UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
ARKANSAS SYSTEMS, INC. AND SUBSIDIARIES D/B/A ARKSYS
Nine month period ended September 30, 1998 and year
ended December 31, 1997
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Consolidated Balance Sheets
Unaudited
SEPTEMBER 30 DECEMBER 31
1998 1997
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents $1,688,615 $2,438,246
Investment securities 6,989 57,660
Accounts receivable:
Trade, less allowance for doubtful accounts
of $252,000 at September 30, 1998 and
December 31, 1997 3,482,022 2,870,388
Other 70,519 33,622
Note receivable from affiliate 26,555 26,555
Costs and estimated earnings in excess of
billings on software installation contracts 603,733 640,165
Income taxes receivable 139,146 -
Deferred income taxes 375,163 331,536
Prepaid expenses and other assets 126,170 116,281
-----------------------------
Total current assets 6,518,912 6,514,453
Investment in affiliates 352,029 499,116
Receivable from affiliates 1,000 390,121
Net property and equipment 825,202 879,500
Cash surrender value of life insurance policies 928,488 847,620
-----------------------------
Total assets $8,625,631 $9,130,810
=============================
3
SEPTEMBER 30 DECEMBER 31
1998 1997
-------------------------------
LIABILITIES
Current liabilities:
Accounts payable $ 340,666 $ 388,151
Income taxes payable - 189,055
Accrued expenses 897,705 1,153,549
Advance payments on contracts 1,384,343 1,253,385
Billings in excess of costs and estimated
earnings on software installation contracts 273,437 316,713
------------------------------
Total current liabilities 2,896,151 3,300,853
Deferred compensation 499,597 476,790
Deferred rent 106,607 68,573
-------------------------------
Total liabilities 3,502,355 3,846,216
Stockholders' equity:
Common stock, ($.000167 par value, authorized
6,000,000 shares; issued and outstanding:
September 30, 1998--2,655,301; December 31,
1998--2,654,461 443 443
Additional paid in capital 393,885 387,517
Unrealized gain on investments (net of tax of
$1,225 at September 30, 1998 and $1,524 at
December 31, 1997) 1,973 2,454
Retained earnings 6,552,862 6,632,772
-------------------------------
6,949,163 7,023,186
Less treasury stock, at cost (September 30,
1998--1,102,809 shares; December 31,
1997--1,090,935 shares) (1,825,887) (1,738,592)
-------------------------------
Total stockholders' equity 5,123,276 5,284,594
-------------------------------
Total liabilities and stockholders' equity $ 8,625,631 $ 9,130,810
===============================
See accompanying notes.
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Consolidated Statements of Operations and Comprehensive Income (Loss)
Unaudited
NINE MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
1998 1997
-------------------------------
Revenue:
Software, maintenance and related revenue $8,767,193 $11,143,465
Gross profit on hardware sales 182,630 292,045
-------------------------------
Total revenue 8,949,823 11,435,510
Operating expense:
Salaries, wages and employee benefits 7,104,425 8,147,139
Depreciation 200,577 260,980
Other general and administrative 2,736,502 3,606,598
Expenses billed to customers (635,628) (896,984)
-------------------------------
Total operating expense 9,405,876 11,117,733
-------------------------------
(Losses) earnings from operations (456,053) 317,777
Other income (expense):
Interest income 64,229 110,663
Interest expense (7) (12)
Loss on sale of property - (157,306)
Other, net 148,289 105,970
-------------------------------
Total other income 212,511 59,315
-------------------------------
(Loss) income before equity in loss of
affiliates and income taxes (243,542) 377,092
Equity in loss of affiliates (26,921) (16,978)
-------------------------------
(Loss) income before income taxes (benefit) (270,463) 360,114
Provision for income taxes (benefit):
Current (146,926) 240,315
Deferred (43,627) (124,195)
-------------------------------
(190,553) 116,120
-------------------------------
Net (loss) income (79,910) 243,994
Other comprehensive income, net of tax:
Unrealized gains on investments:
Unrealized holding gains arising during period 219 909
Less: reclassification adjustments for gains
included in net income (700) -
-------------------------------
Other comprehensive income (loss) (481) 909
-------------------------------
Comprehensive income (loss) $ (80,391) $ 244,903
===============================
See accompanying notes.
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
Nine month period ended September 30, 1998 and year ended December 31, 1997
ADDITIONAL UNREALIZED
COMMON PAID-IN GAIN (LOSS) RETAINED TREASURY
STOCK CAPITAL ON INVESTMENTS EARNINGS STOCK TOTAL
---------------------------------------------------------------------------------------
Balance at January 1, 1997 $443 $368,065 $1,545 $6,388,778 $(1,632,287) $5,126,544
Net income for 1997 - - - 243,994 - 243,994
Sales of stock to employees - 19,452 - - - 19,452
Purchases of treasury
stock--(19,547 shares at $5.44
average per share) - - - - (106,305) (106,305)
Change in unrealized gain (loss)
on investments - - 909 - - 909
----------------------------------------------------------------------------------------
Balance at December 31, 1997 443 387,517 2,454 6,632,772 (1,738,592) 5,284,594
Net loss for 1998 - - - (79,910) - (79,910)
Sales of stock to employees - 6,368 - - - 6,368
Purchases of treasury
stock--(11,874 shares at $7.35
average per share) - - - - (87,295) (87,295)
Change in unrealized gain (loss)
on investments - - (481) - - (481)
---------------------------------------------------------------------------------------
Balance at September 30, 1998 $443 $393,885 $1,973 $6,552,862 $(1,825,887) $5,123,276
=======================================================================================
See accompanying notes
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Consolidated Statements of Cash Flows
Unaudited
NINE MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
1998 1997
-----------------------------
OPERATING ACTIVITIES
Net (loss) income $ (79,910) $ 243,994
Adjustments to reconcile net (loss) income to
cash provided by (used in) operating activities:
Depreciation 200,577 260,980
Loss on sale of property - 157,305
Undistributed loss of affiliates 26,921 16,978
Deferred income taxes (43,627) (124,195)
Changes in operating assets and liabilities:
Accounts and other receivables (648,531) (1,132,450)
Receivable from affiliates 389,121 669,822
Income taxes receivable (139,146) -
Income taxes payable (189,055) 475,420
Costs and estimated earnings in excess of
billings on software installation contracts 36,432 (294,027)
Prepaid expenses and other assets (9,889) 55,155
Cash surrender value of life insurance policies (80,868) (46,233)
Accounts payable and accrued expenses (303,329) 357,396
Advance payments on contracts 130,958 305,482
Billings in excess of costs and estimated
earnings on software installation contracts (43,276) 77,206
Deferred compensation 22,807 72,595
Deferred rent 38,034 24,656
-----------------------------
Net cash (used in) provided by operating (692,781) 1,120,084
activities
INVESTING ACTIVITIES
Proceeds from sale of property and equipment - 963,783
Proceeds from maturities of investments 50,190 -
Purchases of property and equipment (146,279) (50,962)
Purchases of investment securities - (461)
Additional investment in affiliates 120,166 (86,653)
-----------------------------
Net cash provided by investing activities 24,077 825,707
FINANCING ACTIVITIES
Proceeds from sale of stock 6,368 19,452
Purchase of treasury stock (87,295) (106,305)
-----------------------------
Net cash used by financing activities (80,927) (86,853)
-----------------------------
(Decrease) increase in cash and cash equivalents (749,631) 1,858,938
Cash and cash equivalents:
Beginning balance 2,438,246 579,308
-----------------------------
Ending balance $1,688,615 $ 2,438,246
=============================
See accompanying notes.
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements
Unaudited
September 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Founded in 1975 and managed by software professionals Arkansas Systems, Inc. and
Subsidiaries d/b/a ARKSYS, ("ARKSYS" or the "Company") sells payment and
financial transaction delivery systems worldwide. ARKSYS is a closely-held,
independently controlled corporation that is owned 98%, directly and indirectly,
by current employees.
ARKSYS provides payment and transaction processing solutions on the IBM AS/400
platform. Its core solution, Integrated Transaction Management ("ITM"), is a
modular, comprehensive software architecture for ARKSYS' offerings. Offerings
include:
ATM and network processing software
Electronic funds transfer software interfaces
Electronic funds transfer switch control software
Credit/debt card processing software
Corporate cash management and personal financial management access products
Headquartered in Little Rock, Arkansas, ARKSYS has satellite offices in
Budapest, Hungary, and Orlando, Florida. Arkansas-based marketing and regional
sales representatives and a global network of distributors market and sell its
offerings and services. Technical staff members, which include delivery,
development, research and support personnel, are based in Little Rock.
ARKSYS' client base includes more than 350 active clients in the United States
and approximately 70 countries worldwide. ARKSYS has approximately 140
employees.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Arkansas Systems, Inc. and its wholly owned subsidiary, Arkansas Systems, Inc.
International (a Foreign Sales Corporation). All significant intercompany
accounts and transactions have been eliminated in consolidation.
10
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
ARKSYS considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
INVESTMENT SECURITIES
All marketable securities are classified as available-for-sale and are available
to support current operations or to take advantage of other investment
opportunities. Those securities are stated at estimated fair value based upon
market quotes. Unrealized gains and losses, net of tax, are computed on the
basis of specific identification and are included in Retained Earnings.
INVESTMENT IN COMMON STOCK OF LIMITED LIABILITY COMPANIES
ARKSYS is accounting for its investments in Arkansas Systems Building Company,
LLC, a 48.389% owned affiliate, Arkansas Systems Land Company, LLC, a 50% owned
affiliated, Chenal Technology Center, LLC, a 17% owned affiliate, and EFT
Network Services, LLC, a 33 1/3% owned affiliate, by the equity method of
accounting. Under this method, ARKSYS's share of the net income or loss of each
affiliate is reflected in ARKSYS's investment account, and dividends received
from an affiliate are treated as a reduction of the investment account.
RECOGNITION OF REVENUES
ARKSYS offers banking and financial software products under licensing agreements
with monthly and annual maintenance support. Revenues from licensing agreement
contracts are recognized on a percentage of completion basis whereby a pro rata
portion of revenue and related costs are recognized as the work progresses.
Maintenance agreement revenues are recognized over the terms of the maintenance
contracts on a monthly basis. Licensing and maintenance contract revenues
received before they are earned are included in the balance sheets as "Advance
payments on contracts".
FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATION OF CREDIT RISK
ARKSYS maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. ARKSYS has not experienced any losses in such accounts
and does not believe it is exposed to any significant credit risk on cash and
cash equivalents.
11
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Also, ARKSYS's investment portfolio is comprised primarily of U.S. Government
obligations which are backed by the full faith and credit of the United States
Government.
The concentration of credit risk in the Company's receivables with respect to
the financial services industry is mitigated by the Company's credit evaluation
policy, reasonably short collection terms and geographical dispersion of sales
transactions. The Company generally does not require collateral or other
security to support accounts receivables.
At September 30, 1998, 79% of the Company's total accounts receivable resulted
from foreign sales. Customers in Hungary accounted for approximately 2% of the
Company's total accounts receivable at September 30, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight line method. The building and
building additions have been assigned depreciable lives of 10 to 30 years. The
depreciable lives of automobiles, office furniture and data processing equipment
are 3 to 8 years.
IMPAIRMENT OF ASSETS
The Company accounts for any impairment of its long-lived assets using SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-lived Assets
to be Disposed Of". Under SFAS No. 121, impairment losses are recognized when
information indicates the carrying amount of long-lived assets, identifiable
intangibles and any goodwill related to those assets will not be recovered
through future operations or sale.
INCOME TAXES
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
12
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures, consisting primarily of employee salaries
and computer-related expenses, incurred for the development of new software
systems, are expensed as incurred and amounted to approximately $1,300,000 for
the nine months ended September 30, 1998 and $1,700,000 for December 31, 1997.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs included
in other general and administrative expenses totaled $66,620 for the nine months
ended September 30, 1998 and $66,390 for December 31, 1997.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", and accordingly, recognized no compensation expense for the stock
option grants.
2. INVESTMENT SECURITIES
The cost and fair value of investments in debt and equity securities consist of
the following:
SEPTEMBER 30, 1998
--------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------------------------------------------
Equity securities $3,791 $3,198 $ - $6,989
--------------------------------------------------
$3,791 $3,198 $ - $6,989
==================================================
13
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
2. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------------------------------------------
Equity securities $ 3,791 $2,844 $ - $ 6,635
Obligations of local governments 49,891 1,134 - 51,025
--------------------------------------------------
$53,682 $3,978 $ - $57,660
==================================================
Debt securities at December 31, 1997 matured in 1998.
The fair market value of these financial instruments is based upon quoted market
prices for these or similar investments.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------------------------
Land $ 107,088 $ 107,088
Building and improvements 15,176 6,747
Data processing equipment 1,786,257 2,088,947
Office equipment and automobiles 622,885 591,935
--------------------------------
2,531,406 2,794,717
Less accumulated depreciation (1,706,204) (1,915,217)
--------------------------------
Net property and equipment $ 825,202 $ 879,500
================================
4. CONTRACTS IN PROCESS
The software installation contracts in process consist of the following:
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------------------------
Costs and estimated earnings on software
installation contracts $ 4,496,700 $ 3,911,139
Less billings to date (4,166,404) (3,587,687)
--------------------------------
$ 330,296 $ 323,452
================================
15
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
4. CONTRACTS IN PROCESS (CONTINUED)
Components are included in the accompanying consolidated balance sheets under
the following captions:
SEPTEMBER 30 DECEMBER 31
1998 1997
-----------------------------
Costs and estimated earnings in excess of
billings on software installation contracts $ 603,733 $ 640,165
Billings in excess of costs and estimated
earnings on software installation contracts (273,437) (316,713)
-----------------------------
$ 330,296 $ 323,452
=============================
5. INVESTMENT IN LIMITED LIABILITY COMPANIES (UNAUDITED)
Condensed financial information for Arkansas Systems Building Company, LLC;
Arkansas Systems Land Company, LLC; EFT Network Services, LLC; and Chenal
Technology Center, LLC consist of the following:
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
BUILDING LAND NETWORK TECHNOLOGY
COMPANY COMPANY SERVICES CENTER
-----------------------------------------------------------
ASSETS
Cash $ 369,980 $ 211 $ 17,117 $ 178,805
Property and equipment (net) 11,274,322 - 195,470 166,200
Other - 421,453 75,459 1,397,034
-----------------------------------------------------------
Total assets $11,644,302 $421,664 $288,046 $1,742,059
===========================================================
LIABILITIES AND EQUITY
Payable to ARKSYS $ 94,662 $ 1,000 $ 26,555 $ -
Other payables - 421,453 76,795 36,523
Debt 10,505,433 - - 813,704
Capital 490,279 64,695 262,134 406,081
Retained earnings (deficit) 553,928 (65,484) (77,438) 485,751
-----------------------------------------------------------
Total liabilities and equity $11,644,302 $421,664 $288,046 $1,742,059
===========================================================
Revenue $ 1,705,419 $ - $414,897 $1,164,202
Cost of sales - - 65,642 264,542
Operating expenses 1,405,799 23,765 403,101 113,715
-----------------------------------------------------------
Net income (loss) $ 299,620 $(23,765) $(77,438) $ 785,945
===========================================================
Percent owned by ARKSYS 48.389 50 33.33 17
===========================================================
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
5. INVESTMENT IN LIMITED LIABILITY COMPANIES (UNAUDITED) (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
BUILDING LAND NETWORK TECHNOLOGY
COMPANY COMPANY SERVICES CENTER
------------------------------------------------------------
ASSETS
Cash $ 381,480 $ 267 $ 54,597 $ 17,352
Property and equipment
(net) 11,467,503 - 201,297 168,460
Other - 421,453 112,213 2,427,481
------------------------------------------------------------
Total assets $11,848,983 $421,720 $ 368,107 $2,613,293
============================================================
LIABILITIES AND EQUITY
Payable to ARKSYS $ 389,121 $ 1,000 $ 26,555 $ -
Other payables - - 42,733 30,939
Debt 10,602,196 421,453 - 2,077,886
Capital 623,398 80,525 676,628 804,662
Retained earnings
(deficit) 234,268 (81,258) (377,809) (300,194)
------------------------------------------------------------
Total liabilities and
equity $11,848,983 $421,720 $ 368,107 $2,613,293
============================================================
Revenue $ 1,999,697 $ - $ 372,453 $ 303,100
Cost of sales - - 39,115 180,931
Operating expenses 1,823,436 41,719 567,892 216,723
------------------------------------------------------------
Net income (loss) $ 176,261 $(41,719) $(234,554) $ (94,554)
============================================================
Percent owned by ARKSYS 48.389 50 33.33 17
============================================================
None of the debt incurred by the above entities is with recourse to the owners.
6. EMPLOYEE BENEFIT PLANS
ARKSYS has established a Profit Sharing and 401(k) plan for all employees who
have completed one year of service. Each plan participant can contribute up to
the maximum amount allowed by the Internal Revenue Service to the Plan through
payroll deductions. ARKSYS's matching contribution to the plan is discretionary
and is determined each year by the Board of Directors. The employees' vested
percentage regarding the employer's contribution varies according to years of
service. ARKSYS's expense for contributions to the plan for the nine month
period ended September 30, 1998 and the year ended December 31, 1997 was
$224,408 and $287,624, respectively.
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
ARKSYS maintains a self-funded health insurance program which covers all full-
time employees and their families at no charge to the employees. In order to
administer this program, ARKSYS has entered into a contractual agreement with a
third party administrator by which ARKSYS pays a monthly service fee to the
administrator based upon employee enrollment. ARKSYS has also purchased
stop/loss insurance to limit ARKSYS's liability to $25,000 per employee per year
and a total loss on all claims to approximately $21,400 per month. Health care
claims are accrued as the services are rendered and, accordingly, the cost of
claims incurred but not yet paid of approximately $65,000 and $63,000 at
September 30, 1998 and December 31, 1997, respectively is included in accrued
liabilities in the accompanying balance sheets.
Until October 1, 1996, ARKSYS also had a nonqualified, unfunded deferred
compensation plan for certain key executives providing for payments upon
retirement or death. The retirement benefit to be provided was based upon the
length of service rendered and a fixed amount determined at the date of initial
participation. ARKSYS had insured the lives of the participants in the deferred
compensation plan to assist in the funding of the deferred compensation
liability. On October 1, 1996, ARKSYS terminated the deferred compensation plan.
As of December 31, 1996, five of the seven participants in the deferred
compensation plan had received life insurance policies in their names, in full
settlement of the related liability.
In 1997, the obligation related to the remaining two participants was converted
into a new retirement agreement under which payments are to be made monthly
beginning in 2012, for a maximum of 15 years, to either the employee or their
beneficiary. The liability had a present value, at an assumed discount rate of
9%, of $499,597 at September 30, 1998. ARKSYS has insured the lives of the
participants covered by the new retirement agreement to assist in funding of the
deferred compensation liability by acquiring insurance contracts with a combined
cash surrender value of $519,276 at September 30, 1998. The assets and
liabilities are reported gross in the accompanying balance sheets because the
insurance contracts have not been irrevocably assigned to the employees or any
plan or trust and accordingly, the insurance contracts are subject to the claims
of creditors.
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTION PLAN
Effective January 1, 1996, ARKSYS established an incentive stock-based
compensation plan under which stock options may be granted to officers and other
key employees. The plan provides for option prices based on the fair value of
the stock on the date the option is granted, as established by the Board of
Directors based upon a formula which takes into consideration the Company's book
value, gross sales and retained earnings. Options granted under this plan become
exercisable in five equal installments commencing one year from the date of the
grant.
Shares issued pursuant to options granted under this plan shall not exceed
1,000,000.
Transactions relating to the incentive stock-based compensation plan are
summarized as follows:
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
-------------------------
Options outstanding at January 1, 1997 60,250 $6.46
Granted 152,884 6.91
Exercised (200) 6.46
Terminated (9,000) 6.57
-------------------------
Options outstanding at December 31, 1997 203,934 6.82
Granted 154,967 7.17
Exercised - -
Terminated (74,700) 7.33
-------------------------
Options outstanding at September 30, 1998 284,201 6.88
=========================
As of September 30, 1998, options for 251,362 shares were exercisable and
715,599 shares were available for stock option grants under the 1996 plan.
Effective April 1, 1996, ARKSYS established a nonqualified stock-based
compensation plan under which stock option smay be granted to members of the
Board of Directors of the Company. The plan provides for option prices as
established by the Board of Directors. Options granted under this plan become
exercisable, based on the form of the stock option agreement, either upon the
date of grant (incentive form) or in five equal installments commencing one year
from the date of the grant (longevity form).
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTION PLAN (CONTINUED)
Shares issued pursuant to options granted under this plan shall not exceed
240,000. Transactions relating to the nonqualified stock-based compensation plan
are summarized as follows:
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
------------------------------
Options outstanding at January 1, 1997 30,000 $6.46
Granted 4,342 6.46
Exercised - -
Terminated - -
------------------------------
Options outstanding at December 31, 1997 34,342 6.46
Granted 35,620 6.46
Exercised - -
Terminated - -
------------------------------
Options outstanding at September 30, 1998 69,962 $6.46
==============================
As of September 30, 1998, options for 51,940 shares were exercisable and 170,038
shares were available for stock option grants under the 1996 nonqualified plan.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards during the nine
month period ended September 30, 1998 and the year ended December 31, 1997
consistent with the provisions of SFAS 123, the Company's pro forma net (loss)
income would have been $(198,723) and $197,131, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used for grants during the nine month period ended September 30, 1998:
dividend yield of 0%; expected volatility of 0%; risk-free interest rate of
4.33% and expected life of 5 years. The following weighted-average assumptions
were used for grants in 1997: dividend yield of 0%; expected volatility of 0%,
risk-free interest rate of 6.73% and expected life of 5 years.
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE STOCK PLANS
The Company also has an employee stock purchase plan for purposes of providing
employees with ownership opportunities. The Plan is a non-compensatory plan
available to all employees who have completed three full quarters of employment.
After meeting the length of employment requirement, an employee accrues rights
at the rate of twenty shares per full quarter of employment if employed prior to
March 1, 1991. Employees who were employed subsequent to February 28, 1991
accrue ten purchase rights per quarter. Employees who were employed prior to
December 31, 1980 accrue four hundred rights per full quarter of employment.
Rights granted on or after March 1, 1991 expire if not exercised within three
years. Shares of stock purchased with these rights fully vest to the employee
immediately upon purchase. All purchases and sales of stock are at values
established by the Board of Directors based upon a formula which takes into
consideration the Company's book value, gross sales, and retained earnings. The
Company retains a right of first refusal on all proposed sales of Company stock.
The Board of Directors may also grant purchase rights to employees on a
discretionary basis. Shares of stock purchased with these granted rights vest to
the employee over a five year period.
There were rights to purchase 26,603 and 30,213 shares of stock outstanding at
September 30, 1998 and December 31, 1997, respectively. Rights were exercised to
purchase 840 shares during the nine month period ended September 30, 1998 and
2,570 shares during the year ended December 31, 1997.
9. LINE OF CREDIT
At September 30, 1998, ARKSYS had a $1,500,000 unused line of credit with a bank
to be drawn upon as needed, with interest at the lower of 10.0% or the New York
Premium rate. The line expires on July 5, 1999. The line has no outstanding
balance.
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
10. FEDERAL AND STATE INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets are
as follows:
NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1998
CURRENT NONCURRENT TOTAL
-----------------------------------------
Deferred tax liabilities:
Property and equipment $ - $ 74,950 $ 74,950
Deferred revenue 121,229 - 121,229
Other - 1,225 1,225
Prepaid expenses 4,212 - 4,212
-----------------------------------------
Total deferred tax liabilities 125,441 76,175 201,616
Deferred tax assets:
Bad debt reserve 96,491 - 96,491
Deferred rent - 40,820 40,820
Deferred compensation 191,296 - 191,296
Accrued vacation 104,665 - 104,665
Contributions 4,012 - 4,012
Net operating losses and credits - 135,783 135,783
Other 3,712 - 3,712
-----------------------------------------
Total deferred tax assets 400,176 176,603 576,779
-----------------------------------------
Net deferred tax (liabilities)/assets $ 274,735 $ 100,428 $ 375,163
=========================================
YEAR ENDED DECEMBER 31, 1997
CURRENT NONCURRENT TOTAL
-----------------------------------------
Deferred tax liabilities:
Property and equipment $ - $ (92,534) $ (92,534)
Deferred revenue (123,850) - (123,850)
Other - (940) (940)
Prepaid expenses (4,323) - (4,323)
-----------------------------------------
Total deferred tax liabilities (128,173) (93,474) (221,647)
Deferred tax assets:
Bad debt reserve 96,491 - 96,491
Deferred rent - 26,257 26,257
Deferred compensation - 182,563 182,563
Accrued medical claims 14,641 - 14,641
Accrued bonuses 111,274 - 111,274
Accrued vacation 118,756 - 118,756
Other 2,262 939 3,201
-----------------------------------------
Total deferred tax assets 343,424 209,759 553,183
-----------------------------------------
Net deferred tax (liabilities)/assets $ 215,251 $ 116,285 $ 331,536
=========================================
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
10. FEDERAL AND STATE INCOME TAXES (CONTINUED)
The use of the liability method in accounting for income taxes requires that
deferred tax assets are reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Whether a deferred tax asset will be realized depends upon sufficient
future taxable income and consideration of limitation on the ability to utilize
net operation loss carryforwards and other tax attributes.
Management has considered appropriate factors in assessing the probability of
realizing these deferred tax assets. These factors include the deferred tax
liabilities of $204,528 and the projection of future taxable earnings. The
Company believes that the benefits of the deferred tax assets of $587,856 will
be realized, therefore a valuation allowance has not been provided for the
deferred tax asset.
At September 30, 1998, the Company has federal and state net operating loss
carryforwards of approximately $57,000 and $685,000, respectively. The net
operating losses will expire in the year 2018 for federal and 2003 for state.
The Company also has general business credits of approximately $78,000 that will
expire in 2013.
A reconciliation of the statutory federal income tax rate to the Company's
effective rate is presented below.
1998 1997
-------------------------------
Income tax at the statutory rate of 34% $ (91,957) $ 122,439
Federal income tax effects of:
State income taxes - (3,637)
Nondeductible portion of meals and entertainment 8,082 10,915
Cash surrender value of life insurance (27,495) (15,719)
Benefit of nontaxable income from Arkansas Systems, Inc.
International (33,150) (37,563)
Other (46,033) 28,989
-------------------------------
Federal income taxes (190,553) 105,424
State income taxes - 10,696
-------------------------------
Provision for income taxes $ (190,553) $ 116,120
===============================
No income taxes were paid for the nine month period ended September 30, 1998.
Income taxes paid for the year ended December 31, 1997 was $6,500.
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTY
During 1996, ARKSYS entered into an agreement with Arkansas Systems Building
Company, LLC, an affiliate, to lease office space. The lease is classified as an
operating lease and provides for specified annual percentage increases. Minimum
future rental payments under this noncancelable operating lease as of September
30, 1998, for each of the next 5 years and in the aggregate are:
1999 $1,071,844
2000 1,103,999
2001 1,137,119
2002 1,171,233
2003 1,206,370
--------------
Total minimum future rental payments $5,690,565
==============
ARKSYS incurred lease expense of $774,909 for the nine month period ended
September 30, 1998 and $1,071,242 for December 31, 1997, respectively.
12. COMMITMENTS
The Company has an agreement with a former shareholder to repurchase shares of
the Company's common stock over a period extending through 2006. Under the terms
of the agreement the Company will pay the former shareholder approximately
$60,000 per year through 2006.
13. YEAR 2000 CONSIDERATION
ARKSYS has developed a plan to modify its information technology to be ready for
the year 2000 and has begun converting critical data processing systems. ARKSYS
currently expects the project to be substantially complete by early 1999. ARKSYS
does not expect this project to have a significant effect on operations.
14. PENDING SALE
On September 18, 1998, management of the Company signed a letter of
understanding with Euronet Services, Inc. for the sale of all outstanding stock
of the Company. The transaction is expected to close the first week of December
1998 with an effective closing date of November 30, 1998.