United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: March 31, 2002
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( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transaction period from: ____________________ to _____________________.
Commission File number: 0-24031
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Integrated Business Systems and Services, Inc.
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(Exact name of small business issuer as specified in its charter)
South Carolina 57-0910139
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
115 Atrium Way, Suite 228, Columbia, SC 29223
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(Address of principal executive offices)
(803) 736-5595
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(Issuer's telephone number)
__________________________________________________________________________
(Former Name, address or fiscal year, if changed since last report)
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. (X) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
17,814,811 shares of no par common shares outstanding at March 31, 2002
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Transitional Small Business Disclosure Format (check one) ( ) Yes (X) No
1
Integrated Business Systems and Services, Inc.
Index
PART I FINANCIAL INFORMATION Page
Number
------
Item 1 Financial Statements 3-6
Balance Sheets - March 31, 2002, and
December 31, 2001 3
Statements of Operations for the three months
ended March 31, 2002, and 2001, respectively 4
Statements of Cash Flows for the three months
ended March 31, 2002, and 2001, respectively 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 18
Items 1 - 6
SIGNATURES
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Integrated Business Systems & Services, Inc.
Balance Sheets
March 31, 2002 December 31, 2001
(unaudited) (audited)
----------- ---------
Assets
Current assets:
Cash and cash equivalents $ 126,574 $ 6,100
Accounts receivable, trade 201,004 356,969
Short-term investment
Related party notes receivable 74,755 50,000
Interest receivable 26,802 24,635
Unbilled revenue 38,856 38,856
Other prepaid expenses 73,959 35,941
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Total current assets 541,950 512,501
Capitalized software costs, net 375,708 420,511
Property and equipment, net 526,444 564,067
Related party receivable 27,994
Other assets 4,153 4,154
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Total assets 1,448,255 1,529,227
Liabilities and shareholders' equity (deficiency)
Current liabilities:
Notes payable 683,444 $ 696,227
Accounts payable 365,298 405,145
Accrued liabilities
Accrued compensation and benefits 563,194 521,305
Accrued payroll taxes 380,193 322,772
Accrued professional fees 182,357 254,420
Accrued interest 104,857 35,050
Other 64,273 44,049
Deferred revenue 121,476 93,377
------------ ------------
Total current liabilities 2,465,092 2.372,345
Long-term debt, net of current portion 2,543,906 2,145,037
Long-term accrued compensation 55,843 83,219
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Total liabilities: 5,064,841 4,600,601
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Stockholders' equity:
Common Shares, voting, no par value, 100,000,000 shares
authorized, 17,814,811 and 17,774,694, shares outstanding
at March 31, 2002, and December 31, 2001, respectively. 18,775,236 18,041,226
Notes receivable - stock (131,080) (131,080)
Accumulated deficit (21,413,389) (20,134,167)
Non-controlling interest in net assets (847,353) (847,353)
------------ ------------
Total shareholders' equity (3,616,586) (3,071,374)
------------ ------------
Total liabilities and shareholders' equity 1,448,255 1,529,227
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
Integrated Business Systems and Services, Inc.
Statements of Operations
(Unaudited)
Three Months Three Months
ended March 31, 2002 ended March 31, 2001
-------------------- --------------------
Revenues:
Service revenue 310,743 406,893
License revenue 151,590
Maintenance and support 25,563 29,775
Hardware revenue 82,376 441,847
Other revenue 19,694 7,593
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Total revenues 589,966 886,109
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Cost of revenues: 471,362 685,504
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Gross Profit (loss) 118,604 200,605
Research and development costs 131,182 261,339
General and Administrative 629,553 868,380
Sales and marketing 183,480 629,238
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Total operating expenses 944,215 1,758,957
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Loss from operations (825,611) (1,558,352)
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Interest income 2,396 13,722
Other income 13 0
Interest expense (456,020) (38,070)
Loss on equity investment (77,139)
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Total other income (expense) (453,611) (101,487)
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Net loss (1,279,222) (1,659,839)
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Earnings (loss) per share
Basic and diluted $ (0.07) $ (0.12)
Weighted average common shares outstanding 17,792,321 14,293,869
The accompanying notes are an integral part of these consolidated financial
statements.
4
Integrated Business Systems and Services, Inc.
Statements of Cash Flows
(Unaudited)
Three Months
ended March 31,
---------------
2002 2001
---- ----
Operating activities:
Net loss $ (1,279,222) $ (1,659,839)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation/amortization 38,182 35,075
Amortization of software cost 44,805 44,805
Non-cash Interest expense 372,273 0
Issuance of Stock in Exchange for Accounts Payable 62,446 0
Loss on equity investments 0 77,139
Changes in assets and liabilities:
Accounts receivable 155,965 (82,036)
Interest receivable (2,166) 843
Prepaid expenses and other assets (38,018) (12,638)
Accounts payable (39,847) 41,899
Accrued expenses 89,902 84,022
Deferred revenue 28,099 4,531
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Cash used in operating activities (567,581) (1,466,199)
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Investing activities:
Purchases of property and equipment (560) (98,451)
Payment for purchases of Equity in Affiliate 0 (540,000)
Related party receivable, net 3,239 305,000
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Cash provided by (used in) investing activities 2,679 (333,451)
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Financing activities:
Proceeds from issuance of convertible long term debt 809,000 0
(Payments on) proceeds from long term debt (125,000) 1,413,000
Sale of common shares
Proceeds from exercise of common stock options
and warrants 1,376 287,000
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Cash provided by financing activities: 685,376 1,700,000
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Net increase (decrease) in Cash 120,474 (99,650)
Cash and Cash Equivalents at Beginning of Period 6,100 700,892
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Cash and Cash Equivalents at End of Period $ 126,574 $ 601,242
------------ ------------
The accompanying notes are an integral part of these financial statements.
5
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Item 310 of Regulation S-B
promulgated by the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of those of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 2002, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2002. For further information, refer to the audited
financial statements and footnotes thereto included in the Company's Form 10-KSB
for year ended December 31, 2001.
BASIS OF CONSOLIDATION
In 2001 and 2002, the consolidated financial statements include the accounts of
IBSS and its majority-owned subsidiary Synamco, L.L.C. (collectively "IBSS").
EARNINGS PER SHARE
The computation of basic earnings (loss) per share and diluted earnings (loss)
per share is in conformity with the provisions of Statement of Financial
Accounting Standards No. 128.
Going Concern
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, Integrated Business Systems and Services, Inc. ("IBSS") has a
working capital deficiency and an accumulated deficit, including minority
interests, of approximately $1,860,000 and $20,982,000, respectively at December
31, 2001. Ultimately, IBSS' viability as a going concern is dependent upon its
ability to generate positive cash flows from operations, maintain adequate
working capital and obtain satisfactory long-term financing. However, there can
be no assurances that IBSS will be successful in the above endeavors.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
IBSS be unable to continue as a going concern. IBSS' plans include the
following, although it is not possible to predict the ultimate outcome of IBSS'
efforts.
Cost and Expense Reductions. During the third quarter of 2001, IBSS commenced a
comprehensive internal restructuring and cost reduction program. The
implementation of that program is now substantially complete and has resulted in
a reduction of almost 50% in IBSS' monthly gross cash burn rate. Included in the
program were measures that resulted in substantial reductions in IBSS' largest
expense categories of human resource and payroll-related expenses. These
measures included reductions in non-essential staff, deferrals of up to 50% of
executive compensation, reductions in overall staff compensation rates,
scale-backs in certain employee benefit programs, reductions in rates paid for
health insurance and reductions in employee travel, accommodation and hiring
costs. In addition, IBSS has achieved significant cash flow relief through the
discontinuance of non-essential third party consulting and service arrangements
and the renegotiation of other third party contracts, including those in the
areas of public relations, investor relations, financial advisory services,
financial printing and industry research. During the remainder of 2002, in
addition to the reductions outlined above, IBSS expects to substantially reduce
the costs associated with its operating facilities, including reductions in its
lease obligations and its expenditures for furniture, fixtures and equipment. In
the absence of any substantial infusion of growth capital during the year, IBSS
has no plans during 2002 for any significant capital expenditures or any
material increases in its monthly cash burn rate.
Investor Debt and Other Payables. On December 31, 2001, IBSS achieved debt
service relief for 2002 and 2003 through the restructuring of substantially all
of its short-term and long-term investor debt. Under the restructured debt
instruments, the entire principal balance is not payable for up to two years
following January 1, 2002. The first interest payment is not due until January
2003, and the second interest payment is not due until maturity in 2004. IBSS
has also established long-term payout arrangements with respect to substantially
all of its unsecured trade accounts payable. In addition, where permitted under
securities laws, IBSS has satisfied certain third party obligations through
restricted stock grants.
6
Additional Capital. Since December 31, 2001, IBSS has raised approximately
$830,000 in additional investor funding through the issuance of two-year
convertible debentures and common stock purchase warrants. IBSS expects to raise
additional capital during 2002 through the issuance of convertible debt or
equity securities. Because of the operating, market and industry risks
associated with an investment in IBSS, and because its common stock is currently
traded on the Over-the-Counter Bulletin Board maintained by the NASD, IBSS may
experience difficulty in raising additional financing.
7
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Advisory Note Regarding Forward-Looking Statements
Some of the statements contained in this report on Form 10-QSB constitute
forward-looking statements that involve risks and uncertainties. We caution
readers of this report that these statements involve a number of known and
unknown risks that may cause our actual results to be materially different from
those contemplated by these statements. Factors that might cause such a
difference include, but are not limited to, those discussed in this report under
the captions "Factors That May Affect Our Operating Results" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as those set forth in other periodic reports and filings that we make with
the Securities and Exchange Commission.
The following discussion and analysis provides information which the Company
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. This discussion should be read in
conjunction with the financial statements and notes thereto set forth elsewhere
in this report.
Results of Operations
- ---------------------
For the three months ended March 31, 2002, as compared to the three months ended
- --------------------------------------------------------------------------------
March 31, 2001.
- ---------------
Revenues. Total revenues decreased $296,143 to $589,966 in the three months
ended March 31, 2002, from $886,109 in the three months ended March 31, 2001.
This decrease was primarily attributable to an decrease in hardware revenue due
to a decrease in hardware sales
Cost of Revenues. Total cost of revenues decreased $214,142 to $471,362 in the
three months ended March 31, 2002 from $886,109 in the three months ended March
31, 2001. These figures included a $276, 435 decrease in hardware cost. The cost
of revenues as a percentage of total revenues was 80% and 77% in the three
months ended March 31, 2002, and 2001, respectively. Accordingly, the gross
margin was 20% and 23% in the three months ended March 31, 2002, and 2001,
respectively.
Research and Development. Research and development costs decreased $130,157 to $
131,182 in the three months ended March 31, 2002, from $200,605 in the three
months ended March 31, 2001. Research and development costs represented 22% and
29% of total revenues for the three months ended March 31, 2002, and 2001,
respectively.
General and Administrative. General and administrative expenses, including
interest expense, decreased $238,827 to $629,553 in the three months ended March
31, 2002, from $868,830 in the three months ended March 31, 2001. General and
administrative expenses decreased due to cost cutting measures that were taken
in the fourth quarter of 2001 and during the first quarter of 2002. General and
administrative expenses represented 107% and 98% of total revenues in the three
months ended March 31, 2002, and 2001, respectively.
Sales and Marketing. Sales and marketing expenses decreased $445,758 to $183,480
in the three months ended March 31, 2002 from $629,238 in the three months ended
March 31, 2001. This decrease was attributable to decreases in marketing
salaries due a reduction in sales and marketing staff, as well as decreases in
professional fees and public relations awareness expenses. Sales and marketing
expenses represented 31% and 71% of total revenues in the three months ended
March 31, 2002, and 2001, respectively.
Total Other Expense. Total Other Expense increased $352,093 to $453,611 in the
quarter ended March 31, 2002, from the $101,518 in the three months ended March
31, 2001. Although, Loss on Investment in Equity Investment was down $77,139 or
100% due to the divestment of WilCam Systems, LLC., Interest Expense was up
$417,950 to $456.020 in the quarter from $38,070 in the same quarter for the
previous year. Substantially all ($372,274) of this increase was related solely
to the intrinsic value approach that was applied to both the common stock
purchase warrants and the conversion features of our private placements of
convertible debt in 2001, all as required by the application of Accounting
Principles Board Opinion No. 14, Emerging Issues Task Force (EITF) Issue No.
98-5 and EITF Issue No. 00-27. The directive of these accounting policies is to
attribute an appropriate value to the conversion feature imbedded in convertible
debt where the conversion price is either below the market price of the common
stock at the commitment date, or where such price may adjust during the life of
the debt to a price that is below the market price of the common stock at the
time of the adjustment. The entire value of the imbedded conversion feature is
charged to interest expense and credited to additional paid in capital at the
time of the commitment. These accounting policies also require recognition of
the fair value of any warrants issued in connection with debt financing. The
fair value is charged to a debt discount that is amortized to interest expense
over the life of the related debt instrument, and an equal amount is credited to
additional paid in capital. Corporate and Other Related Non-Operating Items
represented 77% and 11% of total revenues in the three months ended March 31,
2002 and 2001, respectively.
8
Liquidity and Capital Resources
Sources of Operating Capital.
Prior to 1997, we financed our operations primarily through our
revenues from operations, including funded research and development revenues,
and occasional short-term loans from our principals and acquaintances. Since the
middle of 1997, we have financed our operations primarily through private and
public offerings of common stock and convertible debt, and to a lesser extent
through borrowings from third-party lenders and from operating revenues. We
raised net proceeds of approximately $1,220,000 in our November 1997 initial
public offering on the Vancouver Stock Exchange. Since that time, we have raised
additional equity of approximately $12.3 million through several private
placements of common stock and stock purchase warrants and the conversion of
approximately $1.7 million of convertible debt into equity. During 2001, we
raised an aggregate of approximately $5.1 million in additional capital,
consisting of approximately $1,032,371 from the exercise of common stock options
and warrants, approximately $409,000 from the private placement of common stock,
and approximately $3.66 million from the sale of convertible debt. During the
first quarter of 2002, we raised approximately $830,000 through the issuance of
two-year convertible debentures. We expect to raise additional funds in 2002
from the private placement of additional debt, equity or equity-linked
securities.
Cost and Expense Reduction Program.
During the last month of the third quarter of 2001, in connection with
executive managements' internal restructuring of our internal operations and in
response to the need to reduce costs in connection with lower than expected
year-to-date revenues, we commenced a comprehensive cost reduction program. The
implementation of that program is now substantially complete and has resulted in
a reduction of almost 50% in our monthly gross cash burn rate.
Included in our cost reduction program were measures that resulted in
substantial reductions in our largest expense categories of human resource and
payroll-related expenses. These measures included reductions in non-essential
staff which reduced our number of full time employees by approximately 33%;
deferrals of up to 50% in the compensation of our seven most highly compensated
executive officers; reductions of approximately 12% in the compensation rates
for almost half of the remaining non-executive personnel; scale-backs in certain
employee benefit programs; reductions of approximately 13% in the rates paid for
health insurance; and substantial reductions in employee travel, accommodation
and hiring costs. In addition, we have achieved significant cash flow relief
through the discontinuance of non-essential third party consulting and service
arrangements and the renegotiation of other third party contracts, including
those in the areas of public relations, investor relations, financial advisory
services, financial printing and industry research.
During the remainder of 2002, in addition to the reductions outlined
above, we expect to substantially reduce the costs associated with our operating
facilities, including reductions in our lease obligations. We currently lease
approximately 19,500 square feet of office space for our principal executive
offices at a current annual gross rent of approximately $338,000. The annual
rent under this lease, which expires in November 2005, will increase to
approximately $345,000 in 2003 through 2005. Management is in discussions with
the lessor of this office space in contemplation of substantial reductions in
the amount of space leased. We have already vacated approximately 10% of our
existing leased space for sublease or release back to our landlord. We expect to
vacate a substantial additional amount of our existing leased space during 2002
without negatively impacting our operations, and we intend to pursue the
renegotiation of our existing lease rates, or consider a buy-out of the lease in
the event we are able to secure a lease of suitable facilities at market rates,
which are currently approximately 35% lower than our current lease rate.
We currently do not have any commitments or budgeted needs for any
material capital expenditures, including purchases of furniture, fixtures and
equipment during the remainder of 2002. In the absence of any substantial
infusion of growth capital during 2002, we do not expect our capital expenditure
plans for 2002 to change.
9
Investor Debt and Other Payables.
On December 31, 2001, we achieved almost complete debt service relief
for 2002 and 2003 through the restructuring of substantially all of our
short-term and long-term investor debt. Under the restructured debt instruments,
the entire principal balance is not payable for up to two years (January 1,
2004). The first interest payment on our restructured debt is not due until
January 2003, and the second interest payment is not due until maturity in 2004.
We have also established long-term payout arrangements with respect to
substantially all of our unsecured trade accounts payable. In addition, where
permitted under securities laws, we have satisfied certain of our third party
obligations through restricted stock grants.
Additional Capital.
As noted above, since December 31, 2001, we have raised approximately
$800,000 through the issuance of two-year convertible debentures. We expect to
raise additional funds in 2002 from the private placement of additional debt,
equity or equity-linked securities. Because of the operating, market and
industry risks associated with an investment in our common stock, and because
our common stock is currently traded on the Over-the Counter Bulletin Board
maintained by the NASD, we may experience difficulty in raising additional
financing.
Our current gross monthly cash burn rate is approximately $340,000. In the
absence of any substantial infusion of growth capital during 2002, we have not
budgeted for any material increase in this gross monthly burn rate. We expect
that the proceeds from revenues generated from our operations and, to a lesser
extent, the proceeds from our 2002 capital raising activities, will be adequate
to meet our projected working capital and other cash requirements for at least
the next twelve months. Management intends to closely follow the company's
progress and to further reduce our expenses if our marketing and sales
strategies do not result in sufficient revenues within a reasonable period. Any
such reduction will involve scaling back, delaying or postponing those
development activities that are not essential to the company achieving its
stated objectives. In any event, our working capital deficit will continue to
grow unless and until revenues increase sufficiently to meet expenditure levels.
Cash Flow Analysis
Net cash used in operating activities decreased by approximately
$889,629 from approximately $1,466,199 during the three months ended March 31,
2001 to approximately $576,570 during the three months ended March 31, 2002.
This significant decrease was largely due to the cost cutting plan that the
Company is currently implementing.
Net cash used in investing activities decreased by approximately
$333,000 from approximately $333,451 during the three months ended March 31,
2001 to approximately $2,679 during the three months ended March 31, 2002.
Almost all of this decrease was attributable to $540,000 in cash used in
purchases of affiliate equity in 2001 that were not repeated in 2002.
Net cash provided by financing activities was approximately $700,000
during the three months ended March 31, 2002, as compared to approximately
$1,700.000 during the three months ended March 31, 2001. The net cash provided
by financing activities in the first quarter of 2002 resulted primarily from the
issuance of approximately $800,000 in convertible debentures.
FACTORS THAT MAY AFFECT OUR OPERATING RESULTS
In addition to other information contained in this Report on Form
10-QSB, the following risk factors should be carefully considered in evaluating
our company and its business. These factors may have a significant impact on our
business, operating results and financial condition. As a consequence of these
risk factors, the other information contained in this report, and the risks
discussed in our other periodic filings with the Securities and Exchange
Commission, our actual results could differ materially
10
from those contemplated by any forward-looking statements contained in this
report.
Risks Related to Our Company
We have a large accumulated deficit, we expect future losses, and we may never
achieve or maintain profitability.
We have experienced operating losses in each of our fiscal years since
January 1, 1995. As of December 31, 2001, we had an accumulated deficit of
approximately $20.1 million. In addition, since 1997, we have continued to
allocate an increasing proportion of our internal resources to research and
development activities associated with the development of our current suite of
new software products. During the last three years, we have also undertaken a
complete restructuring of our sales and marketing organization and have
commenced several new customer acquisition strategies. The execution of these
marketing initiatives required additional staffing resources and other related
expenditures. This strategy of increased emphasis on new product development and
the suspension of much of our traditional sales activities while we began
implementing our sales team reorganization resulted in a substantial reduction
in our traditional service revenues during the affected periods. Despite our
history of losses, we believe it is vital to our future success that we continue
to invest heavily in sales and marketing, although at a lower percentage of
revenue than our investment in this area during our most recent fiscal years.
Nevertheless, if expenditures related to our sales and marketing and the
expansion of our operations are not accompanied or shortly followed by
significantly increased revenue, our losses could be even greater than expected
until we are able to delay or reduce these expenditures. While we believe
profitability is achievable in 2002, many factors, including the factors
described in this report, may result in our incurring losses in 2002. We will
need to significantly increase our quarterly revenues from their historical
levels in order to achieve profitability.
Substantially all of our debt is secured and a default by us under this debt
could result in a foreclosure on all of our assets.
At March 31, 2002 we had approximately $3,227,000 of outstanding debt
under convertible debentures issued by the company in 2001 and 2002. This debt
is secured by all of our assets. Of this amount approximately $125,000 in
principal is due during 2002, approximately 576,000 is due on January 1, 2003
and the remainder of this debt is due on January 1, 2004. Interest payments on
the portion that matures after 2002 are due in two installments on January 1,
2003 and on January 1, 2004. In the event that we are unable to satisfy our
repayment obligations under this secured debt, or we otherwise default under the
terms of this debt, the holders of this debt may seek to foreclose their
security interest. In such event, if we are unable to reach a pay-out
arrangement satisfactory to the holders of this debt and seek relief under
federal bankruptcy laws, we believe that we would no longer be able to maintain
our operations.
Significant unanticipated fluctuations in our actual or anticipated quarterly
revenues and operating results may cause us not to meet securities analysts' or
investors' expectations and may result in a decline in our stock price.
Our quarterly operating results have fluctuated significantly in the
past and may vary significantly in the future. Moreover, as a result of our
limited operating history with our new suite of Synapse-based software products
and the evolving nature of the markets in which we compete, it is difficult to
accurately forecast our revenue in any given period. Accordingly, we believe
that period-to-period comparisons of our historical results of operations are
not necessarily meaningful and should not be relied upon as indications of
trends or of future performance. If our revenues, operating results, earnings or
future projections are below the levels expected by investors or securities
analysts, our stock price is likely to decline.
Our stock price is also subject to the volatility generally associated
with Internet, software and technology stocks in general, and may also be
affected by broader market trends unrelated to our performance. In addition, we
also expect to experience significant fluctuations in our future quarterly
revenues and operating results as a result of many factors specific to our
operations, including:
. the difficulty in predicting the size and timing of our customer
orders
. the mix of our products and services sold and the mix of our
distribution channels
. the lengthy sales cycle for some of our products
. the market acceptance of our products
. the terms and timing of our financing activities
. whether we are able to successfully expand our sales and marketing
programs
. the possible loss of our key personnel
. the difficulty in predicting the amount and timing of employee stock
option exercises
Our revenues and operating results depend upon the volume and timing of
customer orders and payments, and the date of product delivery. New software
licensing, service and maintenance contracts may not result in revenues in the
quarter in which the contracts are signed, and we may not be able to predict
accurately when revenues from these contracts will be recognized. A substantial
portion of our revenues have been and continue to be derived from large
licensing and software implementation orders. We expect this trend to continue
for the foreseeable future. We also expect that increases in the dollar size of
individual license transactions will increase the risk of fluctuation in future
quarterly results. We realize substantially higher gross margins on our license
revenues compared to our services and maintenance revenues. Consequently, our
margins for any particular quarter will be highly dependent on the mix of
license, service and maintenance revenues in that quarter. If we cannot generate
large customer orders, or our customers delay or cancel their orders in a
particular quarter, it will have a material adverse effect on our revenues and,
more significantly on a percentage basis, on our net income or loss in that
quarter.
11
Variations in the time it takes us to sell our products may cause fluctuations
in our operating results.
Our customers generally consider a wide range of issues before
committing to purchase our products, including product benefits, the ability to
operate with existing and future computer systems, the ability to accommodate
increased transaction volumes and product reliability. Some of our customers are
addressing these issues for the first time when they consider whether to buy our
products and services. As a result, we or other parties must educate potential
customers on the use and benefits of our products and services. In addition, the
purchase of our products generally involves a significant commitment of capital
and other resources by a customer. This commitment often requires significant
technical review, assessment of competitive products, and approval at a number
of management levels within a customer's organization. The length of our sales
cycles may vary based on the industry in which the potential customer operates
and is difficult to predict for any particular license transaction. Because of
the number of factors influencing the sales process, the period between our
initial contact with a new customer and the time when we recognize revenue from
that customer varies widely in length. Our sales cycles typically range from two
to six months. For larger opportunities with new customers, however, these
cycles can be longer. The length and variability of our sales cycles makes it
difficult to predict whether particular sales will be concluded in any given
quarter. If one or more of our license transactions are not consummated in a
given quarter, our results of operations for that quarter may be below our
expectations and the expectations of analysts and investors.
We have historically derived substantially all of our revenue from a small
number of customers in the manufacturing industry, and our revenue could decline
if we lose a major customer or significant downturns occur in any of our
customers' industries.
We have generated a substantial portion of our revenue from a limited
number of customers, substantially all of which are in the manufacturing
industry. In 2000, we began expanding our sales and marketing efforts toward
companies in other industries and other vertical markets, particularly for
business-to-business integration and enablement of application service
providers. Nevertheless, we expect that a small number of customers in the
manufacturing industry will continue to account for a substantial portion of our
revenue for the foreseeable future. Any significant decline in the demand for,
and market acceptance of, our software in the manufacturing industry of any of
our customers would hurt what we anticipate for our 2002 results of operations.
We believe that many of our current customers will continue to provide a
substantial portion of our revenue through additional license, implementation
services and maintenance fees. In 2001, our largest customer accounted for more
than 51% of our revenue and our second largest customer accounted for more than
44% of our revenue. Consequently, the loss of even one customer could have a
material adverse effect on our revenue. Moreover, as we continue to market our
products in new vertical markets, we expect that customers in some of those new
vertical markets are likely to have different requirements and may require us to
change our product design or features, sales methods, support capabilities or
pricing policies. If we fail to successfully address these new vertical markets,
we may experience decreased sales in future periods.
If we do not effectively compete with new and existing competitors, our revenues
and operating margins will decline.
The market for our products is intensely competitive, evolving and
subject to rapid technological change. We expect the intensity of competition to
increase in the future. As a result of increased competition, we may have to
reduce the price of our products and services, and we may experience reduced
gross margins and loss of market share, any one of which could significantly
reduce our future revenues and operating results. Many of our current and
potential competitors have longer operating histories, significantly greater
financial, technical, product development and marketing resources as well as
better name recognition and larger customer bases than we do. These competitors
may be able to develop products comparable or superior to those offered by us,
or adapt more quickly to new technologies, evolving industry trends or customer
requirements than we can. They are also positioned to devote greater resources
to the development, promotion and sale of their products than we can.
Accordingly, we may not be able to compete effectively in our markets, and
competition may intensify and harm our business and its operating results. If we
are not successful in developing enhancements to existing products and new
products in a timely manner, garnering customer acceptance or generating average
licensing prices, our gross margins may decline, and our business and operating
results may suffer. For additional information on our competitive posture in our
industry, see the description set forth in this report under "Item 1 -
Description of Business - Competition and Markets."
We must expand our network of distribution partners in order to successfully
sell our products.
We have recently implemented a sales model under which we are focusing
substantial efforts toward the sale of our products through indirect sales
channels such as resellers, system integrators, application software vendors and
infrastructure
12
technology companies. We plan to continue to invest resources to expand our
direct sales force and our relationships with these third parties. We may not be
successful in this expansion, and even if we are, such expansion might not
result in an increase in our revenues. If we fail to maintain our existing
relationships with indirect sales channel arrangements or fail to establish new
ones, or if our revenue does not increase correspondingly with the expenses we
incur in pursuing such relationships, our business will suffer.
If we do not retain our key management personnel and attract and retain other
highly skilled employees, our business will suffer.
Our future success depends on the skills, experience and performance of
our senior management team, other key personnel, and their ability to operate
effectively, both individually and as a group. Each of these persons is bound by
an employment agreement with the company, and we maintain "key man" insurance in
the amount of $1 million on the lives of each of George E. Mendenhall, Chairman
and Chief Executive Officer, and Stuart E. Massey, Executive Vice President.
Nevertheless, recovery under such insurance may not be adequate to compensate us
for the full impact resulting from the death of any one or more these officers.
If any of our senior management or other key research, engineering and
development or sales and marketing personnel were to leave the Company, it would
be difficult to replace them, and our business would be harmed. Our success also
depends on our ability to recruit, retain and motivate highly skilled sales,
marketing and engineering personnel. We face significant competition for
individuals with the skills required to develop, market and support our products
and services. We believe that attracting and retaining these personnel is
particularly difficult for us because:
. the market for connectivity infrastructure software is still
emerging
. our company and our products are not yet widely known in
the marketplace
. the relative scarcity of qualified technical personnel in the
Columbia, South Carolina metropolitan area makes it difficult to
attract and retain technical personnel
We cannot provide assurance that we will be able to recruit and retain
sufficient numbers of these highly skilled employees. If we fail to do so, our
ability to compete will be significantly harmed.
The recent restructuring of our operations could strain our existing resources
and cause our business to suffer.
Our ability to successfully offer products and services and implement
our business plan in our rapidly evolving markets requires an effective planning
and management process. We have recently restructured our entire executive,
administrative and operating teams in order to achieve greater efficiencies in
execution, better allocation of skills across departments and better project
tracking. In connection with that restructuring, we have reduced by
approximately 26% the number of our employees over the past twelve months, from
a high of approximately 60 during 2001 to 40 on March 31, 2002. The anticipated
growth in our customer base during 2002 and 2003 will lead to our need late this
year to increase staff in certain areas. In the meantime, the staffing
requirements necessary to support our existing business growth strategy may
place a significant strain on our currently reduced management systems,
infrastructure and resources. As our customer base grows, concurrent with the
need to expand, train and manage our workforce, we expect that we will also be
required to manage an increasing number of relationships with these new
customers, various strategic alliance partners and other third parties. Failure
to expand any of the foregoing areas efficiently and effectively could interfere
with the growth of our business as a whole.
Defects in or slow performance of our software products could diminish demand
for our products and cause costly liability, which would adversely affect our
operating results.
The Synapse software products we offer are internally complex. Complex
software may contain errors or defects, particularly when first introduced or
when new versions or enhancements are released. Although we conduct extensive
testing, we may not discover software defects that affect our current or new
products or enhancements until after they are sold. Although we have not
experienced any material software defects to date, any errors, defects or slow
performance that is discovered could result in:
. loss of revenue
. product returns or order cancellations
. delay in market acceptance of our products
13
. diversion of our development resources
. distraction of our management
. damage to our customer relationships and our reputation
. increased service and warranty costs
. costly litigation defense
Our license and service agreements with our customers typically contain
provisions designed to limit our exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in our license and service agreements may not be effective as a result of
existing or future federal, state or local laws or ordinances or unfavorable
judicial decisions. Although we have not experienced any product liability
claims to date, sale and support of our products entails the risk of such
claims, which could be substantial in light of customers' use of many of our
products in mission-critical applications. We do not maintain product liability
insurance. If a claimant brings a product liability claim against us, it could
have a material adverse effect on our business, results of operations and
financial condition.
Risks Related to Our Industry
If we fail to adapt to the rapid technological change which characterizes our
markets, we could lose market share or our products could become obsolete.
The market for our current suite of software products is characterized
by:
. rapid technological change
. frequent new product introductions and enhancements
. uncertain product life cycles
. changing customer requirements
. evolving industry standards
The introduction of products embodying new technologies, the emergence
of new industry standards or changes in customer requirements could render some
or all of our existing products obsolete and unmarketable. Moreover, decreases
in the cost of existing products or services could enable our current or
potential customers to fulfill their own needs for transaction processing and
integration systems and services in a more cost-efficient manner than through
the purchase of our products and services. As a result, our success depends upon
our ability to respond to changing customer requirements and enhance existing
products and services to keep pace with technological developments and emerging
industry standards. We have invested significantly in technology and anticipate
that it will be necessary for us to continue to do so. Failure to develop and
introduce enhancements to our existing products and services in a timely manner
in response to changing market conditions or customer requirements will
materially and adversely affect our business, results of operations and
financial condition.
Because our products could interfere with our customers' other software
applications and hardware, we may be subject to claims by these customers, which
may be costly and may not be adequately covered by insurance.
Our products inter-operate with many parts of complicated computer
systems, such as mainframes, servers, personal computers, application software,
databases, operating systems and data transformation software. Failure of any
one of these parts could cause all or large parts of computer systems to fail.
In such circumstances, it may be difficult to determine which part failed, and
it is likely that customers will bring lawsuits against several suppliers. Even
if our software is not at fault, we could suffer material expenses and material
diversion of management time in defending any such lawsuits.
If we fail to adequately protect our proprietary rights, we may lose these
rights and our business may be seriously harmed.
Our success depends upon our proprietary technology. To establish and
protect our proprietary rights, we rely primarily on a combination of:
14
. patent law
. copyright law
. trademark and trade secret laws
. confidentiality procedures and agreements
. licensing arrangements
. the complex nature of our technologies
As part of our confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, customers and strategic partners
when we enter into license, service and maintenance agreements with respect to
our software, documentation and other proprietary information. Despite these
precautions, third parties could copy or otherwise obtain and use our products
or technologies without authorization, or develop similar technologies
independently. It is difficult for us to police unauthorized use of our
products. Because of this difficulty in determining the extent to which piracy
of our software products may exist, software piracy remains a persistent
problem. Expensive litigation may be necessary in the future to enforce our
intellectual property rights. Moreover, effective protection of intellectual
property rights is unavailable or limited in certain foreign countries. While we
believe that our products and technologies are adequately protected against
infringement, existing laws afford only limited protection. Consequently, the
protection of our proprietary rights may not be adequate, and our competitors
could independently develop similar technologies, duplicate our products,
reverse-engineer or design around the intellectual property rights we hold.
Our products may infringe the intellectual property rights of others, which may
cause us to incur unexpected costs or prevent us from selling our products.
The commercial success of our business depends upon our products not infringing
any intellectual property rights of others and upon no claims for infringement
being made against us. We have conducted periodic patent searches to determine
whether or not we may be infringing the patent or trademark rights of any third
parties and have recently applied for patent protection of our proprietary
Synapse software. Because patent applications in the United States are not
publicly disclosed until the patent is issued, applications of which we are not
aware may have been filed which relate to our software products. We may be
subject to legal proceedings and claims from time to time in the ordinary course
of our business, including claims of alleged infringement of the patents,
trademarks and other intellectual property rights of third parties by us or our
licensees in connection with their use of our products. Intellectual property
litigation is expensive and time-consuming, and could divert our management's
attention away from running our business. If we were to discover that our
products violated the intellectual property rights of others, we would have to
obtain licenses from these parties in order to continue marketing our products
without substantial re-engineering. We might not be able to obtain the necessary
licenses on acceptable terms or at all. If we could not obtain such licenses, we
might not be able to re-engineer our products successfully or in a timely
manner. We believe that we are not infringing any intellectual property rights
of third parties, but there can be no assurance that such infringement will not
occur. If we fail to address any infringement issues successfully, we will be
forced to incur significant costs and could be prevented from selling our
products.
Other Risks
The price of our common stock may fluctuate significantly.
The market price for our common stock may be affected by a number of
factors, including developments in the middleware, software or technology
industry, general market conditions and other factors, including factors
unrelated to our operating performance or our competitors' operating
performances. In addition, our stock price and the stock prices of many other
companies in the technology and emerging growth sectors have experienced wide
fluctuations, including recent rapid rises and declines in their stock prices,
that have often been unrelated to the operating performance of such companies.
These factors and fluctuations, as well as general economic, political and
market conditions, such as recessions, may materially adversely affect the
market price of our common stock.
The number of our shares of common stock that are or may become eligible for
sale in the near future may cause the market price for our common stock to
decline significantly, even if our business is doing well.
Trading in our common stock has historically been very limited has made
the market price of our common stock vulnerable to significant fluctuations. At
December 31, 2001, we had 17,774,694 outstanding shares of common stock, with an
15
additional 6,384,709 shares of common stock issuable upon the exercise of
employee stock options and common stock purchase warrants and an additional
2,995,640 shares issuable upon conversion of debt, for a total fully diluted
outstanding share amount of 27,155,043 at December 31, 2001.
Of the 17,774,694 outstanding shares on December 31, 2001, 12,219,594
(or 69%) were freely tradable in the public market. Of the balance of
approximately 5,555,100 shares (or 31 %), (a) 3,830,100 shares were held by
members of management and may be publicly sold only pursuant to the volume and
manner of sale restrictions of Rule 144 under the Securities Act of 1933, and
(b) approximately 1,725,000 shares were issued in private placements that were
exempt from registration under the Securities Act of 1933. As such, these
1,725,000 shares are considered "restricted shares" that are not eligible for
public resale by their holders until the first anniversary following their
issuance, their public resale remains subject to the volume and manner of sale
restrictions of Rule 144 until the second anniversary following their issuance.
Under the operation of Rule 144, approximately 865,000 of these restricted
shares will become eligible for resale under Rule 144 on or before December 31,
2002. The balance of 860,000 shares will become eligible for resale under Rule
144 on March 20, 2003.
Of the 9,380,349 shares issuable at December 31, 2001 upon the exercise
of stock options, and warrants and upon the conversion of debt, 3,141,469 (or
34%) shares will be freely tradable upon exercise or conversion of the
underlying instrument. Of the balance of 6,238,880 shares (or 66%), (a) 523,600
shares were issuable to members of management and are subject to the same resale
restrictions under Rule 144 as are described in the prior paragraph, and (b)
5,715,280 shares were issuable upon exercise or conversion of instruments issued
by us in private placements that were exempt from registration under the
Securities Act of 1933. As such, these 5,715,280 restricted shares are subject
to the same Rule 144 one year and two-year restrictions as are described in the
prior paragraph for restricted shares. We have granted registration rights to
the holders of substantially all of the instruments under which these restricted
shares are issuable. The registration rights generally require us to register
these shares for resale within six months of the date of their issuance upon
excercise or conversion, as applicable, of the underlying instruments.
Once these restricted shares become eligible for resale under Rule 144
or their resale otherwise registered by us with the Securities and Exchange
Commission, if the holders of these restricted shares sell substantial amounts
of their shares into the public market during a short period of time, or if
those shareholders are perceived by the market as intending to sell them, our
stock price may decline significantly. The issuance of these shares will also
result in dilution to our shareholders, and may make it more difficult for us to
sell equity or equity-related securities in the future at a time and at a price
that we deem appropriate.
Failure to raise additional capital or generate the significant capital
necessary to expand our operations and invest in new products could reduce our
ability to compete and result in lower revenues.
We expect that our currently held cash, cash from expected customer
revenues, and cash from one or more private placements of securities expected to
close during the first half of 2002 should be sufficient to meet our working
capital and capital expenditure needs for at least the next 12 months. Even if
we are successful in realizing our expected 2002 sales revenues and in
completing the private sale of additional securities, we expect that we may
still require additional financing in the future to implement our growth
strategies and achieve our long-term objectives. We cannot be certain that we
will be able to obtain additional debt or equity financing on favorable terms,
or at all. If we obtain additional equity financing, our shareholders may
experience significant dilution of their ownership interests and the per share
value of our common stock could decline. If we engage in debt financing, we may
be required to accept terms that restrict our ability to incur additional
indebtedness and that force us to maintain specified liquidity or other ratios,
any of which could harm our business. If we need additional capital and cannot
raise it on acceptable terms, we may not be able to, among other things:
. develop or enhance our products and services
. continue to expand our sales and marketing organizations
. acquire complementary technologies, products or businesses
. expand operations, in the United States or internationally
. hire, train and retain employees
. respond to competitive pressures or unanticipated working
capital requirements
Our failure to do any of these things could result in lower revenues and could
seriously harm our business.
Anti-takeover provisions in our articles of incorporation and state corporate
laws could discourage or prevent a takeover, even if an acquisition would be
beneficial to our shareholders.
16
In many cases, shareholders receive a premium for their shares when a company is
purchased by another enterprise. Various provisions in our articles of
incorporation and bylaws and South Carolina corporate laws could deter and make
it more difficult for a third party to bring about a merger, sale of control, or
similar transaction without approval of our board of directors, even if the
transaction would be beneficial to our shareholders. These provisions tend to
perpetuate existing management. As a result, our shareholders may be deprived of
opportunities to sell some or all of their shares at prices that represent a
premium over market prices. These provisions, which could make it less likely
that a change in control will occur, include:
. provisions in our articles of incorporation establishing three
classes of directors with staggered terms, which means that only
one-third of the members of the board of directors is elected
each year, and each director serves for a term of three years.
. provisions in our articles of incorporation authorizing the board
of directors to issue a series of preferred stock without
shareholder action, which issuance could discourage a third party
from attempting to acquire, or make it more difficult for a third
party to acquire, a controlling interest in us.
. provisions in our articles of incorporation prohibiting
cumulative voting in the election of directors, which would
otherwise allow less than a majority of shareholders to elect
director candidates.
. provisions in our bylaws relating to meetings of shareholders
which limit who may call a meeting and what matters will be voted
upon.
. provisions in our bylaws establishing advance notice requirements
for nominations for election to the the board of directors and
for proposing matters that can be acted upon by shareholders at
shareholder meetings.
. state law provisions that require two-thirds of the shareholders
to approve mergers and similar transactions, and amendments to
the articles of incorporation.
In addition, the South Carolina Business Combination Act, the South
Carolina Control Share Acquisition Act and the vesting terms of our stock option
plans may discourage, delay or prevent a change in control of our company.
17
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
We are not involved in any material legal proceedings.
Item 2 - Changes in Securities
During the three months ended March 31, 2002 we issued the following
securities in transactions that were not registered under the Securities Act of
1933:
During the first quarter, we received approximately $800,000 in gross
proceeds from the issuance of two-year convertible debentures. The debentures
carry an annual interest rate of 9%, which increases one percentage point each
calendar quarter unless the debentures are repaid on or before December 31,
2002, whereupon the interest rate reverts to 9%. All principal under the
debentures is due upon maturity on January 1, 2004 and interest is payable in
two annual installments on January 1, 2003 and at maturity. Under the
debentures, we are obligated to apply toward the repayment of principle and
interest an escalating percentage of funds over $1 million received by us in
future capital raising activities. The conversion price per share under the
debentures is the lower of $1.00 and 50% of the average closing price of the
common stock for the 30 calendar days prior to conversion. The exercise price
per share under the warrants is $1.60. In January, the Company issued 38,117
shares to satisfy certain third party obligations.
These securities were issued without registration under the Securities
Act of 1933 in reliance upon the exemption from registration contained in
Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933, as a
transaction, not involving a general solicitation, in which the purchasers were
purchasing for investment. We believe that the purchasers were given or had
access to detailed financial and other information with respect to our company
and possessed requisite financial sophistication.
Item 3 - Defaults Upon Senior Securities
This item is not applicable.
Item 4 - Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of the shareholders of the Company
during the first quarter of fiscal year 2002.
Item 5 - Other Information
This item is not applicable.
Item 6 - Exhibits and Reports on Form 8-K
There were no Form 8-K filings during the period.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, hereunto, duly authorized.
Integrated Business Systems and Services, Inc.
(Registrant)
/s/ George E. Mendenhall
- ------------------------------------------
George E. Mendenhall, Ph.D.
18
Chief Executive Officer and
Chairman of the Board
Date: May 15, 2002
19
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
FORM 10-QSB
EXHIBIT INDEX
Exhibit
Number
- ------
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 2.1 to the Company's Form 1-A
filed July 9, 1997).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference to
Exhibit 2.2 to the Company's Form 1-A filed July 9, 1997).
10.1 Employment Agreement dated as of December 31, 1996 between the Company
and Harry P. Langley (incorporated by reference to Exhibit 6.2 to the
Company's Form 1-A filed July 9, 1997).
10.2 Amendment No. 1 dated as of September 1, 1997, to Employment Agreement
dated as of December 31, 1996, between the Company and Harry P. Langley
(incorporated by reference to Exhibit 6.21 to the Company's Amendment
No. 1 to Form 1-A filed September 15, 1997).
10.3 Employment Agreement dated as of January 1, 1997, as amended January 1,
1999, between the Company and George E. Mendenhall (incorporated by
reference to Exhibit 6.3 to the Company's Form 1-A filed July 9, 1997).
10.4 Amendment No. 1 dated as of September 1, 1997, to Employment Agreement
dated as of January 1, 1997, between the Company and George E.
Mendenhall (incorporated by reference to Exhibit 6.22 to the
Company'sAmendment No. 1 to Form 1-A filed September 15, 1997).
10.5 Amendment No. 2 dated as of January 1, 1999 to Employment Agreement
dated January 1, 1997, between the Company and George E. Mendenhall
(incorporated by reference to Exhibit 6.17(b) to the Company's Amendment
No. 1 to Form SB-1 filed April 6, 1999 (Registration No.333-43437)).
10.6 Employment Agreement dated as of December 31, 1996 between the Company
and Stuart E. Massey (incorporated by reference to Exhibit 6.4 to the
Company's Form 1-A filed July 9, 1997).
10.7 Amendment No. 1 dated as of September 1, 1997, to Employment Agreement
dated as of December 31, 1996, between the Company and Stuart E. Massey
(incorporated by reference to Exhibit 6.23 to the Company's Amendment
No. 1 to Form 1-A filed September 15, 1997).
10.8 Employment Agreement effective as of January 1, 1999 between the Company
and Donald R. Futch (incorporated by reference to Exhibit 6.20 to the
Company's Amendment No. 1 to Form SB-1 filed April 6, 1999(Registration
No. 333-43437)).
10.9 Employment Agreement effective as of May 30, 2000 between the Company
and William S. McMaster. (incorporated by reference to Exhibit 10.10 to
the Company's 10-KSB for the year ended December 31, 2000).
10.10 Integrated Business Systems and Services, Inc. Stock Option Plan
(incorporated by reference to Exhibit 6.18 to the Company's Form 1-A
filed July 9, 1997) (incorporated by reference to Exhibit 10.12 to the
Company's 10-KSB for the year ended December 31, 2000).
10.11 Integrated Business Systems and Services, Inc. 2001 Stock Incentive
Plan, as amended.
10.12 Lease Agreement dated October 1, 2000 between the Company and Atrium
Northeast Limited Partnership (incorporated by reference as Exhibit
10.16 of the Company's Form 10-QSB for the quarter ended September 30,
2000).
10.13 Escrow Agreement among Pacific Corporate Trust Company, the Company,
Harry P. Langley, George E. Mendenhall and Stuart E. Massey
(incorporated by reference to Exhibit 6.24 to the Company's Amendment
No. 2 to Form 1-A filed October 8, 1997).
10.14 Nonqualified Stock Option Agreement dated as of May 30, 2000 between the
Company and William S. McMaster (incorporated by reference to Exhibit
10.15 to the Company's 10-KSB for the year ended December 31, 2000).
10.16 Letter Agreement between the Company and George E. Mendenhall effective
September 1, 2001 with respect to cash compensation deferral.
10.17 Letter Agreement between the Company and Stuart E. Massey effective
September 1, 2001 with respect to cash compensation deferral.
10.18 Letter Agreement between the Company and William S. McMaster effective
September 1, 2001 with respect to cash compensation deferral.
10.19 Letter Agreement between the Company and Donald R. Futch effective
September 1, 2001 with respect to cash compensation deferral.
10.20 Letter Agreement between the Company and James V. Hopkins effective
September 1, 2001 with respect to cash compensation deferral.
10.21 Class A Secured Convertible Debenture dated December 31, 2001 between
the Company and IBSS Class A Investors.
10.22 Class B Secured Convertible Debenture dated December 31, 2001 between
the Company and IBSS Class B Investors.
10.23 Common Stock Purchase Warrant dated December 31, 2001 between the
Company and IBSS Class A Investors.
10.24 Common Stock Purchase Warrant dated December 31, 2001 between the
Company and IBSS Class B Investors.
10.25 Omnibus Security Agreement dated December 31, 2001 by and among the
Company, IBSS Class A Investors and IBSS Class B Investors.
10.26 Inter-Creditor Agreement dated December 31, 2001 by and among the
Company, IBSS Class A Investors and IBSS Class B Investors.
21 Subsidiaries of the Company (incorporated by reference to Exhibit 21 to
the Company's Form 10-KSB for the fiscal year ended December 31, 2001).