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 December 31, 1997.
Commission file number: 0-25338
INTIME SYSTEMS INTERNATIONAL, INC.
(Name of small business issuer in its charter)
DELAWARE 65-0480407
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 FORUM PLACE, WEST PALM BEACH, FL 33401
- ------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 478-0022
Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Units consisting of 1 share of Class A Common Stock and 1 Class A Warrant
Class A Common Stock
Class A Warrants
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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]
Revenues for its most recent fiscal year. $13,881,632.
The aggregate market value of the voting stock held by non-affiliates based on
the closing price quoted by NASDAQ on March 31, 1998: $27,527,451. (Includes the
value of Class A Common Stock. See Item 11).
Number of shares outstanding of each of the issuer's classes of common equity,
as of March 18, 1998:
Class A Common Stock 4,516,493 Shares
2,360,000 Class A Warrants
Documents incorporated by reference:
None.
Transitional Small Business Disclosure Format (check one):
YES ___ NO X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
InTime Systems International, Inc. (the "Company") and its wholly owned
subsidiaries, the Consulting Team ("TEAM"), are primarily engaged in providing
system integration services relating to the selection, implementation and use of
human resources, payroll and selected software systems. The Company was
incorporated in Delaware in January 1994 and acquired all of the common stock of
TEAM, a Florida corporation organized in 1985 and InTime Systems, Inc., a
Delaware corporation organized in 1993. The Company's headquarters are located
in West Palm Beach, Florida.
In 1995, the Company developed a proprietary time and attendance management
software system, ("TAMS"), which provides management with combined time,
attendance, payroll and human resource information on a real time basis. TAMS
integrates the human resource and payroll systems for producing a paycheck,
allowing employers to efficiently and accurately produce a paycheck and collect
information to better monitor, analyze, and audit human resource costs in their
business. Since 1985, TEAM has been providing consulting services to employers
relating to the selection, implementation and use of human resource, payroll and
selected software systems. It is from this experience that TAMS was developed
incorporating many features that were not available in client human resource
and/or payroll systems.
In January 1997, the Company signed a technology license agreement (the
"Agreement") with ORACLE Corporation ("ORACLE") allowing ORACLE to promote,
market and distribute TAMS/O (OTM) through its worldwide distribution channels.
The Company also continues to market TAMS/O through its existing sales team.
PRODUCT AND SERVICE DESCRIPTION
CONSULTING SERVICES
The Company provides consulting services on Human Resource Management Systems
("HRMS") for primarily Fortune 1,000 companies. The primary focus is directed
toward strategic services consulting and full system implementation projects for
major HRMS applications, such as Oracle, PeopleSoft, and ADP. TEAM's consulting
fulfillment staff is structured around two (2) major consulting areas: Strategic
Services and HRMS implementation. The Strategic Services group provides
consulting services on process reengineering and improvements, HRMS needs
evaluation, vendor selection and negotiations, generalized human resource,
payroll and benefit administration and establishing human resource information
centers. The HRMS implementation group provides consulting services on all
aspects of HRMS implementation projects, including project definition, fit
analysis, data modeling, functional and technical assistance on the
implementation of packaged systems into production environments.
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CONSULTING STAFF
TEAM's HRMS consulting staff consists primarily of senior level consultants who
are experienced with human resource, payroll and benefit administration
practices and recent changes in industry standards, technological advances in
vendor systems, and government compliance regulations. TEAM's staff contains a
blend of functional skills necessary to apply the business needs to the system's
technology and technical skills needed to ensure the systems are designed with
enough flexibility to handle the ever-changing business practices.
The Company recognizes that its success can be sustained only through the
efforts and quality of its consultants. Management has responded and provides
responsive technical and professional support to all of its consultants.
Additionally, TEAM recently established an employee training program to ensure
its consultants are knowledgeable in the latest applications, technology and
project management expertise.
MARKETING CONSULTING SERVICES
The Company's consulting services are marketed by public or association
presentations, speeches and the preparation of relevant professional articles:
by identifying prospective clients through participation in professional
organizations, direct mail advertising in trade journals and publications read
by corporate executives: by developing alliances with major HRMS vendors and
other third party consulting organizations: and through referrals or inquiries
to TEAM by prospects who have heard of TEAM's successful engagements with other
clients. The Company continues to expand all of these traditional lead
development avenues by adding new senior sales personnel, offering customer
incentives, and by marketing TEAM's proprietary methodologies.
COMPETITION
The Information Technology (IT) services industry is extremely competitive and
highly fragmented. Although the market is consolidating, management does not
believe any one company is dominant in the HRMS consulting field. Some of the
Company's competitors possess substantially greater resources, greater name
recognition and a more established client based than the Company. Management of
the Company believes that the significant and competitive factors in the sale of
its services include the quality of the consultant services, price and
reputation.
Prime contractors represent additional competitive challenges. As many
businesses strive to provide enterprise-wide solutions in their software
selections, some have also gone to enterprise solutions for the systems
integration IT with respect to implementation of these systems. The Company is
taking steps to become an enterprise solution for certain vendor products.
The Company believes that specializing in the implementation of human
resource/payroll/benefit systems is a unique service. By having a specialization
in this area, thirteen years of experience and a solid reputation, TEAM will
continue to have the ability to compete with larger and more recognized firms.
TEAM is one of only a few specialized firms that provide full-service technical
and functional assistance in the human resource, payroll and benefit systems
area.
CONSULTING AGREEMENTS
Consulting services for all of TEAM's projects are documented through a
Professional Services Agreement ("PSA") and a Work Authorization Form ("WAF").
The PSA is written to cover the basic contractual terms while the WAF contains
the specifics, such as rates and deliverables for each consulting engagement. By
breaking contractual terms from specific terms for individual projects, a
consulting engagement can be expanded to accommodate additional work or rate
increases without having to renegotiate the contract. A typical implementation
consulting contract involves two to four staff members for a period of six
months to one year. Strategic service projects are more focused and average one
to two staff members for a period of one month to six months.
Consultants work with clients on an hourly, daily, weekly or monthly basis.
Generally, TEAM charges its clients for consulting services on an hourly or per
diem rate basis. However, TEAM has entered into 'fixed price' and 'not
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to exceed bid' contracts. These contracts are typically executed when TEAM has
completed a project definition audit to correctly assess the effort and
resources required.
Clients and the Company's staff must sign a confidential disclosure and
non-compete agreement, which preclude them from hiring any of the Company's
consultants for a period of six months after the Company's contract with the
client is completed.
MAJOR CUSTOMERS
During 1997, the following customers comprised 10% or more of the Company's net
revenue:
THE NEW YORK TIMES COMPANY 12.00%
ASPLUNDH TREE SERVICE 10.70%
The Company's major customers vary from year to year. See Item 7 note 8.
SOFTWARE PRODUCTS
The Company has two versions of TAMS. The first version is the original TAMS
product, which was developed for operation in a mainframe environment. The
second, TAMS/O, was specifically developed to work exclusively with the Oracle
HRMS system.
In 1996, the Company discontinued the sale of the mainframe version of TAMS.
This was primarily due to the fact that the HRMS market in general has moved to
client/server technology. This has resulted in minimal expenditures by the
Company for the mainframe-based products.
TAMS/O was specifically developed to work exclusively within the Oracle human
resource and payroll system. The system was developed pursuant to Oracle
Application Technical Standards, and therefore provides employers with a
seamless interface between the systems.
Operating in an integrated environment eliminates the traditional need for
multiple interfaces and high manual maintenance efforts associated with
stand-alone time and attendance systems.
TAMS/O can provide employers with many efficiency and cost saving benefits,
including:
\bullet\ Elimination of duplicate payments, overpayments and underpayments;
\bullet\ Eliminating the typical "time-crunch" associated with meeting
payroll deadlines, which often lead to multiple errors;
\bullet\ Eliminating the manual activity involved in consolidating,
calculating, verifying, correcting, balancing and editing time
and attendance system data prior to payroll processing;
\bullet\ Controlling labor costs by providing management immediate
information, such as attendance and work trends in various
units and notice of where time or cost limits have been exceeded;
\bullet\ Tracking accrued vacation and leave time and other employee
entitlements such as family leave to facilitate the audit process
and reduce auditing cost;
\bullet\ Scheduling employees for work on many different shifts and plans;
\bullet\ Helping management optimize the labor force mix of permanent,
part-time, contract or shared-job employees.
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MARKETING AND SALES STRATEGY
TAMS/O
In January of 1997, the Company entered into an agreement with Oracle which
allows for the distribution of the TAMS/O product directly by Oracle. Under this
agreement, Oracle may market the product under their own product name ("OTM"),
and the product will be listed on the Oracle price list and sold with Oracle
HRMS systems. The product may also be licensed directly by Oracle's authorized
distributors.
Under the agreement, the Company will provide support to Oracle marketing, and
support consultants on the OTM product. Specifically this will include assisting
Oracle in developing sales and marketing s material, and instructing Oracle
marketing support personnel in the performance of presentation and demonstration
of OTM, and in supporting the global demonstration version of the OTM product
for Oracle. The Company also agrees to provide technical support in enhancing
OTM for future releases.
During the term of this agreement Oracle has the option to acquire from the
Company a worldwide, perpetual, royalty-free, irrevocable, non-exclusive right
and license. In the event Oracle exercises the option, Oracle shall pay the
Company the sublicense fees for a period of three years from the exercise date.
It is anticipated that the OTM product will be demonstrated to each of Oracle's
prospective HRMS customers, as the product will be included in their global
demonstration system, and in Oracle application sales training.
Although the agreement is non-exclusive and does allow the Company to directly
market the product, management does not foresee significant benefits in this
course of action and will minimize any direct sales efforts for this product.
Oracle will be licensing the product directly to its customers under similar
terms for the licensing of Oracle's own products. The Company will receive a
royalty from each of the licenses Oracle and/or its distributors conclude
pursuant to the conditions of the agreements.
LICENSE, MAINTENANCE, AND SERVICE AGREEMENT
When the Company makes direct sales of its current TAMS/O product, the Company
provides a warranty of title against major programming defects. The licensee can
also elect an annual maintenance plan at a cost of approximately 19% of the base
license fee. The Company enters into contracts with its customers to directly
customize TAMS/O as part of a separate professional services agreement. The
estimated revenue from implementation and consulting services can be
approximately 4 to 7 times the cost of the license fee.
COMPETITION AND TAMS/O
TAMS/O is the only time and attendance system which is fully integrated and
formally approved (through the CAI approval process) with the Oracle HRMS
systems. Although there are many stand-alone and independent management systems
on the market, all require interfaces to be maintained and built, with
duplication of data, additional training, and lower level of integrated
functionality than is offered with TAMS/O.
As a result of the new technology license agreement with Oracle, it is
anticipated that TAMS/O will be the only time and attendance management system
offered directly by Oracle with integration with its payroll system.
The agreement with Oracle is not exclusive; therefore, there can be no assurance
that other companies with financial resources and expertise in this specialized
field do not have or are not currently developing a functionally equivalent
product that will become available to Oracle in the near future. The computer
industry is characterized by rapidly changing technology and is intensely
competitive. The Company's ability to continue to provide Oracle with a
competitive product will depend on Oracle's ability to license OTM, and provide
a continuing revenue stream to the Company to enhance and improve it. There can
be no assurance that the Company will be able to compete successfully or that
those competitors will not develop technologies, products, or relationships that
will render TAMS/O obsolete or less marketable or that the company will be able
to successfully enhance TAMS/O on an on-going basis.
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DEVELOPMENT
The Company is committed to refining TAMS/O and OTM to meet the changing needs
of the market place and assuring continued compatibility of the product with the
introduction of any new software. No assurances can be given that the Company
will be able to do so, or if able to do so, that these refinements and upgrades
will be introduced in a timely manner. The Company currently employs 7
development staff who expects to devote all or a portion of their time to
development support in accordance with the Oracle distribution agreement. The
Company's research and development department will handle all product
enhancement activity, maintenance, and modification of OTM in connection with
the Oracle agreement.
EMPLOYEES
Currently, the Company has 83 full-time employees, including its executive
officers. The Company is currently using the services of 15 independent
contractors. The Company's staff is divided into 10 employees in administration,
12 in sales and marketing, 10 in product development, 1 in software sales, 1 in
training, 1 in recruiting, and 47 consultants. None of the Company's employees
or independent consultants are covered by a collective bargaining agreement;
however, most are engaged by a standard letter agreement. Each person has signed
a non-compete and confidential disclosure agreement.
The Company's success depends on its ability to attract and retain consultants
with the technical skills require to meet client specific needs. The IT industry
has high consultant turnover rates and the demand for consultants to date has
substantially exceeded supply. This has resulted in intense competition for
consultants and the Company expects such competition for consultants to increase
in the future. There can be no assurances that the Company will attract and
retain the personnel it requires to conduct its operations successfully or
attract additional personnel for expanded operations. Failure to attract and
retain such personnel or an increase in the Company's consulting turnover rate
could have a material adverse affect on the Company's business, operating
results and financial conditions.
Due to the high demand for IT services and the shortage of qualified IT
consultants, management anticipates salary increases in the IT industry will
surpass normal levels of those of other industries. If the demand continues to
be strong, the trend of salary increases could have a material adverse affect on
the Company's business, operating results and financial conditions, if the
Company is unable to pass the increased payroll cost on to its clients. The
Company attempts to pass these costs on to the clients to offset the increases
where possible. There can be no assurances that all increases can be passed on
to the customer.
SEASONALITY
The Company's operating results are adversely affected when the client
facilities close due to holidays or inclement weather. The Company generally
experiences a certain amount of seasonality in the fourth quarter due to the
number of holidays and closings of client facilities during that quarter.
Further, the Company may experience lower operating results in the first quarter
due in part to the timing of client budget approval processes.
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YEAR 2000 ISSUES
The Company has completed an initial evaluation of its internal systems and
concluded that its current financial systems are Year 2000 compliant and as
such, transition to the Year 2000 will not have a material impact on the
Company. The Company's product, TAMS/O, has also been evaluated and considered
year 2000 compliant.
The Company is exposed to external Year 2000 risk through the Company's
suppliers and financial institutions if these third party vendor's systems are
not Year 2000 compliant. These disruptions could include the client's inability
to process payment to the Company or financial institution's inability to
process checks drawn on the Company, accept deposits, wire transfers. Other
suppliers and vendors that could have an impact on the Company include a loss of
data communications and other interruptions essential to the normal conduct of
business of the Company. The Company is unable to determine the nature or impact
of such interruptions, if any, at this time.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases all of its office space. The headquarters is in
West Palm Beach, Florida, with additional sales and marketing offices in the
Dallas, TX and Burlingame, CA areas. The research and development office is in
Columbia, South Carolina. Set forth below is a summary of the offices leased by
the Company.
LOCATION SQUARE FEET ANNUAL RENTAL EXPIRATION DATE
- -------- ----------- ------------- ---------------
West Palm Beach, Fla. 10,529 $186,155 Nov. 2001 (1)
Columbia, SC 3,600 $40,710 July 1998 (2)
Dallas, TX 285 $13,927 Jan. 1998 (3)
Burlingame, CA 229 $13,800 (3)
1) 10,529 square feet in an office complex in West Palm Beach. The lease
expires 2001. The rental rates, including CAM, range from $15.00 to $19.25
per square foot over the life of the lease.
2) 3,600 Sq.Ft. expires July 1998. Management anticipates continuing on a
month to month basis.
3) Space rented in executive office suites. No long-term arrangements have
been entered into.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICES OF SECURITIES
Effective February 16, 1995 the Company's units; consisting of 1 share of Class
A common stock and 1 Class A warrant to purchase 1 share of Class A common
stock, began trading on the Small Cap Market of the NASDAQ Stock Market under
the symbols: units, TAMSU; Class A common stock, TAMSA; and Class A Warrants,
TAMSW.
As of March 20, 1998, the Company believes there were in excess of 300
beneficial owners for the common stock units, Class A common stock, and
warrants. The high and low bid prices for the period January 1, 1996 through
December 31, 1997 as reported by NASDAQ are:
1996 1997
---- ----
UNITS (TAMSU) HIGH LOW HIGH LOW
------------- ---- --- ---- ---
Fourth Quarter $10.50 $9.00 $7.06 $5.25
Third Quarter $ 9.58 $8.50 $8.50 $7.00
Second Quarter $10.75 $8.38 $8.94 $7.25
First Quarter $ 9.88 $8.25 $9.94 $8.88
CLASS A COMMON STOCK (TAMSA) HIGH LOW HIGH LOW
---------------------------- ---- --- ---- ---
Fourth Quarter $ 8.00 $6.89 $6.25 $4.38
Third Quarter $ 7.47 $6.50 $7.25 $5.75
Second Quarter $ 8.00 $6.25 $7.25 $6.38
First Quarter $ 6.89 $6.13 $7.25 $7.00
CLASS A WARRANTS (TAMSW) HIGH LOW HIGH LOW
------------------------ ---- --- ---- ---
Fourth Quarter $ 2.75 $1.75 $1.38 $0.81
Third Quarter $ 2.25 $1.63 $1.98 $1.06
Second Quarter $ 2.75 $2.00 $2.25 $1.50
First Quarter $ 3.00 $2.00 $2.12 $1.75
At March 26, 1998, the closing prices for the Company's common stock units,
Class A common stock and warrants as reported by NASDAQ, were 8, 7, and 1.5
respectively. Such prices reflect inter-dealer prices and do not reflect retail
mark-ups, mark-downs, or commissions. Although there are no restrictions on the
Company's ability to pay dividends to date, the Company has not declared any
cash dividends on any class of security nor does it anticipate doing so in the
foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
GENERAL
The following selected financial data and discussion should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto, and is qualified in its entirety by the foregoing and by other detailed
financial information included elsewhere in this annual report.
SELECTED FINANCIAL DATA
The following tables set forth selected financial and operating data for the
years ended December 31, 1997 and 1996. The information for the years ended
December 31, 1997 and 1996 has been derived from the consolidated financial
statements of the Company, which have been audited by Price Waterhouse LLP, the
Company's independent accountants and appears elsewhere in this annual report.
YEAR ENDED DECEMBER 31,
1996 1997
---- ----
STATEMENT OF INCOME DATA: (DOLLARS IN THOUSANDS)
Revenues:
Consulting Services......................... $11,193 $12,732
Software Related Services (1)............... 479 1,003
Other....................................... 65 146
------- -------
Net Revenues................................ 11,737 13,881
Cost and Expenses:
Consulting Services......................... 6,003 7,713
Cost of Software Services (1)............... 353 508
Sales and Marketing......................... 2,864 1,941
Software Development........................ 810 649
General and Administrative.................. 1,648 2,798
Income Before Taxes........................... 60 272
Income Taxes Benefit........................ - 292
------ -------
Net Income.................................... $60 $564
Net Income Per Share - basic.................. $ .02 $ .22
Net Income Per Share - diluted................ $ .02 $ .21
(1) Software related services revenue is derived from software license fees and
maintenance fees. Software service costs are direct costs associated with
the Company's proprietary software product TAMS/O including salaries,
wages, travel, and other expenses incurred in earning the software related
services revenues.
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RESULTS OF OPERATIONS
The following table sets forth expense items as a percentage of net sales for
the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
---- ----
Net Revenue............................ 100.00% 100.00%
Consulting Service Costs ............. 51.10 56.00
Software Service Costs ............... 3.00 4.00
Sales/Marketing Expenses ............. 24.40 14.00
Software Development ................. 6.90 5.00
General and Administrative Expenses ... 14.00 20.00
------ ------
Income from Operations ............... .01% 2.00%
======= =======
REVENUES
Net revenues for the year ended December 31, 1997 increased by $2,187,600 or 19%
over net revenues for 1996. This revenue growth is derived primarily from two
sources - Consulting Services and Software License Fees. Revenue growth from
Consulting Services is derived primarily from the utilization of consultants and
increased billing rates. The increase represents a combination of increased
billing rates, and the strong demand for systems integration services. Although
the demand for consulting services remains strong and the outlook is good, it is
unlikely that the Company, in the future, can continue to grow at the current
rate solely from billing rate increases.
Software related revenue increased by $503,830 from 1996 to 1997 or
approximately 101%. The growth of software related revenue is due primarily to
license fees received from the royalty associated with the Oracle Licensing
Agreement as well as direct sales of TAMS/O to customers. The increase in the
revenue was directly affected by the roll out of the Oracle HMRS product in June
of 1997.
In January of 1997, the Company entered into an agreement with Oracle
Corporation, which allows for the worldwide, non-exclusive distribution of
TAMS/O directly by Oracle. Under this agreement, Oracle may market the product
under their own product name, OTM. The product will be listed on the Oracle
price list and sold with Oracle HRMS systems. At this time, management cannot
reasonably estimate the impact on software sales of the Oracle distribution of
OTM.
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CONSULTING SERVICE COSTS
For the year ended December 31, 1997, the cost of consulting services increased
by $1,714,002 or 29% and represented 69% of consulting revenues. For the same
period in 1996, the cost of consulting services were 54% of consulting revenues.
The cost of the consulting services as a percentage of consulting revenues can
be impacted by several factors. These factors include the cost of individual
consultants and the actual billable time they achieve during the year. As the
demand for consultants and systems integration increases, the Company expects
that the cost for individual consultants will also increase. Management
anticipates passing these costs along to their clients; however, there are no
assurances that the cost increases can be completely passed through or passed
through at all. During the first half of 1997 the Company expanded its
consulting staff expecting substantial new Oracle implementation business.
During 1997 the actual billable time ("utilization") of the consulting staff was
below what was anticipated by management because TEAM did not close the
contracts for the implementation of Oracle HMRS software that had been
anticipated, due to delays in the product release. During 1997, the mix of
Oracle HRMS implementation consultants represented 66% of our existing
consulting staff. PeopleSoft consultants represented the remaining 33% of the
consultants. As a result of the industry demand for systems integration
services, the Company has focused on specific vendor applications and larger
implementations. The Company will be hiring new consultants and training them on
applications that the Company views have the largest growth potential. This will
include Oracle, PeopleSoft, and ADP. The hiring and training period will
represent non-billable time and will have a negative impact on margins between
consulting revenues and the cost of consulting services. Management believes
that this will be a short-term impact; however, the long-term benefits of having
the resources available to meet demand will outweigh this temporary impact to
earnings.
In addition to the items noted above, the Company also uses independent
contractors. Cost for outside contractors can range 30% to 60% higher than
internal consultants depending on the technical abilities of the contractor. The
mix between employees of the Company and outside contractors could have a
significant impact on the cost of consulting services. The increased costs
associated with the independent contractors generally cannot be passed on to
clients.
SOFTWARE SERVICE COSTS
Software service costs are direct costs primarily associated with the Company's
proprietary TAMS/O product. These costs include salaries, wages, travel, and
other expenses incurred from sales support efforts.
For the year ended December 31, 1997, software services costs increased by
$155,795 from the same period in 1996. Software services costs were 51% of
software related revenues for the year ended December 31, 1997. For the year
ended December 31, 1996, such cost were 71% of software related revenues.
Management anticipates that as OTM sales increases, the cost of sales and sales
support will decrease as a result of the Oracle licensing agreement. The Company
will be required to provide sales support in conjunction with this contract but
management does not anticipate this cost to be material in relation to the
revenue.
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SALES AND MARKETING EXPENSES
Sales and marketing expenses as a percentage of net sales decreased from 24% in
1996 to 14% in 1997. The drop in the percentage of sales and marketing expense
to net revenues can be attributed to a reduced focus on external sales of the
software products TAMS and TAMS/O. In 1996, a significant effort was put into
the distribution of the product but was abandoned due to the delayed release of
the Oracle HRMS and payroll products. In addition, certain costs classified as
sales and marketing in the prior year have been reclassified to general and
administrative expense to more accurately reflect the nature of the costs. These
costs included the salary of the CEO as well as rent at the corporate office. In
addition, a more territorial dispersion of sales staff took place in 1997, which
cut down on travel and related cost associated with sales-calls and related
proposals. As previously noted under the Consulting Revenue section, the Company
has turned its focus to three primary HR and payroll systems applications, which
should further assist in maintaining sales and marketing-related expense at its
current levels.
SOFTWARE DEVELOPMENT EXPENSES
Software development costs decreased by $161,262 or 20% during 1997 as compared
to the same period in 1996. Software development costs consist primarily of
salary and wages of the development staff required to support the existing
TAMS/O systems and the Oracle agreement. Any future additional cost will be
based on the support required as a result of product sales and/or client
specific customization and would be entirely offset by such revenue.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $1,160,226 or 71% over 1996. As
a percent of net revenues, general and administrative expenses were 20% and 14%
for the year ended December 31, 1997 and 1996, respectively. During the third
quarter of 1997, the Company accrued a non-recurring charge of approximately
$182,000 related to the severance for certain officers of the Company in
accordance with the Company's reorganization. In addition, as previously
mentioned, the Company has reclassified certain costs from sales and marketing
expense to general and administrative expenses to more properly reflect the
nature of these expenditures. These costs include the salary of the CEO as well
as the rent on the corporate headquarters. Also included in general and
administrative costs were the recruiting costs for consulting. The Company
experienced a significant increase in the recruiting costs for 1997 over 1996.
Total costs for recruiting during 1997 was $554,000. As a result of the rapid
advances in the IT industry, implementation of HRMS systems have become
increasingly complex. The advances in the technology systems have required many
organizations to turn to Information Technology service firms such as the
Company for implementation support. The advance accompanied with a shortage of
IT consultants qualified to support these new systems has made it increasingly
costly and competitive in the marketplace to hire and retain qualified
consultants. As the industry continues to develop, management anticipates that
the cost of training and recruiting and retaining qualified consultants will
continue to increase over time. Management is unsure whether the increased costs
associated with hiring and retaining consultants can be passed on to its
customers.
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RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Company reported net income of
$564,362 as compared to net income $60,335 in 1996. The increase in net income
was attributable to:
1. A reduction in the overall costs incurred in the development of software
products.
2. Decreased sales and marketing expenses relating to TAMS.
3. Increased revenue from software.
In 1997 the Company signed the Oracle Agreement for the distribution of the
Company's Time and Attendance software product (OTM). In conjunction with the
signing of the agreement and the shipment of the first product, the company
received a $500,000 advanced royalty payment $387,500 of which is included in
the software revenue for 1997. In addition, the Company sold product directly to
customers representing approximately $600,000 in 1997, which contributed to the
significant increase in software revenues for 1997. Offsetting this contribution
from the software was an increase in the costs of consulting services for 1997.
This increased cost is partially attributable to the increasing salaries of
consultants. As the market becomes increasingly competitive due to the shortage
of qualified consultants, the salaries will also increase. In addition to the
increasing costs, the Company experienced a lower than anticipated utilization
for the year due to a significant investment in Oracle consultants and related
training. Management does anticipate the Oracle consulting margins will improve
for 1998.
During 1998, the Company will continue to preview new HRMS products as they are
introduced to the market to try to identify first to market opportunities for
new classes of HRMS software products and related consulting opportunities.
The Company's revenue from software sales during 1998 will be directly dependent
upon Oracle's ability to market and sell its existing HRMS application package
and the OTM software.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company funded its operations from cash generated by
operations. Net cash provided by operations was $575,043 as compared to cash
used in operating activities in 1996 of $131,034. For the year ended December
31, 1997, the Company had a net cash increase of $53,418 compared to $53,173 for
the year ended December 31, 1996. At December 31, 1997, the Company had working
capital in the amount of $3,774,089.
The Company does not expect to have significant commitments for capital
expenditures over the next twelve months. Capital expenditures will consist
primarily of computers for new consultants hired during 1998 and replacing
existing computers with the newest technologies. The Company expects that all
capital expenditures will be financed through existing cash flow of the Company.
The Company has no outstanding lines of credit or debt as of December 31, 1997.
Management believes that the cash flow from operations combined with current
cash balances will be adequate. The Company is currently exploring the
possibility of acquisitions that are complementary to its business, using the
Company's existing securities. Any significant acquisitions, however, may
require additional debt or equity financing to meet the cash requirements
resulting from an acquisition transaction.
CURRENT DISCUSSIONS
The Company received an offer from a large business to acquire the Company for
an undisclosed cash amount. Although the deadline to accept the offer (Mid-March
1998) passed, the Company believes that the opportunity still exists. To assist
the Company and its board of directors in complying with their fiduciary duties,
the Company has retained Raymond James & Associates, Inc. ("Raymond James'), a
large regional investments banking firm, to evaluate the offer and solicit other
offers. The Company's ultimate position will be assessed in conjunction with the
advise of Raymond James. If an offer is recommended by the Company, it may or
may not be above the current market for the Company's Common Stock. Because of
the uncertainties including whether (i) the offer to purchase the Company is
still open, (ii) other offers will be presented, and (iii) Raymond James will
provide an opinion as to the fairness of the offer, no assurances can be given
concerning the likelihood of any sale of the Company.
14
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements contained in the section of the report under Results of
Operation are forward-looking statements within the meaning of Section 27A of
the Securities and Exchange Act of 1993 and Section 21E of the Securities and
Exchange Act of 1934. Statements that express the "belief", "anticipation",
"plans", "expectations", and similar expressions are intended to identify
forward-looking statements. The results anticipated by any or all of these
forward-looking statements may not occur. While the Company believes that these
statements are accurate, the Company's business is dependant upon general
economic conditions and various conditions specific to its industry and future
trend results can not be predicted with certainty.
The forward-looking statements and some of the qualifying factors are:
\bullet\ Oracle's ability to license OTM. Qualifying factors include Oracle's
ability to sell its HRMS software and the introductions of new
competitive technologies;
\bullet\ The increase in consulting compensation. If the demand for qualified
consultants continues to increase, competition for these resources
will cause the salaries of these employees to increase. These costs
may not be able to be passed on to customers;
\bullet\ The Company's continued success and future growth will depend on its
ability to attract, develop and retain a sufficient number of
experienced and highly skilled consultants. The Company's inability to
recruit, develop and retain a significant number of experienced and
highly qualified consultants to staff its consulting projects would
have an adverse impact on the Company's performance. The Company's
ability to recruit and retain qualified consultants is dependent on
competitive pressures;
\bullet\ Because the software product, OTM, is dependent on the Oracle HRMS
software success, any downturn on the sales of Oracle product would
have an adverse impact on OTM sales;
\bullet\ The Company is currently exploring acquisition opportunities and
anticipates making acquisitions through the issuance of common stock
of the Company. Among the factors which could impact the ability to
complete an acquisition include price and accounting issues which
could impede the ability of the Company to structure an acquisition
on a pooling of interest basis;
\bullet\ Improving of the Oracle consulting margins. Contributing factors
include Oracle's ability to sell sufficient number of HRMS systems and
the ability of the Company to pass along those costs associated with
attracting, training Oracle HRMS consultants given the current market
conditions in the Information Technology service industry.
\bullet/ The possible sale of the Company is dependent on the ability to reach
a favorable agreement, the ability to receive a fairness opinion from
its financial advisors and the approval of shareholders.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
See F-1 through F-18 at the end of this annual report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Incorporated by reference from the Company's Proxy Statement for the annual
meeting of stockholders to be held on May 4, 1998, section entitled "Election of
Directors".
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's Proxy Statement for the annual
meeting of stockholders to be held on May 4, 1998, section entitled "Executive
Compensation".
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT
Incorporated by reference from the Company's Proxy Statement for the annual
meeting of stockholders to be held on May 4, 1998, sections entitled "Voting
Securities and Principal Holders Thereof".
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's Proxy Statement for the annual
meeting of stockholders to be held on May 4, 1998, section entitled "Related
Party Transactions".
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
(a) Reports on Form 8-K: No reports on Form 8-K were filed during the period
covered by this report.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the day of April 15, 1998.
InTime Systems International, Inc.
By: /S/ WILLIAM E BERRY
----------------------------------
William E Berry
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 29, 1995 by the following persons in the capacities
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ WILLIAM E. BERRY Chairman of the Board April 15, 1998
- --------------------
William E. Berry
/S/ MICHAEL D. MATTE Chief Financial Officer/Director April 15, 1998
- -----------------------
Michael D. Matte
/S/ JOHN E. STEINER Chairman of the Board April 15, 1998
- -------------------
John E. Steiner
/S/ PAUL PIPER Director April 15, 1998
- -------------------
Paul Piper
</TABLE>
17
<PAGE>
INTIME SYSTEMS
INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheet as of December 31, 1997 and 1996 F-3
Consolidated Statement of Operations for the years ended December 31, 1997,
1996 and 1995 F-4
Consolidated Statement of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1997,
1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of InTime Systems International, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
InTime Systems International, Inc. and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. 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. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
February 26, 1998
Atlanta, Georgia
F-2
<PAGE>
<TABLE>
<CAPTION>
INTIME SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
1997 1996
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,995,165 $ 1,941,747
Accounts receivable, net of allowance for doubtful
accounts of $156,039 and $102,654, respectively 2,524,205 2,101,940
Other assets 86,992 89,601
Deferred tax asset, net (Note 5) 291,962 -
----------------- -----------------
Total current assets 4,898,324 4,133,288
Property and equipment, net of accumulated
depreciation and amortization (Note 3) 536,953 633,558
Software development costs, net of accumulated
amortization (Note 4) 156,491 312,491
----------------- -----------------
$ 5,591,768 $ 5,079,337
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current liabilities:
Account payable and accrued expenses $ 493,441 $ 361,888
Deferred revenue 162,906 126,426
Current obligations under capital leases (Note 6) 88,934 202,903
----------------- -----------------
Total current liabilities 745,281 691,217
Obligations under capital leases (Note 6) - 124,155
----------------- -----------------
Total liabilities 745,281 815,372
----------------- -----------------
Stockholder's equity (Note 9)
Preferred stock:
Par value $1.00 per share; 5,000,000 shares
authorized; no shares issued or outstanding - -
Common stock:
Class A common stock:
Par value $.01 per share; 16,905,279 shares
authorized; 1,975,908 and 1,790,516 shares issued
and outstanding, respectively 19,759 17,905
Class B common stock:
Par value $.01 per share; 3,094,721 shares
authorized; 2,540,588 and 2,715,664 shares issued
and outstanding, respectively 25,406 27,157
Additional paid-in capital 6,198,701 6,180,643
Retained deficit (1,397,379) (1,961,740)
----------------- -----------------
Total stockholders' equity 4,846,487 4,263,965
Commitments and contingencies (Note 6) - -
----------------- -----------------
$ 5,591,768 $ 5,079,337
================= =================
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
INTIME SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended
December 31,
-------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Net revenues:
Consulting services $ 12,732,557 $ 11,193,014 $ 6,773,983
Computer software services 1,003,303 479,019 519,689
Interest income 116,050 41,829 208,451
Other 29,722 23,007 10,919
------------------- ------------------- -----------------
13,881,632 11,736,869 7,513,042
Costs and expenses:
Cost of consulting services 7,713,248 6,002,642 4,485,427
Cost of software services 508,469 352,674 851,079
Sales and marketing 1,940,519 2,863,599 2,270,667
Computer software research
and development 648,777 810,039 1,139,232
General and administrative 2,798,220 1,647,580 1,015,323
------------------- ------------------- -----------------
Income (loss) before
benefit for income taxes 272,399 60,335 (2,248,686)
Benefit for income taxes (Note 5) 291,962 - 414,633
------------------- ------------------- -----------------
Net income (loss) $ 564,361 $ 60,335 $(1,834,053)
------------------- ------------------- -----------------
Net income (loss) per share - basic $ .22 $ .02 $ (.70)
=================== =================== =================
Net income (loss) per share - diluted $ .21 $ .02 $ (.69)
=================== =================== =================
Weighted average shares outstanding - basic 2,619,522 2,615,950 2,605,040
=================== =================== =================
Weighted average shares outstanding - diluted 2,655,493 2,676,475 2,657,597
=================== =================== =================
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
INTIME SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
CLASS A COMMON STOCK CLASS B COMMON STOCK
NUMBER NUMBER PAR
OF SHARES PAR VALUE OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 - - 3,094,721 $ 30,947
Issuance of 1,400,000 shares of
common stock in connection with
the initial public offering (Note 9) 1,400,000 $ 14,000 - -
Conversion of 210,000 Class B
shares to Class A shares as underwriter's
over-allotment option in connection with
the initial public offering (Note 9) 210,000 2,100 (210,000) (2,100)
Net loss - - - -
---------------- -------------- -------------- ---------------
Balance at December 31, 1995 1,610,000 16,100 2,884,721 28,847
Conversion of 169,057 Class B
shares to Class A Shares 169,057 1,690 (169,057) (1,690)
Exercise of stock options 11,459 115 - -
Net income - - - -
---------------- -------------- -------------- ---------------
Balance at December 31, 1996 1,790,516 17,905 2,715,664 27,157
Conversion of 175,076 Class B
shares to Class A Shares 175,076 1,751 (175,076) (1,751)
Exercise of stock options 10,316 103 - -
Net income - - - -
---------------- -------------- -------------- ---------------
Balance at December 31, 1997 1,975,908 $ 19,759 2,540,588 $ 25,406
---------------- -------------- -------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
<S> <C> <C> <C>
Balance at December 31, 1994 $ 812,303 $ (188,022) $ 655,228
Issuance of 1,400,000 shares of
common stock in connection with
the initial public offering (Note 9) 5,348,296 - 5,362,296
Conversion of 210,000 Class B
shares to Class A shares as underwriter's
over-allotment option in connection with
the initial public offering (Note 9) - - -
Net loss - (1,834,053) (1,834,053)
-------------- --------------- --------------
Balance at December 31, 1995 6,160,599 (2,022,075) 4,183,471
Conversion of 169,057 Class B
shares to Class A Shares - - -
Exercise of stock options 20,044 - 20,159
Net income - 60,335 60,335
-------------- --------------- --------------
Balance at December 31, 1996 6,180,643 (1,961,740) 4,263,965
Conversion of 175,076 Class B
shares to Class A Shares - - -
Exercise of stock options 18,058 - 18,161
Net income - 564,361 564,361
-------------- --------------- --------------
Balance at December 31, 1997 $ 6,198,701 $(1,397,379) $ 4,846,487
-------------- --------------- --------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
INTIME SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended
December 31,
--------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 564,361 $ 60,335 $ (1,834,053)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 554,267 393,552 194,989
Provision for doubtful accounts
receivable 165,983 30,654 37,200
Loss on sale-leaseback transaction - 66,679 -
Changes in assets and liabilities:
Increase in accounts receivable (588,248) (796,075) (89,925)
Decrease (increase) in other assets 2,609 (10,417) (59,725)
Increase in deferred income taxes (291,962) - (414,633)
Increase (decrease) in accounts payable
and accrued expenses 131,553 71,434 (79,608)
Increase in deferred revenue 36,480 52,804 73,622
---------------- --------------- ---------------
Net cash provided by (used in) operating activities 575,043 (131,034) (2,172,133)
---------------- --------------- ---------------
Cash flows used in investing activities:
Software development costs capitalized - - (128,697)
Purchases of property and equipment (301,662) (88,523) (788,010)
---------------- --------------- ---------------
Net cash used in investing activities (301,662) (88,523) (916,707)
---------------- --------------- ---------------
Cash flows (used in) provided by financing activities:
Decrease in prepaid IPO costs - - 583,770
Repayment of notes payable to stockholders - - (625,000)
Repayment of bridge notes to investors - - (1,500,000)
Proceeds from sale of computer equipment in sale-leaseback
transaction - 362,041 -
Repayment of capital lease obligations (238,124) (109,470) (9,178)
Proceeds from the issuance of common stock 18,161 20,159 5,362,296
---------------- --------------- ---------------
Net cash (used in) provided by financing activities (219,963) 272,730 3,811,888
---------------- --------------- ---------------
Increase in cash and cash equivalents 53,418 53,173 723,048
---------------- --------------- ---------------
Cash and cash equivalents, beginning of year 1,941,747 1,888,574 1,165,526
---------------- --------------- ---------------
Cash and cash equivalents, end of year $ 1,995,165 $ 1,941,747 $ 1,888,574
================ =============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest
under capital lease obligations (Note 6) $ 31,993 $ 29,921 $ 1,989
================ =============== ===============
Supplemental disclosure of non-cash financing and investing
activities:
Increase in capital lease obligations (Note 6) $ - $ 413,074 $ -
---------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND BASIS OF FINANCIAL STATEMENT PRESENTATION:
InTime Systems International, Inc. (the "Company") was incorporated in the State
of Delaware on January 3, 1994. Upon formation, the Company acquired all of the
outstanding common stock of The Consulting TEAM, Inc. ("TEAM") and InTime
Systems, Inc. ("InTime"). TEAM and InTime operated under common control, with
common stockholders and management. The Company, as successor, continued the
business activities previously conducted by TEAM and InTime. TEAM was
incorporated in the State of Florida on June 4, 1985. TEAM provides a wide array
of human resource and payroll systems consulting services to governmental and
business entities. InTime was incorporated in the State of Delaware on February
2, 1993. InTime designs, develops, markets and installs computer software to aid
governmental and business entities in their management of human resources.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include the
operations of TEAM and InTime. All significant transactions and balances between
the Company, TEAM and InTime have been eliminated in consolidation.
REVENUE RECOGNITION
Consulting services - The Company performs consulting services generally on a
time and expense basis. Revenues are recognized as services are performed.
Certain reimbursable expenses incurred in the performance of consulting services
are included in net revenues from consulting services and costs of consulting
services provided in the Consolidated Statement of Operations.
Computer software services - Revenue from computer software sales is recognized
upon delivery and customer acceptance, which signifies that the Company has no
significant obligations remaining, and collection of the resulting receivable is
probable, in accordance with AICPA Statement of Position 91-1, "Software Revenue
Recognition." If significant vendor obligations remain, the Company will accrue
for the remaining costs. The Company does not grant returns or refunds after
customer acceptance of the software.
Software sold is covered under warranty during the period a maintenance plan is
in force and in effect. The Company provides a 90 to 180 day free maintenance
period as part of its initial license agreement with a customer. Any estimated
costs to provide such services are accrued upon product shipment. A subsequent
maintenance plan may be purchased by the customer for a fee. Such maintenance
fee revenue is recognized on a pro rata basis over the term of the agreements.
In October 1997, the Accounting Standards Executive Committee issued Statement
of Position 97-2, "Software Revenue Recognition". The standard is effective for
fiscal years beginning after December 15, 1997. The Company will adopt the new
standard in January 1998. The effect of adoption is not expected to be material.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investment instruments with
an original maturity of three months or less.
F-7
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation for financial reporting purposes is recorded using the
straight-line method over estimated useful lives ranging from three to five
years. Expenditures for maintenance and repairs are charged to expense as
incurred. Gains and losses on sales of equipment are reflected in current
operations.
COMPUTER SOFTWARE RESEARCH AND DEVELOPMENT COSTS
All computer software research and development costs are expensed as incurred
prior to the establishment of technological feasibility.
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS
Capitalized computer software development costs consist principally of salaries
and certain other expenses directly related to the development and modification
of software products in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed". Capitalization of such
costs begins upon establishment of technological feasibility as defined in SFAS
No. 86 and is discontinued when the resulting product is available for general
release.
Amortization of capitalized computer software development costs is provided at
the greater of the ratio of current product revenue to the total of current and
anticipated product revenue or on a straight-line basis over the estimated
economic life of the software, which is not more than five years.
INCOME TAXES
The Company records taxes under an asset and liability approach recognizing
deferred tax liabilities and assets for the future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation" which is effective for
transactions entered into in fiscal years beginning after December 15, 1995.
SFAS No. 123 defines a fair value based method of accounting for stock-based
compensation. The Statement allows measurement of compensation cost in
conformity with Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", provided pro forma disclosure is made concerning
net income as if the fair value approach had been applied. The Company adopted
the disclosure approach permitted by SFAS No. 123 effective January 1, 1996 and
continues to apply the compensatory measurement principles of APB No. 25.
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.
Actual results could differ from those estimates.
F-8
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
DECEMBER 31,
1997 1996
<S> <C> <C>
Furniture and fixtures $ 244,070 $ 235,862
Computer hardware and other equipment 982,520 699,104
Vehicle - 47,778
Leasehold improvements 18,983 8,945
---------------- ----------------
1,245,573 991,689
Less - Accumulated depreciation and amortization (708,620) (358,131)
---------------- ----------------
$ 536,953 $ 633,558
================ ================
</TABLE>
Depreciation of property and equipment totaled $350,489, $237,552 and $99,593
for the years ended December 31, 1997, 1996 and 1995, respectively. The Company
has entered into noncancellable capital leases on the above vehicle and certain
computer equipment. (See Note 6.)
NOTE 4 - SOFTWARE DEVELOPMENT EXPENDITURES:
<TABLE>
<CAPTION>
Computer software research and development expenditures are summarized as
follows:
YEAR ENDED
DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Total computer software research and
development expenditures $ 648,777 $ 810,039 $ 1,267,929
Less - Additions to capitalized computer
software development costs, before
amortization - - 128,697
----------------- ------------------ -----------------
Computer software research and development
expense $ 648,777 $ 810,039 $ 1,139,232
================= ================== =================
</TABLE>
In 1997 and 1996, computer software research and development expenses consisted
solely of salary and wages of development staff required to enhance and maintain
the existing systems.
F-9
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Activity for capitalized software development costs is summarized as follows:
YEAR ENDED
DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year, net $ 312,491 $ 468,491 $ 435,190
Additions - - 128,697
Amortization expense (156,000) (156,000) (95,396)
----------------- ------------------ -----------------
Balance at end of year, net $ 156,491 $ 312,491 $ 468,491
================= ================== =================
</TABLE>
NOTE 5 - INCOME TAXES:
<TABLE>
<CAPTION>
For the years ended December 31, 1997, 1996 and 1995, the benefit for income
taxes was as follows:
YEAR ENDED
DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Current tax expense:
Federal $ - $ - $ -
State - - -
----------------- ------------------ -----------------
- - -
Deferred tax benefit:
Federal (259,522) - (349,164)
State (32,440) - (65,468)
----------------- ------------------ -----------------
$ (291,962) $ - $ (414,632)
================= ================== =================
F-10
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The differences between income taxes at the statutory federal income tax rate of
34% and income taxes shown above are as follows:
YEAR ENDED
DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate $ 92,616 $ 20,607 $ (764,553)
Increase (decrease) in taxes resulting from:
State income taxes, net of federal
income tax benefit 20,189 2,576 (95,580)
Change in the valuation allowance (426,557) (8,280) 412,114
Realization of deferred tax asset - (37,063) -
Other 21,790 22,160 33,386
--------------- --------------- --------------
$ (291,962) $ - $ (414,633)
=============== =============== ==============
</TABLE>
F-11
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deferred tax (assets) liabilities arising in accordance with SFAS No. 109 are as
follows:
DECEMBER 31,
1997 1996
<S> <C> <C>
Deferred tax assets:
Current deferred tax asset:
Bad debt expense $ (59,685) $ (39,266)
Deferred revenue (62,312) -
Non-current deferred tax assets:
Net operating loss carry-forwards (324,121) (707,146)
---------------- ----------------
Total deferred tax assets (446,118) (746,412)
---------------- ----------------
Deferred tax liabilities:
Current deferred tax liability:
Cash to accrual adjustments 88,280 176,563
Non-current deferred tax liability:
Capitalized software development costs 59,858 119,529
Tax depreciation over book 6,018 29,926
---------------- ----------------
Total deferred tax liabilities 154,156 326,018
---------------- ----------------
Net deferred tax asset before valuation
allowance (291,962) (420,394)
Deferred tax asset valuation allowance - 420,394
---------------- ----------------
Net deferred tax asset $ (291,962) $ -
================ ================
</TABLE>
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that the tax benefits associated with temporary differences will
not be realized. Based on the current facts and circumstances, management
believes that it is more likely than not that the deferred tax assets will be
realized and, accordingly, does not believe that a valuation allowance is
necessary.
F-12
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS:
The Company leases certain office space, equipment and a vehicle under
noncancellable operating lease agreements expiring over the next five years. In
addition, the Company leases certain computer equipment under capital leases,
which will expire over the next three years. The asset balances are included in
property and equipment, net of accumulated depreciation and amortization, in the
consolidated balance sheet. The following is an analysis of the leased property
under capital leases by major classes:
ASSET BALANCES AT
DECEMBER 31,
1997 1996
Computer and equipment $ 413,074 $ 413,074
Vehicle - 47,778
---------- ----------
413,074 460,852
Less: Accumulated amortization (293,977) (113,789)
---------- ----------
$ 119,097 $ 347,063
========== ==========
During 1996, the Company entered into a sale-leaseback transaction whereby it
sold computer equipment with a net book value of $428,720 at a loss of $66,679
and recorded a capital lease obligation of $362,041. The asset balance and
accumulated amortization related to this transaction included above at December
31, 1997 is $413,074.
At December 31, 1997, future minimum rentals for noncancellable leases with
terms in excess of one year were as follows:
YEAR ENDING MINIMUM ANNUAL RENTALS
DECEMBER 31, OPERATING CAPITAL
1998 $ 178,888 $ 88,934
1999 187,416 -
2000 196,155 -
2001 205,105 -
2002 - -
---------------- ----------------
$ 767,564 $ 88,934
================ ================
Total rent expense under these and other agreements was $253,542, $237,460 and
$139,642 for the years ended December 31, 1997, 1996 and 1995, respectively.
Under the capital leases, the Company recorded interest expense of $31,993,
$29,921 and $1,989 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-13
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7 - SAVINGS PLAN:
The Company has established a defined contribution plan (the "Plan") which
qualifies under Section 401(k) of the Internal Revenue Code for the benefit of
eligible employees and their beneficiaries. Employees may elect to contribute
from 2% to 15% of their annual compensation to the Plan and the Company may make
matching contributions equal to the percentage of the elective contributions
made by the employees. The Company may make an additional discretionary annual
contribution. Employer contributions of $0, $58,427 and $0 were made to the Plan
in the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 8 - MAJOR CUSTOMERS:
The Company's operations, as briefly described in Note 1, are conducted within
one business segment.
Customers comprising 10% or greater of the Company's net revenues are summarized
as follows:
YEAR ENDED
DECEMBER 31,
1997 1996 1995
New York Times 12% 19% -%
Asplundh Tree Service 11 12 -
Delta Airlines 3 7 11
General American Life Insurance Company - 1 23
All others 74 61 66
---- ---- ----
100% 100% 100%
===== ===== =====
NOTE 9 - STOCKHOLDERS' EQUITY:
In accordance with the Escrow Agreement dated as of February 16, 1995 (the
"Agreement") certain shares of Class B Common Stock and options to purchase
shares of Class A Common Stock owned by certain officers, directors and
employees of the Company are held in escrow and will not be assignable or
transferable until such time, if ever, as the escrowed shares are released from
escrow in accordance with the Agreement. Shares will be released from escrow if
certain pre-tax income targets are met or when the market value of the Company's
Class A Common Stock reaches certain levels. In the period in which it is
probable that the release requirements will be achieved (the "Measurement
Date"), the Company must record compensation expense equal to the difference
between the market value of the Class A Common Stock on the Measurement Date and
the market value of the shares when placed in escrow.
The Company filed a registration statement with the Securities and Exchange
Commission for an initial public offering of 1,400,000 units, (not including an
underwriter's over-allotment option of 210,000 units) with each unit consisting
of one share of the Company's Class A Common Stock and one redeemable Class A
Warrant which became effective February 16, 1995.
F-14
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
On February 27, 1995 the Company received $4,587,432 in proceeds from the
initial public offering. These proceeds are net of broker commissions and the
repayment of the $1,500,000 private placement notes payable plus accrued
interest.
On January 19, 1998, the Board of Directors approved the conversion of all
shares of Class B Common Stock to Class A Common Stock. After the conversion,
there were no outstanding shares of Class B Common Stock.
NOTE 10 - NET INCOME (LOSS) PER SHARE:
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share ("EPS") by
replacing the presentation by primary EPS with a presentation of basic EPS. In
addition, SFAS No. 128 requires dual presentation of basic and diluted EPS on
the face of the income statement and requires a reconciliation of the numerator
and denominator of the diluted EPS calculation. The Company has adopted SFAS No.
128 as of December 31, 1997 and has restated EPS for all prior periods
presented.
Net income per share - basic is computed by dividing net income by the weighted
average number of common shares outstanding. Net income per share - diluted is
computed by dividing net income by the weighted average number of common shares
outstanding and dilutive common share equivalents using the treasury stock
method. Dilutive common share equivalents include common shares issuable upon
exercise of outstanding stock options.
In accordance with SFAS No. 128, the calculation of net income (loss) per share
- - basic and net income (loss) per share - diluted is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NET INCOME (LOSS) PER SHARE - BASIC COMPUTATION
Net income (loss) $ 564,361 $ 60,335 $ (1,834,053)
Income (loss) available to common shareholders 564,361 60,335 (1,834,053)
---------------- ---------------- ----------------
Average common shares outstanding - basic 2,626,815 2,615,950 2,605,040
---------------- ---------------- ----------------
Net income (loss) per share - basic $ .22 $ .02 $ (.70)
================ ================ ================
NET INCOME (LOSS) PER SHARE - DILUTED COMPUTATION
Income (loss) available to common shareholders $ 564,361 $ 60,335 $ (1,834,053)
================ ================ ================
Incremental shares from assumed conversions:
Stock Options 28,678 59,976 52,577
---------------- ---------------- ----------------
Average common shares outstanding - diluted 2,655,483 2,676,475 2,657,597
---------------- ---------------- ----------------
Net income (loss) per share - diluted $ .21 $ .02 $ (.69)
================ ================ ================
</TABLE>
Options to purchase 410,317 shares of common stock at an average price of $6.91
per share were outstanding during the fourth quarter of 1997, but were not
included in the computation of net income per share - diluted because the
options' exercise price was greater than the average market price of the common
shares. The options, which expire at various dates over the next ten years, were
still outstanding at December 31, 1997.
F-15
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - STOCK OPTION PLANS:
On January 10, 1994, the Company established the 1994 Stock Option Plan (the
"Stock Plan") for employees, consultants and directors. The Stock Plan provides
for options to buy 300,000 shares of the Company's common stock. The Stock Plan
is administered by the Board of Directors. The Board of Directors will determine
eligibility to receive options, the exercise price, the number of shares subject
to the options, the vesting schedule and the term of any options granted. On
July 1, 1997, the Company increased the number of shares which can be issued
under the Stock Plan to 650,000 shares. The options vest semi-annually over a
three year period each June 30 and December 31, provided that the grantee is
still employed by the Company on each vesting date. The options expire ten years
from their issuance date. On January 19, 1998, the Board of Directors approved
the repricing of all employee options to the then current market value of $5.75
per share.
In accordance with SFAS No. 123, the fair value of each option under the Stock
Plan is estimated on the date of grant using Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1997 and
1996: dividend yield of 0%, expected volatility of 29% and 65%, respectively,
average risk-free interest rate of 6% and an expected life of 5 years.
The Company applies APB No. 25 and related Interpretations in accounting for its
Stock Plan. Accordingly, no compensation cost has been recognized for its Stock
Plan. Had compensation cost for the Company's Stock Plan been determined based
on the fair value at the grant dates for awards consistent with the method of
SFAS No. 123, the Company's net income (loss) and net income (loss) per share
would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997 1996
<S> <C> <C>
Net income (loss) As reported $ 564,361 $ 60,335
Pro forma 267,663 (198,254)
Net income (loss) per share
- basic As reported $ .22 $ .02
Pro forma .10 (.08)
Net income (loss) per share
- diluted As reported .21 $ .02
Pro forma .10 (.07)
</TABLE>
F-16
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
A summary of the status of the Company's Stock Plan as of December 31, 1997 and
1996, and changes during these years in presented below:
When options are exercised, par value of the shares issued is recorded as an
addition to common stock, and the remainder of the proceeds is credited to
additional paid-in capital. No income or expense has been recognized in
connection with the exercise of these stock options. The following table
summarizes information about options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- -----------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C>
OPTIONS
Outstanding at the beginning
of the year 382,527 $ 5.25 369,433 $ 4.61
Granted 347,800 6.09 97,700 7.06
Exercised (10,316) 1.76 (11,459) 1.76
Forfeited (199,695) 6.12 (73,147) 3.75
---------------- ------------------
Outstanding at the end of
the year 520,316 5.54 382,527 5.25
================ ==================
Options exercisable
at the end of the year 278,522 5.81 159,532 3.90
================ ==================
Weighted average fair
value of options granted
during the year $ 2.29 $ 4.15
</TABLE>
When options are exercised, par value of the shares issued is recorded as an
addition to common stock, and the remainder of the proceeds is credited to
additional paid-in capital. No income or expense has been recognized in
connection with the exercise of these stock options. The following table
summarizes information about options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
RANGE OF EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED
AVERAGE
PRICES NUMBER REMAINING CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
<C> <C> <C> <C> <C> <C>
$1.76 - $7.34 520,316 8.2 years $ 5.54 278,522 $ 5.81
</TABLE>
F-17
<PAGE>
INTIME SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12 - QUARTERLY OPERATING RESULTS (UNAUDITED):
The following is a summary of the unaudited condensed consolidated quarterly
operating results of the Company for 1997 and 1996:
<TABLE>
<CAPTION>
1997 QUARTER ENDED
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
<S> <C> <C> <C> <C>
Net revenues $ 3,762,885 $ 3,617,710 $ 3,228,503 $ 3,272,534
Expenses 3,558,570 $ 3,765,203 $ 2,845,741 $ 3,147,757
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 204,315 $ (147,493) $ 382,762 $ 124,777
================ ================ ================ ================
Net income (loss) per share - basic $ .08 $ (.06) $ .15 $ .05
Net income (loss) per share - diluted $ .08 $ (.06) $ .14 $ .05
Weighted average shares outstanding -
basic 2,625,500 2,618,755 2,618,259 2,617,052
Weighted average shares outstanding -
diluted 2,651,059 2,652,463 2,665,280 2,672,245
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTER ENDED
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
<S> <C> <C> <C> <C>
Net revenues $ 3,277,310 $ 3,136,735 $ 2,961,343 $ 2,361,481
Expenses 3,118,593 $ 2,923,085 $ 2,666,200 $ 2,968,656
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 158,717 $ 213,650 $ 295,143 $ (607,175)
================ ================ ================ ================
Net income (loss) per share - basic $ .06 $ .08 $ .11 $ (.23)
Net income (loss) per share - diluted $ .06 $ .08 $ .11 $ (.23)
Weighted average shares outstanding -
basic 2,616,499 2,616,499 2,616,470 2,614,835
Weighted average shares outstanding -
diluted 2,686,437 2,674,818 2,677,577 2,679,118
</TABLE>
F-18
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited financial statements for the period ended December 31,
1997 and December 31, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> $1,941,747 $1,995,165
<SECURITIES> 0 0
<RECEIVABLES> 2,204,594 2,792,842
<ALLOWANCES> (102,654) (268,638)
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,133,288 4,898,324
<PP&E> 991,689 1,293,351
<DEPRECIATION> (358,130) 756,397
<TOTAL-ASSETS> 5,079,337 5,591,768
<CURRENT-LIABILITIES> 691,217 745,281
<BONDS> 124,155 0
0 0
0 0
<COMMON> 45,062 45,164
<OTHER-SE> 4,218,903 4,801,323
<TOTAL-LIABILITY-AND-EQUITY> 5,079,337 5,591,768
<SALES> 0 0
<TOTAL-REVENUES> 11,736,869 13,881,632
<CGS> 0 0
<TOTAL-COSTS> 11,676,534 13,609,232
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 30,654 165,984
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 60,335 272,400
<INCOME-TAX> 0 291,962
<INCOME-CONTINUING> 60,335 564,362
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 60,335 564,362
<EPS-PRIMARY> .02 .22
<EPS-DILUTED> .02 .21
</TABLE>
