308 $ 136,758
======= =======
Scheduled payments by year:
1998 $121,385
1999 118,902
2000 154,771
2001 59,635
2002 0
-------
$454,693
=======
NOTE 10 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and for 1997 and 1996
were $775,484 and $1,217,438 respectively.
F-19
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 11 - INCOME TAXES
The provision for income taxes for the years ended June 30, 1997 and 1996,
consisted of:
1997 1996
-------------- --------------
Federal
Current $ 0 $ 0
Deferred (1,455,500) (1,699,500)
Deferred tax asset valuation adjustment 1,455,500 1,699,500
State
Current 0 0
Deferred (250,000) 0
Deferred Tax Asset Valuation Adjustment 250,000 0
--------- ---------
Total Provision $ 0 $ 0
========= =========
Reconciliation of the federal statutory rate to the Company's effective tax rate
is as follows:
1997 1996
-------------- --------------
U.S. Federal statutory tax rate (34.0)% (34.0)%
Deferred tax asset valuation adjustment 34.0% 34.0%
--------- ---------
Effective tax rate (0.0)% 0.0%
========= =========
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
the components of deferred tax liabilities and assets at June 30, 1997 and 1996,
consisted of:
1997 1996
-------------- --------------
Deferred Tax Assets
Net Operating Loss Carryforwards $ 4,813,000 $ 3,592,700
Capital Loss Carryforwards 782,000 0
Depreciation 20,000 32,500
--------- ---------
5,615,000 3,625,200
Deferred Tax Liabilities
Amortization 465,000 350,700
Leases 170,000 0
--------- ---------
Net deferred tax assets $ 4,980,000 $ 3,274,500
Deferred tax asset valuation allowance (4,980,000) (3,274,500)
--------- ---------
$ 0 $ 0
========= =========
F-20
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES - continued
The components resulting in the deferred assets and liabilities above have been
included in the accompanying balance sheets as of June 30, 1997 and 1996:
1997 1996
-------------- --------------
Current Assets $ 0 $ 0
Noncurrent Assets 4,980,000 3,274,500
Noncurrent Valuation Allowance (4,980,000) (3,274,500)
--------- ---------
$ 0 $ 0
========= =========
At June 30, 1997, the Company has net operating loss carryforwards of
approximately $13,000,000, which are available to reduce future taxable income.
These carryforwards expire in 2012 to 2017. The net operating loss carryforwards
include approximately $3,100,000 which related to the operations of IDSI prior
to the merger of DSI and RFG and are subject to certain limitations. The Company
also had capital loss carryforwards of $2,300,000, which are available to reduce
future capital gains. This carryforward expires in 2001.
NOTE 12 - COMMITMENTS
Employment and consulting agreements - During 1996 the Company entered into
employment agreements with several of its key executives to continue their
employment through a portion of the year 2001. On June 28, 1996, the Company
entered into an agreement with the former major stockholders of The Neptune
Group, Inc. to provide consulting services for a period of five years.
Subsequent to June 30, 1997, these consultants and the Company replaced the
previous consulting agreement with a termination agreement that included
termination payments totaling $338,014 plus outstanding consulting fees of
$68,750. The resultant liability will be paid in unequal installments over 42
months. Payment deferral fees totaling $17,760 are included in the amounts
below, as the Company anticipates electing to defer payments of the first six
monthly installments. See Note 18 - CONTINGENCIES for additional terms of the
termination agreement.
Commitments from these agreements are summarized as follows:
Former
Employees Consultants Total
--------- ----------- -----
1998 $ 630,000 $ 144,744 $ 774,744
1999 601,583 111,912 713,495
2000 410,000 111,912 521,912
2001 309,167 55,956 365,123
--------- --------- ---------
$1,950,750 $ 424,524 $ 2,375,274
========= ========= =========
F-21
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS - continued
Leases - The Company leases its office space, company vehicles, and equipment
under non-cancelable lease agreements. The Company has the option to acquire the
leased vehicles at the end of the respective terms of the leases at fair market
value. Expenses under lease agreements for 1997 and 1996 were $241,680 and
$121,190, respectively. Future minimum lease obligations are:
Years ending
June 30 Facilities Vehicles Equipment Total
---------- -------- --------- -----
1998 $ 247,802 $27,006 $ 1,008 $275,816
1999 238,305 15,952 1,008 255,265
2000 207,093 7,128 1,008 215,229
2001 154,411 7,128 1,008 162,547
2002 16,955 0 84 17,039
------- ------ ------ -------
$864,566 $57,214 $ 4,116 $925,896
======= ====== ====== =======
NOTE 13 - STOCKHOLDERS' EQUITY
Reverse stock split
On May 2, 1994, DSI effected a one-for-two reverse stock split of its
outstanding common stock. All references in the financial statements to shares
issued, average number of shares outstanding and related prices and per share
data in the accompanying financial statements have been restated to reflect this
reverse stock split.
Preferred stock
The articles of Incorporation for IDSI authorized 1,000,000 shares of $.001 par
value preferred stock. On June 27, 1996 the Company issued 1,631 shares of
Series A convertible preferred stock for $1,000 per share less offering costs of
$130,480. The preferred shares were convertible into common shares at various
dates up to 100 days from the date of the offering and carried liquidation and
dividend preferences with respect to common shares. Dividends on the preferred
stock are cumulative and dividends may be paid in the common stock of the
Company or in cash at the discretion of the Company. By October, 1996, all of
the 1,631 preferred shares had been converted into common shares totaling
1,359,633. As of June 27, 1997, the Company could not legally pay preferred
stock dividends due to its cumulative deficit, therefore none were due according
to the provisions of the private placement agreement pertaining to the Series A
preferred stock.
Common stock transactions
During 1993, DSI issued an aggregate of 1,106,342 shares of common stock to
various individuals and consultants for services performed, equipment and
technology or for cash investments. In all instances, except for the initial
capitalization of 764,400 shares, the restricted shares of common stock were
issued at $.50 per share and $303,115 was credited to stockholders' equity in
the accompanying balance sheet. For those shares of common stock issued for
services, a corresponding offset was charged to earnings as consulting expenses.
F-22
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 13 - STOCKHOLDERS' EQUITY - continued
On February 2, 1993, the Board of Directors approved an offering of common stock
of DSI pursuant to Rule 504 of Regulation D (the "Offering"). The Offering
provided by Rule 504 is exempt from registration with the Securities and
Exchange Commission. Under the Offering, a minimum of 100,000 shares and a
maximum of 400,000 shares of common stock were offered at $.50 per share. The
shares of common stock were registered with the Securities Division of the State
of Nevada and were offered in a Prospectus prepared for this purpose. The
maximum of 400,000 shares of common stock offered under this Offering was sold
and net proceeds of approximately $174,000 ($200,000 less selling commissions of
7.5% and offering expenses of approximately $1,000), were received by DSI in
July, 1993.
In July, 1994, DSI issued 150,000 shares for cash at $.19 per share. In
September, 1994, DSI issued 207,143 shares for cash at $.70 per share. In
October, 1994, DSI issued 188,000 shares for cash at $.70 per share. In
December, 1994, DSI issued 525,000 shares at $.35 per share.
Also in December, 1994, DSI issued 723,371 shares at $.50 per share for the
conversion of outstanding accounts payable and management services rendered,
100,000 shares at $.25 per share to cancel a convertible note for $25,000,
$24,250 shares at $.70 to satisfy a $14,000 note plus accrued interest. In each
case, shares issued in 1994 were valued giving consideration to the negotiated
value at the amount of the proceeds received.
In February and March, 1995, DSI issued 1,228,572 shares for cash at $.35 per
share, 250,000 shares for contractual rights at $.50 per share, 150,000 shares
for services at $.50 per share, and 1,050,000 shares at for cash $.50 per share.
These shares issued in 1995 were valued giving consideration to the negotiated
value of the services received, except for those issued cash, which were valued
at the amount of the proceeds received. Also in February, 1995, DSI issued
59,173 shares in satisfaction of a payable to an affiliate, Resource Finance
Group, Ltd. as part of a three party agreement involving a significant
stockholder, Mid America Venture Capital, Inc. Pursuant to that agreement, the
value set per share was $3.60.
In January and February 1996, DSI sold 1,428,572 shares at $.70 per share for
cash. On April 1, the shareholders of Resource Finance Group Ltd. received
1,590,850 shares for their net assets of $2,268,428 or $1.43 per share. In May
1996, 150,000 shares were issued as payment for services at $2 per share. In
June 1996, 138,760 shares were issued from exercising of warrants at $1 per
share. In June 1996, shares were issued for services as follows: 14,000 shares
at average price of $2.87 for employment services, 56,860 shares at $3.5625 per
share for bonus compensation. In June, 881,654 shares were issued to retire
private placement debt as warrant holders exercised Series A warrants for $1.69
per share. In June, 750,000 shares were issued in exchange for certain net
assets of The Neptune Group, Inc. at $1.97 per share. In June, 1996, dissenting
shares from the merger of DSI and RFG were purchased for $1.43 per share.
During 1997, options and warrants for 843,266 shares were exercised for proceeds
totaling $739,682, or for an average of $.88 per share. A total of 1,359,633
shares were issued as a result of conversions of Series A preferred stock.
F-23
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 13 - STOCKHOLDERS' EQUITY - continued
Common Shares Reserved for Conversions of Options and Warrants
A total of 6,035,533 shares have been reserved for potential conversion of stock
purchase options and warrants, with exercise prices from $.50 to $20.00 and
expiration dates from September 30, 1997 through September 29, 2001.
Post-closing Purchase Price Adjustment
As a result of the settlement of contingencies arising from the purchase of The
Neptune Group, Inc., and as goodwill was not recorded as a result of the
acquisition, additional-paid-in-capital was reduced by $208,304. The adjustment,
made pursuant to the guidance provided by SFAS 38--"Accounting for
Preacquisition Contingencies of Purchases Enterprises"--consisted primarily of a
liability assumed as a result of negotiations with an important third party
purchaser of the Company's leases. The third party had an unsettled dispute with
The Neptune Group, Inc. prior to its acquisition by IDSI. The nature of the
dispute had been disclosed to the Company prior to the acquisition. Although the
Company was satisfied that no liability existed at the time of the acquisition,
it settled with the third party in consideration of a future business
relationship with that third party. See Note 18 - CONTINGENCIES for a
description of the settlement agreement.
NOTE 14 - STOCK COMPENSATION AND STOCK OPTION PLANS
The Company has a qualified stock option plan for its employees ("The ISO
Plan"), adopted and effective April 1, 1996, which permits grants of options at
exercise prices equal to the fair market value of the stock at the grant date.
The exercise price for employees who may own more than 10% of the outstanding
shares of the Company or a subsidiary will be at least 110% of the fair value of
the Company's common stock at the time of the grant. The Company has reserved a
maximum of 500,000 common shares to be issued upon exercise of the options
granted under the ISO Plan. Common stock options granted generally have a term
of six (6) years from the date of the grant or in the case of a 10% Stockholder,
five years from the date of grant. One third (1/3) of the shares subject to the
option granted under the ISO Plan vests and is exercisable with respect to such
number of shares, on each of the first three annual anniversaries of the date of
the grant. A total of 414,540 shares were available for grants as of June 30,
1997, 85,460 were outstanding and 28,487 were exercisable under the ISO Plan.
Compensation cost charged to expense associated with the ISO Plan was $0 in 1997
and $0 in 1996.
The Company also has non-qualified stock option plans ("The NSO Plans") that
permit grants of options to purchase stock to full-time and part-time employees
(as determined by the Company Board of Directors), officers and directors of the
Company or Affiliated Corporation, and any attorney, consultant or other adviser
to the Company or affiliated Corporation. Additionally, the Company's Board of
Directors is empowered to grant stock options and warrants to others in the
normal course of business. The NSO Plans do not require a maximum term for
options and warrants, but NSO options or warrants have not been granted for a
period extending beyond five years. Vesting is generally immediate, although
this is not a matter of Board of Directors' policy. As of June 30, 1997,
5,950,073 shares were reserved pursuant to the NSO Plans, 11,243,135 were
outstanding and 10,453,135 were exercisable. Costs charged to expense associated
with the NSO Plan for 1997 and 1996 were $79,292 and $531,545, respectively.
F-24
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 14 - STOCK COMPENSATION AND STOCK OPTION PLANS - continued
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123
(SFAS 123) "Accounting for Stock-Based Compensation" requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of the grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1997
and 1996: risk-free interest rate of 5.11%; no dividend yield for both years;
expected life equal to the full life of each option; and volatility factors of
90% for 1997 and 64% for 1996.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective judgments including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1997 1996
-------------- --------------
Net loss As reported $ (4,182,103) $ (4,488,756)
Pro forma $ (4,391,434) $( 5,459,914)
Loss per share As reported $ (.30) $ (.53)
Pro forma $ (.30) $(.64)
F-25
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 14 - STOCK COMPENSATION AND STOCK OPTION PLANS - continued
A summary of the Company's stock option activity, and related information
follows:
1997 1996
--------------------- -----------------------
Weighted Weighted
Ave. Ave.
Exercise Exercise
Options Price Options Price
--------- ------------ ---------- ----------
Outstanding at
beginning of year 10,239,384 $ 2.37 6,874,169 $ 1.96
Granted 2,858,377 1.33 4,385,628 2.83
Exercised (843,266) .88 (1,020,413) 1.60
Forfeited/Canceled (925,900) 1.22 0 n/a
---------- ----------
Outstanding at June 30 11,328,595 2.31 10,239,384 2.37
========== ==========
Exercisable at June 30 10,481,622 2.39 10,239,384 2.37
========== ==========
The weighted average grant-date fair value and weighted average exercise prices
of options granted during the year:
1997 1996
--------------------- -----------------------
Weighted Weighted Weighted Weighted
Ave. Ave. Ave. Ave.
Fair Exercise Fair Exercise
Value Price Value Price
--------- ------------ ---------- ----------
Exercise price
below market price $ .59 $ .25 $ 2.01 $ 2.31
Exercise price
equal to market price .72 1.24 .90 2.35
Exercise price
above market price .45 2.10 2.07 3.79
All options and warrants .68 1.35 1.54 2.91
F-26
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 14 - STOCK COMPENSATION AND STOCK OPTION PLANS - continued
Following is a summary of the outstanding stock options as of June 30, 1997:
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Ave. Weighted Weighted
Range of Number Remaining Ave. Ave.
Exercise Out- Contractual Exercise Number Exercise
Prices standing Life Price Exercisable Price
- ------------ --------- ----------- -------- ----------- --------
$ .25 - 1.00 4,051,218 2.5 $ .91 4,051,218 $ .91
1.13 - 2.00 2,569,833 3.0 1.45 1,779,833 1.50
2.13 - 3.00 1,710,460 2.0 2.47 1,653,487 2.49
3.25 - 5.00 2,797,084 3.8 3.87 2,797,084 3.87
18.50 - 20.00 200,000 3.4 18.88 200,000 18.88
---------- ----------
11,328,595 2.9 2.31 10,481,622 2.39
========== ==========
NOTE 15 - RELATED PARTY BALANCES AND TRANSACTIONS
During 1996, prior to the merger of RFG and DSI, IDS received revenues from DSI,
pursuant to a joint operating agreement, for contracted labor and services
totaling $1,232,131.
On July 22, 1996 the Company awarded a cash bonus of $50,000 to Robert Hyte, a
director.
On November 14, 1996, the Company advanced $30,000 to Mid America Venture
Capital Fund, Inc., an affiliate by reason of beneficial stock ownership. The
advance was made to cover possible future expenses relating to consulting
services.
On December 30, 1996, David Horowitz, then Chairman and Director of the Company
and also Chief Executive Officer of DSI, exchanged approximately 8 months of his
employment contract with DSI for cash of $56,250 which was returned to the
Company when Mr. Horowitz exercised options for 112,500 shares at $.50 per share
on December 31, 1996. On December 30, 1996, Robert Hyte, a Director of the
Company and also Chairman and Chief Operating Officer of DSI, exchanged
approximately 9 months of his employment contract with DSI for cash of $64,000
which was returned to the Company when Mr. Hyte exercised options for 128,000
shares at $.50 per share on December 31, 1996. The Company retained the related
stock certificates issued from the exercise of the options as security for the
future performance of the contracted services.
On December 31, 1996 the Company granted a warrant to Mid America Venture
Capital Fund, Inc. to purchase 187,500 shares at $1.125 per share.
On March 1, 1997 the Company authorized the exchange of cash collateral for the
stock certificates held as security. On April 1, 1997, Robert Hyte provided
$50,000 as cash collateral to the Company, and, in exchange, the Company
released 100,000 of the 128,000 shares which were previously held as collateral
for the performance of duties which were previously under contract.
F-27
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 16 - ACQUISITIONS
On April 1, 1996 DSI was deemed to acquire, for accounting purposes, Resource
Finance Group, Ltd. ("RFG") for $2,406,200 ($137,800 in assumed liabilities and
1,590,850 shares of the Company's common stock valued at $2,268,400) for all of
the outstanding capital stock of RFG, a company primarily engaged in the
development and distribution of computerized business systems designed
specifically for the long-term (non-acute) health care industry. RFG then
effected a merger with Digital Sciences, Inc. ("DSI") by exchanging its common
stock for DSI's outstanding stock on a one for one basis. As a result, DSI's
former shareholders received approximately 85% of the Company's outstanding
shares and for that reason DSI was deemed to be the surviving entity. DSI has
adopted RFG's fiscal year end of June 30.
On June 28, 1996, the Company acquired substantially all the assets of The
Neptune Group, Inc., a leasing operation providing financing to purchasers of
medical equipment and computer systems, for $1,728,203 ($247,219 in assumed
liabilities and 750,000 shares of the Company's common stock valued at
$1,480,984). The valuation of the acquired net assets (and the stock exchanged)
was reduced in 1997 by $208,304 due to the post-combination resolution of
contingencies existing at the time of the acquisition.
The acquisitions were accounted for by the purchase method and accordingly the
results of operations have been included in the accompanying financial
statements from the effective dates of the business combinations.
NOTE 17 - CONCENTRATIONS OF CREDIT RISK AND DISCLOSURE OF UNCERTAINTIES
Concentrations of credit risk and disclosures of uncertainties not disclosed
elsewhere:
The Company invests its excess cash with financial institutions and does not
believe it is exposed to any significant credit risk.
In June, 1997, the Company signed an agreement with a third party lease
purchaser that grants effective rights of first refusal to the purchase of the
Company's sales-type leases involving the Vision or Focus products. Discount
rates used to value these transactions were fixed in the agreement.
The Company's internal operating systems and its software products are either
designed to accommodate Year 2000 changes, or will be modified without material
cost according to management estimates.
NOTE 18 - CONTINGENCIES
In June 1996, the Company agreed to assume the defense of a lawsuit with a
former sales agent of The Neptune Group, Inc. and has also acquired the rights
to a counter suit against the same agent. The outcome of the suits are not
determinable at June 30, 1997 and accordingly no assets or liabilities are
reflected in the financial statements. Although management believes the former
agent's claim to be without merit, successful assertion of the claim could have
a materially adverse effect on the financial position, liquidity and operations
of the Company.
On May 13, 1997 DSI reached an agreement where it acquired exclusive rights to
market and sell a product. DSI must sell 50 units of the product by September
30, 1997 or the Company would incur a liability of up to $240,000 less credits
for units sold by then.
F-28
<PAGE>
INTELLIGENT DECISION SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 18 - CONTINGENCIES - continued
On June 1, 1997, Neptune signed an agreement with DVI Financial Services ("DVI")
which restructured a claim that DVI had against Old Neptune. Neptune is required
to pay DVI an amount between $240,000 and $400,000 depending upon the amount of
leases that are purchased by DVI. DVI was granted exclusive rights to purchase
Vision and Focus systems leases and will withhold $300 per Vision or Focus
system lease purchased by DVI. DVI will withhold .5% to 1% of the original cost
of non DSI leases purchased by DVI. Neptune will owe a minimum payment to DVI of
$60,000, less amounts previously withheld by DVI, which will be due annually on
May 31, 1998, May 31, 1999, May 31, 2000 and May 31, 2001. As part of the
agreement, Neptune received financing rates which were more favorable than the
rates that they previously negotiated. The present value of the minimum future
payments of $240,000 has been recorded as a liability in the consolidated
financial statements of the Company.
NOTE 19 - SUBSEQUENT EVENTS
On July 10, 1997 the Company entered into an agreement with Old Neptune and
Visys modifying respectively the June 28, 1997 Neptune Purchase Agreement and
Visys Consulting Agreement. The Company reduced the exercise price of warrants
for the purchase of 300,000 shares previously granted to Old Neptune to $1.00
from $2.50 and the exercise price of warrants for the purchase of 750,000 shares
warrant previously granted to Old Neptune to $2.00 from $4.00. The Company
terminated the Visys consulting agreement and restructured its payments to Visys
in the form of a promissory note and security agreement with payments totaling
$406,764 over a 42 month period. A security agreement and collateralized
promissory note for $406,764 was executed. The company is also to pay to Visys
2% of the invoice price for all Vision and Focus sales or leases made through a
four year period ending June 30, 2001. The Company has provided for the
foregoing as of June 30, 1997.
F-29
Sound Solutions Inc.
Distribution Agreement
Between: Sound Solutions, Inc. (SSI) And: Digital Sciences, Inc. (DSI)
175 Andover Street 88 Danbury Road
Danvers, MA 01923 Wilton, CT 06897
a wholly owned subsidiary of
Intelligent Decision Systems, Inc. (IDSI)
Products
SSI develops the Eye Care Information CenterTM (ECIC) which provide educational
information to any patient about Lens Information, Frame Information, Contact
Lenses, Common Eye Problems, even information about Cataract and Refractive
Surgery. Additional information can be provided about the Optometrist and
Ophthalmologist on call. Full audio/video instructions including easy-to-read
colorful screens and 3-d animation are used to educate any level of patient.
This system is a valuable tool for any doctor's waiting area. Also included are
(6) custom designed screens that will slide-show display while program is not in
use, and a custom designed menu with customer's logo (provided within 30 days
after product delivery). Five years of telephone support and system maintenance
is also included at no additional charge: Other optional modules are also
available to work with the Eye Care Information Center to manage frames
inventory (Frames ManagerTM) and to simplify customer frame selection (Frames
SelectorTM).
Services
SSI includes limited customization for each DSI customer who purchases the Eye
Care Information Center within 30 days after delivery to customer from DSI of
each unit. SSI will maintain and support each ECIC application during
installation, setup, and operation for up to five (5) years after purchase.
After five (5) years, a support and maintenance fee will apply for each year
thereafter to maintain the same level of service. SSI also offers an optional
service known as the Practice Marketing PackageTM that will allow each customer
to enhance specific presentation functions utilizing SSI consultation, advice,
graphics and animation services.
Pricing
DSI will submit a purchase order (defined by basic accounting practices) in
advance to SSI for each ECIC unit sold, indicating customer's name and address,
along with projected delivery date to customer, and any special instructions.
DSI will pay to SSI within 30 days after delivery to DSI, the total purchase
price of $5000 per unit, less quantity discounts as outlined in the below
pricing table. All sales are final 30 days after DSI delivery acceptance. The
following discount schedule will apply for total units sold and delivered within
each calendar year:
1-100 $5000.00 101-250 $4500.00
251-500 $4050.00 501+ $3645.00
Payment Terms
DSI will submit in advance, a purchase order to SSI for all orders with any
special instructions that may be required as part of the sale. Payment from DSI
to SSI will be required within 30 days of delivery of each product to DSI.
FocusTM Compatible
DSI develops and markets to medical care providers the FocusTM system. ECIC can
be networked with the FocusTM system for transfer of data collected from ECIC to
be used as part of the FocusTM market research information. SSI will work with
DSI to develop the export/import procedures at no additional charge.
Distribution
DSI will make the ECIC available to its optical customers, either as a stand
alone unit not requiring the purchase of the FocusTM system in order to obtain
the ECIC, or in combination with its FocusTM system.
Exclusivity
SSI will agree to only sell the ECIC application through DSI for the medical
care provider industry, provided DSI takes delivery of at least 50 units by
September 30, 1997 and an additional 50 units by April 1, 1998. DSI must take
delivery of at least 100 units each year thereafter in order to maintain
exclusivity for each additional year. Any and all new products developed by SSI
for the medical care provider industry, will be offered exclusively to DSI under
the same performance, terms and conditions of this agreement.
/s/ RG /s/ TD
- ------- ---------
DSI Initials SSI Initials
<PAGE>
Sound Solutions, Inc.
Exclusivity Forfeiture Clause
In the event that DSI does not take delivery of at least 50 ECIC units by
September 30, 1997, DSI will pay to SSI by or before October 31, 1997, a total
of $5,000 for each unit up to 50 units not previously delivered in cash or
registered IDSI common stocks at market price equal to the same cash value. In
the event that DSI elects to issue to SSI registered IDSI stock in lieu of cash,
SSI must be able to sell such stock without restriction or approval by DSI or
IDSI. The additional units purchased, but not yet delivered may be obtained and
delivered to DSI with no additional purchase charges assessed to DSI. DSI will
forfeit their exclusive rights to sell the ECIC and SSI will be able to market
the ECIC directly, and/or seek other distribution agreements. DSI will still be
able to distribute the ECIC program on a non-exclusive basis according to the
terms and conditions of this agreement; all other terms and conditions of this
agreement will still be valid and binding until the expiration of this
agreement.
Non-Compete
DSI agrees not to develop, distribute or resell any other product that would be
of a competitive nature to the ECIC as defined in the product description above,
for a period of not less than two (2) years after the expiration of this
agreement, or for not less then two (2) years after the forfeit of exclusivity
as described above.
Stock Options
DSI will grant to SSI stock options to purchase 50,000 shares of Intelligent
Decision Systems, Inc. ("IDSI") stock at the per share market price on the date
of this agreement. The stock options will expire in five years from the date of
this agreement. SSI can purchase 16,666 shares at the established price per
share as indicated above, after one year from the date of this agreement.
Provided DSI maintains its exclusivity of the ECIC program, an additional 16,666
shares can purchased by SSI for the same price, two years after the date of this
agreement, and the remaining shares can be purchased by SSI for the same price
three years after the date of this agreement. In the event that DSI forfeits
their exclusivity, any stock options earned by SSI as outlined above, prior to
that time will be valid and will not terminate unless SSI elects not to purchase
them within five years from the date of this agreement all other stock options
not earned will be terminated, unless DSI reestablished its exclusivity.
Other Medical Specialty Applications
SSI will agree to develop a similar application to the ECIC for any other
medical specialties to be delivered within 90 days of an application operation
design and a purchase order as outlined above, for at least 10 units. Payment to
SSI will be made within 30 days of delivery to DSI. DSI must take delivery of at
least 10 units upon new product completion.
Expiration
The term of this agreement as outlined above is for five years and will expire
on the fifth anniversary date of this agreement. This agreement will
automatically be renewed for one year periods thereafter, unless terminated in
writing by either party within thirty days of the expiration of this agreement
or any subsequent renewal period.
Jurisdiction
Sound Solutions, Inc. is a Massachusetts Corporation and therefore this
agreement is prepared according to the laws governed by the state of
Massachusetts. In the event of a a dispute, both parties agree that legal
jurisdiction will be in the state of Massachusetts.
Authorization
Both signers below have received board approval and are authorized to sign and
agree to the terms and conditions of this agreement on behalf of their
respective corporations. This agreement supersides any and all other agreements
verbal or otherwise.
Acknowledge and accepted on this 13th day of May, 1997 by:
Ron L. Greenberg Francis D'Ambrosio, Jr. M.D.
- ----------------------------------- -----------------------------------
Digital Sciences, Inc. Sound Solutions, Inc.
Ron L. Greenberg, Vice President Francis D'Ambrosio, Jr. M.D.,
President
/s/ RG /s/ TD
- ------- ---------
DSI Initials SSI Initials
WA
West America
Securities Corp.
Investment Bankers
Established 1993
--------------------------------
Capital Markets Group
May 2,1997
Mr. Mark A. Babin, President
Intelligent Decision Systems, Inc.
Weyhill Building, Suite 400
2025 East Beltline Ave., S.E.
Grand Rapids, MI 49546
Dear Mr. Babin:
The purpose of this letter is to confirm the engagement of West America
Capital Markets Group, Inc. ("West America") by Intelligent Decision Systems,
Inc.(the "Company") to render certain advisory services to the Company.
Section 1. Services to be Rendered West America will perform such of
the following financial advisory services as the Company may reasonably request:
(a) West America will familiarize itself to the extent it deems
appropriate and feasible with the business operations properties, financial
condition, and prospects of the Company, it being understood that West America
shall, in the course of such familiarization, rely entirely upon publicly
available information and such other information as may be supplied by the
Company, without independent investigation;
(b) West America will advise and assist the Company in identifying
and/or evaluating various strategic or financial alternatives (each an
"Alternative Transaction) that may be available to the Company, to enhance
shareholder values including, without limitation, an acquisition of all or a
significant portion of the assets or equity securities of another corporation or
other business entity, a sale of the Company, or a significant portion of its
equity securities, assets, or businesses to one or more third parties, a
recapitalization or restructuring of the Company (including divestitures,
spin-offs, split-offs and similar transactions) a public or private sale of
additional equity or debt securities of the Company, repurchases by the Company
of its common stock or other securities, a liquidation of the Company, or such
other form of transaction that West America, after completing the
familiarization process provided for in Section 1(a) hereof, believes may be of
possible interest to the Company;
(c) If the Company determines to consider or undertake one or more
Alternative Transactions, West America will advise and assist the Company in
considering the desirability of undertaking such Alternative Transaction(s) and,
if the Company believes such Alternative Transaction(s) to be desirable, West
America will advise the Company in effecting such Alternative Transaction(s);
(d) West America will render such other financial advisory services as
may from time to time be agreed upon by West America and the Company.
<PAGE>
WA
Capital Markets Group
Section 2. Compensation. The Company shall pay to West America for its
services hereunder the following cash fees:
An amount equal to ten percent (10%) of the Aggregate consideration in
connection with any Alternative Transaction, such fees to be contingent upon the
consummation of an Alternative Transaction and payable at the closing thereof.
For purposes hereof, the term Aggregate Consideration shall mean the
total amount of cash and the fair market value (on the date of payment) of all
other property paid or payable, directly or indirectly, to or by the Company or
to the Company's security Holders [or its employees] in connection with an
Alternative Transaction or a transaction related thereto (including, without
limitation, amounts paid by the Company or any other party [(A) pursuant to
covenants not to complete, employment contacts, employee benefit plans, or other
similar arrangement and (B)] to holders of warrants, stock purchase rights,
convertible securities, or similar rights of the Company and to holders of any
options or stock- appreciation rights issued by the Company, whether or not
vested). Aggregate Consideration shall also include the value of any long-term
liabilities (including the principal amount of any indebtedness for borrowed
money) indirectly or directly assumed or acquired by the Company or any other
party, or otherwise repaid or retired in connection with or anticipation of an
Alternative Transaction. If any Alternative Transaction takes the form of a sale
or Purchase of assets, Aggregate consideration shall also include (i) the value
of any current assets not sold or purchased, minus (ii) the value of any current
liabilities not assumed. In the event of an Alternative Transaction that takes
the form of a recapitalization, restructuring, or similar transaction, Aggregate
Consideration shall also include the fair market value of the equity securities
of the Company retained by the Company's security holders following such
transaction (such securities and all other securities received by such security
holders, being deemed to have been paid to such security holders in such
transaction).
Section 3. Expenses. In addition to any fees that may be payable to
West America hereunder and regardless of whether any Alternative Transaction is
proposed or consummated, the Company hereby agrees, from time to time upon
request, to reimburse West America for all reasonable fees and disbursements of
West America's counsel and all of West America's reasonable travel and other
out-of-pocket expenses incurred in connection with any actual or proposed
transaction or otherwise arising out of West America's engagement hereunder,
provided that in no event shall the aggregate amount of expenses to be
reimbursed exceed $5,000.00 without the consent of the Company, which consent
shall not be unreasonably withheld.
Section 4. Indemnity. The Company agrees to defend, indemnify and hold
harmless West America, its directors, officers and employees, successors and
assigns from and against any an d all claims, demands, suits at law or in
equity, loss, damage, attorney's fees and liability of any kind due to, arising
out of or resulting from a breach of any covenant, representation or warranty
made by the Company in this Agreement, or arising out of or resulting from any
claim for or actual damage incurred by any party in a Transaction, except where
such claim is based on West America's gross negligence or willful misconduct.
The Company further acknowledges and agrees that West America shall have no
liability of any nature whatsoever due to or arising from a breach of the
company's warranties, express or implied, as to the Company's Product(s) and/or
Services(s), and agrees to defend, save, and hold West America harmless from any
claim of whatever nature arising therefrom.
-2-
<PAGE>
WA
Capital Markets Group
Section 5. Termination of Engagement; Etc. West America's engagement
hereunder may be terminated by either the company or West America at any time
after October 31, 1997, with or without cause, upon written advice to that
effect to the other party; provided, however, that West America will be entitled
to its full fees under Section 2 hereof in the event that at any time prior to
the expiration of two years after such termination an Alternative Transaction is
consummated; and provided further, that the provisions of this section 5 and
Sections 3 and 6 hereof shall survive any such termination.
Section 6. Miscellaneous.
(a) This letter agreement shall be deemed made in California. Such
agreements shall be governed by the laws of the state of California, without
regard to such state's rules concerning conflicts of laws. Any right to trial by
jury with respect to any claim or proceeding related to or arising out of this
engagement, or any transaction or conduct in connection herewith, is waived.
(b) The Company expressly acknowledges that all opinions and advice
(written or oral) given by West America to the Company in connection with West
America's engagement are intended solely for the benefit and use of the Company
(including its management, directors, and attorneys) in considering the
transaction to which they relate and the Company agrees that no such opinion or
advice shall be used for any other purpose or reproduced, disseminated, quoted,
or referred to at any time, in any manner, or for any purpose, nor shall any
public references to West America be made by the Company (or such persons),
without the prior written consent of West America, which consent shall not be
unreasonably withheld.
(c) The Company expressly acknowledges that West America has been
retained solely as an advisor to the board of directors of the Company, and not
as an advisor to or agent of any other person, and that the Company's engagement
of West America is not intended to confer rights upon any persons not a party
hereto (including shareholders, employees, or creditors of the company) as
against West America, West America's affiliates or their respective directors,
officers, agents and employees.
(d) The Company will furnish West America with such information as West
America reasonably may request (all such information being the ("Information").
The Company recognizes and confirms that West America (a) will use and rely
primarily on the information and on information available from generally
recognized public sources in performing the services contemplated by this letter
without having independently verified the same, and (b) does not assume
responsibility for the accuracy or completeness of the Information and such
other information.
* * *
-3-
<PAGE>
WA
Capital Markets Group
Please confirm that the foregoing is in accordance with your understandings and
agreements with West America Capital Markets Group, Inc. by signing and
returning to West America the original copy of this letter. Thank you.
Very truly yours,
West America Capital Markets Group, Inc.
By: /s/ Robert B. Kay
-----------------------------------------
Robert Kay
Managing Director
Accepted and Agreed as of the
Date first Above Written:
Intelligent Decision Systems, inc.
By: /s/ Mark A. Babin
-----------------------------------------
Signature
Mark A. Babin
----------------------------------------
Name
President
----------------------------------------
Title
-4-
AGREEMENT
THIS AGREEMENT is made as of the 1st day of June, 1997, by and between
DVI FINANCIAL SERVICES, INC., a Delaware corporation ("DVI") and NEPTUNE
TECHNOLOGY LEASING CORPORATION, a Michigan corporation ("Neptune").
Background
A. Neptune, a wholly owned subsidiary of Intelligent Decision Systems,
Inc. ("IDS"), is in the business of financing and leasing medical equipment and
other medical related assets.
B. Digital Sciences, Inc. ("DSI") has created computer hardware and
software systems for use by nursing homes and physicians. These systems are
respectively known as the "Vision System(s)" and the "Focus System(s)"
(hereinafter referred to collectively as the "System(s)").
C. DSI has granted Neptune, directly and through DSI's wholly owned
subsidiary, DSI Financial Corporation ("DFC"), the exclusive right to purchase
the Systems, on a unit by unit basis, when an end user has been identified who
desires to lease the right to use the subject System.
D. DFC in turn has granted Neptune the exclusive right to purchase all
of the Systems which DFC purchases from DSI.
E. Neptune either (i) leases the subject System directly to the end
user pursuant to a Rental Agreement, a true and correct copy of the form of
which has been delivered to DVI by Neptune (the "Rental Agreement"), or (ii)
leases the subject System to DFC pursuant to a Master Lease Agreement dated as
of March 6, 1996, a true and correct copy of which has been delivered to DVI by
Neptune (the "DFC Lease"), and DFC in turn subleases the subject System to the
end user pursuant to the Rental Agreement, which Rental Agreement is then
assigned to Neptune as additional security under the DFC Lease.
F. Neptune has agreed to offer to sell and assign to DVI, on a lease by
lease basis, all of Neptune's right, title and interest in certain new lease
transactions for the lease of Systems to end users (whether directly or through
DFC), along with Neptune's right, title and interest in any security which is
part of such new lease transaction (hereinafter referred to individually as a
"System Loan" and collectively as the "System Loans"), on the terms contained in
this Agreement.
G. As part of Neptune's business, Neptune also finances the purchase
and/or lease of other machinery, equipment and
<PAGE>
assets relating to the medical business (hereinafter referred to as the "Non-
System Loan(s)").
H. Neptune has also agreed to offer to sell and assign to DVI certain
of the Non-System Loans on the terms contained in this Agreement.
I. On September 6, 1994, Neptune Technology Leasing Corp., a Delaware
corporation ("Old Neptune"), sold and assigned to DVI an equipment loan with
American Mobile Imaging, L.C. ("AMI") for the sum of $419,265 (the "AMI Loan").
J. The AMI Loan transaction was documented by, among other things, a
certain Assignment Agreement dated September 6, 1994 from Old Neptune to DVI.
K. AMI subsequently defaulted under the AMI Loan, which resulted in a
loss to DVI of principal interest, late fees and costs of collection in excess
of $450,000 (collectively, the "DVI Losses").
L. A dispute has arose between DVI, Old Neptune and Neptune as to
whether Old Neptune and Neptune are required under the Assignment Agreement to
repurchase the AMI Loan and/or reimburse DVI for the DVI Losses.
M. In order to avoid litigation, DVI is willing to release its claim
for the DVI Losses against both Old Neptune and Neptune in consideration of
Neptune making certain payments and granting certain rights to DVI, as more
fully set forth herein.
NOW, THEREFORE, in consideration of the foregoing, and the mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. AMI Loan.
(a) Neptune agrees to pay to DVI, on account of the
DVI Losses, an amount equal to the AMI Repayment (hereinafter defined).
(b) The AMI Repayment shall be paid by Neptune to
DVI in installment payments in accordance with the terms of subparagraphs 2 (d)
(ii) and 3 (d)(ii) below (any payments made by Neptune to DVI under
subparagraphs 2 (d) (ii) and 3 (d) (ii) below are hereinafter referred to as the
"Credit Payments"), subject to the minimum payments required by Neptune under
subparagraph 1 (c) below. The term "Credit Payments" shall also include any
other supplemental payment made by Neptune to DVI during the term of this
Agreement and which have been specifically agreed to by DVI
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<PAGE>
and Neptune in writing to have been made on account of the AMI Repayment.
(c) Notwithstanding anything contained in this
Agreement to the contrary,
(i) If the total amount of the Credit
Payments, for the period from June 1, 1997 through May 31, 1998, is less than
$60,000, then Neptune shall pay to DVI, on account of the AMI Repayment, by
June 10, 1998, in addition to all other obligations of Neptune hereunder, the
difference between $60,000 and the total amount of the Credit Payments for the
aforesaid one (1) year.
(ii) If the total amount of the Credit
Payments, for the period from June 1, 1997 through May 31, 1999, is less than
$120,000, then Neptune shall pay to DVI, on account of the AMI Repayment, by
June 10, 1999, in addition to all other obligations of Neptune hereunder,
the difference between $120,000 and the total amount of the Credit Payments
for the aforesaid two (2) years.
(iii) If the total amount of the Credit
Payments, for the period from June 1, 1997 through May 31, 2000, is less than
$180,000, then Neptune shall pay to DVI, on account of the AMI Repayment, by
June 10, 2000, in addition to all other obligations of Neptune hereunder,
the difference between $180,000 and the total amount of the Credit Payments
for the aforesaid three (3) years.
(iv) If the total amount of the Credit
Payments, for the period from June 1, 1997 through May 31, 2001, is less than
$240,000, then Neptune shall pay to DVI, on account of the AMI Repayment, by
June 10, 2001, in addition to all other obligations of Neptune hereunder,
the difference between $240,000 and the total amount of the Credit Payments
for the aforesaid four (4) years.
(d) The total amount of the AMI Repayment shall
be determined based on the amounts required to be paid by Neptune under
subparagraphs 2 (d) (ii) and 3 (d) (ii) below, but in no event shall the total
amount of the AMI Repayment be less than $240,000 or more than $400,000.
(e) The term of Neptune's exclusive agreement
with DSI and/or DFC to purchase and lease back the Systems shall not in any
way suspend, affect or modify Neptune's payment obligations under subparagraph
1 (c) above.
-3 -
<PAGE>
(f) Neptune shall be entitled to a credit, to be applied on account of the AMI
Repayment as of June 1, 1997, based on the total of all payments tendered by
Neptune to DVI on account of the DVI Losses prior to the date of this
Agreement, in the amount of $4,400.00.
2. System Loans.
(a) Neptune agrees to offer to sell and assign to DVI
all of the System Loans for the Vision System on an exclusive basis and for the
Focus System on a non-exclusive basis. DVI shall have the first option, in DVI's
sole discretion, to purchase any or all of the System Loans as and when each
System Loan is presented by Neptune to DVI for DVI's consideration.
(b) Neptune shall deliver to DVI, at least five (5)
business days prior to the scheduled date of funding of any new System Loan
(whether directly with the end user or through DFC under the DFC Lease), all
lease transaction, credit and related information and documentation that DVI may
reasonably request in order for DVI to evaluate whether it desires to purchase
such System Loan. Neptune shall cooperate with any reasonable requests from DVI
for any additional documentation or information that DVI may require in order to
render a decision on whether to purchase a particular System Loan. Within five
(5) business days after the date when DVI receives the aforesaid documentation
and information, DVI shall notify Neptune whether or not DVI has elected to
purchase such System Loan. If DVI fails to notify Neptune of its decision with
respect to a particular System Loan by the five (5) business day deadline
referenced above in this subparagraph, then DVI shall be deemed to have elected
not to purchase such System Loan.
(c) If DVI elects not to purchase a particular System
Loan, then Neptune shall be permitted to sell such System Loan to a third party;
provided, however, if the business terms of such System Loan (i.e., principal
amount, interest rate, term, security, etc.) shall subsequently change in any
material respect, then Neptune shall be required to re-offer said System Loan to
DVI for DVI's reconsideration.
(d) If DVI elects to purchase a System Loan, the
purchase price shall be calculated as follows:
(i) An amount equal to the total remaining
payments due under the System Loan discounted back to the date of Closing
(hereinafter defined) at an interest rate equal to ____ basis points (___%) over
the published rate of U.S. Treasury Bonds and Notes (with a term as equal as is
possible to the same term as the System Loan being purchased) (hereafter, the
-4-
<PAGE>
"Equivalent Treasury Rate") on the date when DVI notified Neptune of its
election to purchase said System Loan.
(ii) The sum of $300 shall be deducted from
the amount calculated under subparagraph 2 (d) (i) above for each of the System
Loans being purchased by DVI. The aforesaid $300 deduction shall be applied as
of the date of Closing on account of the AMI Repayment.
(e) The form of documentation to be used by Neptune
for the System Loans, along with any revisions thereto, shall be subject to
DVI's and Neptune's reasonable approval and shall include the documentation set
forth on the Schedule of Required Documentation attached hereto as Exhibit "A".
DVI shall have the right to request Neptune to make reasonable revisions to said
form documentation as from time to time is reasonably requested by DVI during
the term of this Agreement, which requests shall not be unreasonably denied by
Neptune.
(f) The form of Assignment, along with any other
related documents, required to document the sale and assignment of any of the
System Loans from Neptune to DVI, shall be subject to DVI's and Neptune's
reasonable approval. Both Neptune and DVI shall have the right to request
reasonable revisions to the aforesaid Assignment during the term of this
Agreement. Without limiting the foregoing, the Assignment will contain customary
representations and warranties by Neptune with respect to the loans being sold
and assigned thereunder including, without limitation, the validity of and
authenticity of the underlying lease documents and security.
3. Non-System Loans.
(a) Neptune agrees to offer, on a non-exclusive basis,
to sell and assign to DVI any Non-System Loans that Neptune elects to offer to
DVI for DVI's consideration (the aforesaid Non-System Loans are hereinafter
referred to individually as a "N/S Loan" and collectively as the "N/S Loans").
(b) Neptune shall deliver to DVI, at least ten (10)
business days prior to the scheduled date of funding under any new N/S Loan, if
presented by Neptune to DVI for purchase, all lease transaction, credit and
related information and documentation that DVI may reasonably request in order
for DVI to evaluate whether it desires to purchase such N/S Loan and, if
applicable, the Third Party Price Calculation (hereinafter defined). Neptune
shall cooperate with any reasonable requests from DVI for any additional
documentation or information that DVI may require to render a decision on
whether to purchase a
-5-
<PAGE>
particular N/S Loan. Within ten (10) business days after the date when DVI
receives the aforesaid documentation and information, DVI shall notify Neptune
as to whether or not DVI has elected to purchase such N/S Loan. If DVI fails to
timely notify Neptune of its decision with respect to a particular N/S Loan,
then DVI shall be deemed to have elected not to purchase such N/S Loan.
(c) If DVI elects not to purchase a particular N/S
Loan, if presented by Neptune to DVI for purchase, then Neptune shall be
permitted to sell such N/S Loan to a third party; provided, however, if the
business terms of such N/S Loan (i.e., principal amount, interest rate, term,
security, etc.) shall subsequently change in any material respect, then Neptune
shall be required to re-offer said N/S Loan to DVI for DVI's reconsideration.
(d) If DVI elects to purchase a N/S Loan, the purchase
price shall be equal to:
the lessor of the DVI Price Calculation or the Third Party Price Calculation.
For purposes of this Paragraph 3, the DVI Price Calculation shall be an amount
equal to the total remaining payments due under the N/S Loan discounted back to
the date of Closing at an interest rate equal to ___ basis points (____%) over
the Equivalent Treasury Rate on the date when DVI notified Neptune of its
election to purchase said N/S Loan. The Third Party Price Calculation shall be
an amount equal to any purchase price that Neptune has been offered from any
independent third party financing source for the N/S Loan being offered to DVI.
(ii) If the interest due under the N/S Loan
being purchased by DVI is equal to or greater than ___ basis points (__%) over
the Equivalent Treasury Rate, then the following amount shall be deducted from
the amounts calculated under subparagraph 3 (d) (i) above for each of the N/S
Loans being purchased by DVI:
o If the interest rate due under the N/S Loan is ____
to ___ basis points (__% to ___%) over the Equivalent
Treasury Rate, then .5% of the original cost of the
subject equipment (the "Original Cost") shall be
deducted.
o If the interest rate due under the N/S Loan is ___
to ____ basis points (____% to ____%) over the
Equivalent Treasury Rate, then .75% of the Original
Cost shall be deducted.
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<PAGE>
o If the interest rate due under the N/S Loan is ____
or more basis points (___% or greater) over the
Equivalent treasury Rate, then 1% of the Original
cost shall be deducted.
All amounts calculated under this subparagraph 3 (d) (ii), if the subject N/S
Loan is purchased by DVI, shall be applied as of the date of Closing on account
of the AMI Repayment.
(e) The form of documentation to be used by Neptune
for the N/S Loans, along with any revisions thereto, shall be subject to both
Neptune's and DVI's reasonable approval. DVI shall have the right to request
Neptune to make reasonable revisions to said form documentation as from time to
time is reasonably requested by DVI during the term of this Agreement, which
requests shall not be unreasonably denied by Neptune.
(f) The form of Assignment, along with any other
related documents, required to document the sale and assignment of any of the
N/S Loans from Neptune to DVI, shall be subject to DVI's and Neptune's
reasonable approval. Both Neptune and DVI shall have the right to request
reasonable revisions to the aforesaid Assignment and other related documents
during the term of this Agreement. Without limiting the foregoing, the
Assignment will contain customary representations and warranties by Neptune with
respect to the loans being sold and assigned thereunder including, without
limitation, the validity of and authenticity of the underlying lease or loan
documents and security.
4. Term.
(a) The term of this Agreement shall commence on June
1, 1997 and terminate on May 31, 2001.
(b) If and when Neptune has paid DVI the sum of
$400,000 on account of the AMI Repayment, then no further deductions shall be
taken against the purchase price under subparagraphs 2 (d) (ii) and 3 (d) (ii)
above; however, all other terms and conditions contained in this Agreement shall
continue in full force and effect through May 31, 2001.
5. Closing.
(a) The term "Closing" hereunder shall be defined to
mean the date when DVI purchases a System Loan or a N/S Loan from Neptune
hereunder (i.e., payment of the purchase price and the delivery of the
Assignment Agreement).
- 7 -
<PAGE>
(b) Unless otherwise agreed to by DVI, the Closing on
any System Loan or N/S Loan shall be completed on the same date as when Neptune
completes funding thereunder with the respective end user or DFC as the case may
be.
(c) Any rental payments that were pre-paid under any
of the System Loan and/or the N/S Loans, prior to Closing for periods subsequent
to Closing, shall be credited against the purchase price owed by DVI to Neptune
hereunder.
6. Notices. All notices, requests and other communications under
this Agreement shall be in writing and shall be deemed to have been properly
given if personally delivered, sent by facsimile (with confirmation being
retained in the sender's file), or sent by private overnight express carrier,
such a Federal Express, next day delivery, charges pre-paid addressed as
follows:
If intended for DVI:
Joseph F. Malott, Director,
Credit Documentation
DVI, Inc.
500 Hyde Park
Doylestown, PA 18901
Fax: (215) 230-8108
with a copy to:
Robert W. Gundlach, Esquire
Fox, Rothschild, O'Brien & Frankel
2000 Market Street, 10th Floor
Philadelphia, PA 19103
Fax: (215) 299-2150
If intended for
Neptune: Eugene J. Feher, President
Neptune Technology Leasing Corp.
88 Danbury Road
Wilton, CT 06897
Fax: (203) 762-0921
with a copy to: David M. Keller, Esquire
Intelligent Decision Systems, Inc.
2025 East Beltline Avenue, S.E. Suite 400
Grand Rapids, MI 49546
Fax: (616) 285-0249
or at such other address for which DVI or Neptune shall have been given notice
as herein provided. Notices by the parties may be
-8-
<PAGE>
given on their behalf by their respective counsel. All such notices, requests
and other communications shall be deemed to have been sufficiently given for all
purposes on the date of delivery, if personally delivered or sent by facsimile,
or the date of deposit, if sent by private overnight express courier.
7. Neptune's Default. In the event Neptune violates or fails
to fulfill or perform any of the terms contained in this Agreement required to
be performed by Neptune, then DVI shall have the right, after the delivery to
Neptune of written notice specifying the nature of such default and Neptune's
failure to cure any such default within fourteen (14) days after the receipt of
such notice, in DVI's option and in lieu of any other remedy which may be
available to DVI at law or in equity (including, without limitation, the right
to compel specific performance of Neptune's obligations hereunder or the right
to reimburse DVI for any lost profits or costs), to terminate this Agreement,
whereupon Neptune shall be immediately required to pay to DVI the difference
between $240,000 and the total amount of the Credit Payments through the date of
termination.
8. Arbitration. Any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration administered by the American Arbitration Association under its
Commercial Arbitration Rules out of its Philadelphia, Pennsylvania office, and
judgment on the award rendered by the arbitration(s) may be entered in any Court
having jurisdiction thereof. The non-prevailing party in any such arbitration
proceedings (who shall be determined by the arbitrator(s)) shall be required to
reimburse the prevailing party for all reasonable attorney's fees and costs
incurred by the prevailing party in such arbitration proceedings.
9. Release. In consideration of the agreements contained in
this Agreement (including, without limitation, Neptune's agreement under
Paragraph 1 (c) above), DVI and Neptune each shall release and forever discharge
the other from any and all actions, causes of action, suits, claims and demands
of every kind and nature whatsoever, whether now known or hereafter to become
known, anticipated or unanticipated, which either party ever had, now has or may
have had, by reason of any matter, cause or thing whatsoever, arising out of,
related to or in any way connected with the AMI Loan. Nothing contained in this
paragraph shall prevent DVI from enforcing the terms contained in this
Agreement.
10. Representations and Warranties. Neptune hereby represents
and warrants that the information contained in the "Background" section of this
Agreement (other than with respect to the amount of the DVI Losses) is true and
correct.
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<PAGE>
11. Miscellaneous.
(a) The headings in this Agreement are inserted for
convenience of reference only and in no way defined, describe or limit the scope
or intent of this Agreement or any of the provisions hereof.
(b) This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns.
(c) Neptune shall not have the right to assign its
rights and/or obligations under this Agreement.
(d) This Agreement contains the entire agreement
between Neptune and DVI concerning the subject matter hereof.
(e) This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of the date first above written.
DVI FINANCIAL SERVICES, INC.
Attest: /s/ Arlene Antonelli By: /s/ Joseph F. Malott
------------------------- -------------------------------
(Vice) President
NEPTUNE TECHNOLOGY LEASING
CORPORATION
Attest: /s/ Jonathan Preiser By: /s/ Eugene J. Feher
------------------------ ------------------------------
Eugene J. Feher, President
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<PAGE>
GUARANTY AND SURETY
A. The undersigned, intending to be legally bound hereby, has agreed to
guarantee and act as a surety for, the full performance of all the monetary
obligations of Neptune Technology Leasing Corporation under this Agreement.
INTELLIGENT DECISION SYSTEMS, INC.
Attest: /s/ David M. Keller By: /s/ Mark A. Babin
------------------------ ------------------------------
President
B. The undersigned, intending to be legally bound hereby, consents to,
and agrees to cooperate with Neptune Technology Leasing Corporation in
connection with, the sale and assignment of any System Loans to DVI in
accordance with the terms of this Agreement.
DIGITAL SCIENCES, INC.
Attest: /s/ Jonathan Preiser By: /s/ David Horowitz
------------------------- ---------------------------
President
DSI FINANCIAL CORPORATION
Attest: /s/ David M. Keller By: /s/ David Horowitz
------------------------- ---------------------------
President
INTELLIGENT DECISION SYSTEMS, INC.
Attest: /s/ David M. Keller By: /s/ Mark A. Babin
------------------------- ---------------------------
President
The following is a list of the Intelligent Decision Systems, Inc.'s
subsidiaries:
1. Digital Sciences, Inc.
Digital Sciences, Inc. is a Delaware corporation that was
incorporated on June 1, 1995 and does business under the name
of Digital Sciences, Inc.
2. The Neptune Group, Inc.
The Neptune Group, Inc. is a Michigan corporation that was
incorporated on July 2, 1996 (after the Company's 6/30/96 fiscal
year end) and does business under the name of The Neptune Group,
Inc. and Neptune Technology Leasing Corp.
WILBER &
TOWNSHEND P.C.
Certified Public Accountants 465 Baldwin St.
Business Advisors Jenison, MI 49428
PH: 616-457-4880
FX: 616-457-1114
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our audit report dated September 19, 1996 for the year
ended June 30, 1996 contained in the financial statements section of Intelligent
Decision Systems, Inc.'s Form 10-KSB for the year ended June 30, 1997.
/s/ Wilber & Townshend
Jenison, MI
September 26, 1997
Coopers Coopers & Lybrand, L.L.P.
& Lybrand a professioan serices firm
We consent to the incorporation by reference in the registration statements of
Intelligent Decision Systems, Inc. and Subsidiaries (a Development Stage
Company) on Forms S-3 (File Nos. 333-3437 and 333-10175) and S-8 (File Nos.
333-20261 and 333-24853) of our report, dated August 27, 1997, on our audit of
the consolidated financial statements and financial statement schedule of
Intelligent Decision Systems, inc. as of June 30, 1997, and for the year ended
June 30, 1997, which report is included in this Annual Report on Form 10-KSB.
/s/ Coopers & Lybrand L.L.P.
Grand Rapids, Michigan
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the financial
statements contained in Intelligent Decision Systems, Inc.'s Report on
Form 10-KSB for the fiscal year ended June 30, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 879500
<NAME> Intelligent Decision Systems, Inc.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 355,009
<SECURITIES> 0
<RECEIVABLES> 482,598
<ALLOWANCES> 16,598
<INVENTORY> 53,534
<CURRENT-ASSETS> 1,331,565
<PP&E> 786,194
<DEPRECIATION> 393,782
<TOTAL-ASSETS> 3,474,576
<CURRENT-LIABILITIES> 1,594,998
<BONDS> 333,338
0
0
<COMMON> 13,090,824
<OTHER-SE> (11,544,584)
<TOTAL-LIABILITY-AND-EQUITY> 3,474,576
<SALES> 1,919,831
<TOTAL-REVENUES> 1,919,831
<CGS> 0
<TOTAL-COSTS> 1,997,410
<OTHER-EXPENSES> 4,172,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,038
<INCOME-PRETAX> (4,032,103)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,032,103)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,032,103)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
