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: June 30, 2002
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( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transaction period from: to
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Commission File number: 0-24031
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
(Issuer's telephone number)
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(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:
18,409,248 shares of no par value common stock outstanding at June 30, 2002
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Transitional Small Business Disclosure Format (check one) ( ) Yes (X) No
1
Integrated Business Systems and Services, Inc.
Form 10-QSB
Quarter Ended June 30, 2002
Table of Contents
Page
Number
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets as of June
30, 2002, and December 31, 2001 3
Consolidated Condensed Statements of Operations for the
three months and six months ended June 30, 2002 and 2001,
respectively 4
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 2002 and 2001, respectively 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Risk Factors That May Affect Our Financial Condition and
Operating Results 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
IMPORTANT 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Factors That May Affect Our Financial Condition
and Operating Results," as well as those set forth in other periodic reports and
filings that we make with the Securities and Exchange Commission.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Integrated Business Systems and Services, Inc.
Consolidated Condensed Balance Sheets
June 30, 2002 December 31, 2001
ASSETS: (unaudited) (audited)
----------- ---------
Current assets:
Cash and cash equivalents $ 64,298 $ 6,100
Accounts receivable, trade, net 137,257 347,969
Accounts receivable, other -0- 9,000
Related party notes receivable, net of loan loss allowance of $207,200 50,000 50,000
Interest receivable 28,991 24,635
Unbilled revenue -0- 38,856
Other prepaid expenses 43,766 35,941
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Total current assets 324,312 512,501
Capitalized software costs, net 330,903 420,511
Property and equipment, net 488,247 564,067
Related party receivable 21,499 27,994
Other assets 3,978 4,154
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Total assets $ 1,168,939 $ 1,529,227
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Notes payable $ 673,547 $ 696,227
Accounts payable 232,896 405,145
Accrued liabilities:
Compensation and benefits 608,996 521,305
Payroll taxes 481,280 322,772
Professional fees 263,504 254,420
Interest payable 198,145 35,050
Other 60,722 44,049
Deferred revenue 58,219 93,377
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Total current liabilities 2,577,309 2,372,345
Long-term debt, net of current portion 2,632,073 2,145,037
Long-term accrued compensation 23,483 83,219
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Total liabilities 5,232,865 4,600,601
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Shareholders' equity (deficiency):
Common stock, no par value per share, 100,000,000 shares authorized,
18,409,248 and 17,774,694, shares outstanding at June 30, 2002
and December 31, 2001, respectively 18,956,958 18,041,226
Notes receivable - stock (131,080) (131,080)
Accumulated deficit (22,042,451) (20,134,167)
Non-controlling interest in net assets (847,353) (847,353)
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Total shareholders' equity (deficiency) (4,063,926) (3,071,374)
----------- -----------
Total liabilities and shareholders' equity (deficiency) $1,168,939 $1,529,227
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
3
Integrated Business Systems and Services, Inc.
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
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2002 2001 2002 2001
---- ---- ----- ----
Revenues:
Services $ 641,812 $ 663,842 $ 952,555 $ 1,070,735
Licenses 105,000 0 256,590 0
Maintenance and support 24,402 22,593 48,803 52,367
Hardware - third party 571 33,625 82,947 475,473
Other 1,162 1,162 2,325 2,569
-------- ---------- ----- ---------
Total revenues 772,947 721,222 1,343,220 1,601,144
Cost of revenues 318,949 376,673 770,830 1,055,887
------- ---------- ------- ---------
Gross profit 453,998 344,549 572,390 545,257
Operating expenses:
Research and development 121,863 163,271 253,045 424,610
Sales and marketing 145,565 555,606 328,046 1,184,844
General and administrative 637,138 872,577 1,265,079 1,741,061
------- ---------- --------- ---------
Total operating expenses 904,566 1,591,454 1,846,170 3,350,515
------- ---------- --------- ---------
Loss from operations (450,568) (1,246,905) (1,273,780) (2,805,258)
Interest and miscellaneous income 2,391 5,589 4,801 19,312
Interest expense (183,285) (62,828) (639,305) (100,897)
Loss on equity investment 0 (70,599) 0 (147,738)
-------- ---------- ---------- ---------
Total other (expenses) income (180,894) (127,838) (634,504) (229,323)
-------- ---------- ---------- ---------
Net loss $ (631,462) $ (1,374,743) $(1,908,284) $(3,034,581)
======== ========== ========== ==========
Earnings (loss) per share, basic and diluted $ (0.04) $ (0.10) $ (0.11) $ (0.21)
======== ========== ========== ==========
Weighted average common shares outstanding 17,868,045 14,370,292 17,830,392 14,411,821
The accompanying notes are an integral part of these consolidated financial statements.
4
Integrated Business Systems and Services, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Six months ended June 30,
2002 2001
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Operating activities
Net loss $ (1,908,284) $ (3,034,582)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 76,380 72,319
Amortization of software 89,609 89,609
Non-cash interest expense 460,442 0
Issuance of equity for accounts payable 104,446 0
Loss on equity investments 0 147,738
Changes in assets and liabilities:
Investments 0 50,000
Accounts receivable 219,712 (336,630)
Interest receivable (4,356) (31)
Unbilled revenue 38,856 0
Prepaid expenses and other assets (7,649) (54,875)
Accounts payable (172,249) (187)
Accrued expenses 375,315 159,371
Deferred revenue (35,158) 56,674
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Cash used in operating activities (762,936) (2,850,594)
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Investing activities
Purchases of property and equipment (560) (140,765)
Investment in affiliate companies 0 (540,000)
Related party note receivable 0 275,000
Related party receivable 6,495 0
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Cash provided by (used in) investing activities 5,935 (405,765)
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Financing activities
Proceeds from (payments on) notes payable, net 839,000 1,218,938
Payments on notes payable (134,898) (352,000)
Sale of common stock 100,000 350,000
Proceeds from exercise of common stock options and warrants 11,097 1,398,845
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Cash provided by financing activities 815,199 2,615,783
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Net increase (decrease) in cash 58,198 (640,576)
Cash and cash equivalents at beginning of period 6,100 700,892
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Cash and cash equivalents at end of period $ 64,298 $ 60,316
======= =========
The accompanying notes are an integral part of these consolidated financial statements.
5
Integrated Business Systems and Services, Inc.
Notes To Consolidated Condensed Financial Statements
(Unaudited)
1. Basis Of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
condensed 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 and
six-month periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2002. For
further information, please refer to the audited financial statements and
footnotes thereto included in the company's Form 10-KSB for the year ended
December 31, 2001, as filed with the Securities and Exchange Commission.
2. Basis Of Consolidation
In 2001 and 2002, the consolidated financial statements include
the accounts of Integrated Business Systems and Services, Inc. and its
majority-owned subsidiary, Synamco, LLC (collectively, the "company").
3. Earnings Per Share
The computations of basic earnings (loss) per share and diluted
earnings (loss) per share are in conformity with the provisions of Statement of
Financial Accounting Standards No. 128.
4. 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
consolidated financial statements, at June 30, 2002 the company had a working
capital deficiency and an accumulated deficit, including minority interests, of
approximately $2.25 million and $22 million, respectively. Ultimately, the
company's 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 the company 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 the company be unable to continue as a going concern. The company's plans
include the measures described in the following paragraphs, although it is not
possible to predict the ultimate outcome of the company's efforts. For
additional information regarding the measures described below, please refer to
the matters described elsewhere in this report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Cost and Expense Reductions. During September of 2001, the company
commenced a comprehensive internal restructuring and cost reduction program. The
implementation of that program is continuing and has resulted through July of
2002 in a reduction of almost 50% in the company's monthly gross cash expense
run rate. Continuation of that cost reduction program is expected to further
reduce the company's monthly cash expense run rate.
Investor Debt and Other Payables. On December 31, 2001, the company
achieved significant 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, approximately 80% of the entire
principal balance is not payable for up to
6
two years (First Quarter 2004). Substantially all of the remaining 20% of
principal is payable during the first quarter of 2003. The first interest
payment is not due until first quarter 2003, and the next interest payment on
the remaining debt is not due until maturity in 2004. The company 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, the company has utilized restricted stock grants to satisfy
third party obligations.
Additional Capital. Since December 31, 2001, the company has raised
approximately $939,000 in additional investor funding through the private
placement of common stock, two-year convertible debentures and common stock
purchase warrants. The company expects to raise additional capital during 2002
or early in 2003 through the private placement of convertible debt or equity
securities. Because of several factors, including the operating, market and
industry risks associated with an investment in its common stock, the fact that
the company's common stock is no longer traded on the Nasdaq Stock Market and is
currently traded on the Over-the Counter Bulletin Board maintained by the NASD,
and the continued weakness in the capital markets in general and the technology
sectors in particular, the company expects that it will experience difficulty in
obtaining additional financing until its operating results or overall market
conditions improve.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provides information that
we believe is relevant to an assessment and understanding of our results of
operations and financial condition. This discussion should be read in
conjunction with the condensed consolidated financial statements and related
notes set forth in this quarterly report on Form 10-QSB under the caption "Part
I - Financial Information - Financial Statements."
Results of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001.
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Revenues. Our total operating revenues increased 7.2% (or
approximately $52,000) to approximately $773,000 in the three months ended June
30, 2002, from approximately $721,000 in the comparable prior year period. This
increase was primarily attributable to an increase of $105,000 in our license
revenue, offset by a decrease of approximately $33,000 and $22,000 in our
hardware revenue and service revenue, respectively.
Cost of Revenues. Our total cost of revenues decreased 15.3% (or
approximately $58,000) to approximately $319,000 in the three months ended June
30, 2002, from approximately $377,000 in the comparable prior year period. This
decrease was attributable to increased operational efficiencies achieved as a
consequence of our recent restructuring, including staff reductions and lower
labor costs of personnel necessary for project implementations, as well as to
the decrease in hardware costs associated with the comparable decrease in
hardware revenues for this quarter of 2002.
Gross Profit. Our gross profit increased 31.6% (or approximately
$109,000) to approximately $454,000 in the three months ended June 30, 2002,
from approximately $345,000 in the comparable prior year period. We experienced
a corresponding gross margin increase to approximately 59% for the three months
ended June 30, 2002 from approximately 48% for the comparable prior year period.
Research and Development Expenses. Our research and development
expenses decreased 25.2% (or approximately $41,000) to approximately $122,000 in
the three months ended June 30, 2002, from approximately $163,000 in the
comparable prior year period. As a percentage of our total quarterly revenues,
research and development expenses in the second quarter of 2002 decreased to
15.8% from 22.6% in the comparable quarter of last year. The decrease for the
second quarter of this year was primarily attributable to the relatively larger
allocation of resources in the second quarter of last year to research and
development, as well as to the reductions in these expenses realized as a
consequence of our comprehensive restructuring and cost reduction program
described below under the heading "Liquidity and Capital Resources - Cost and
Expense Reduction Program." Although our research and development expenses in
the second quarter of this year decreased both in dollar amount and as a
percentage of revenues from those incurred in the comparable quarter of last
year, we anticipate that these expenses will increase in actual dollars on a
quarterly basis. We expect, however, that they will continue to decrease as a
percentage of our quarterly revenues.
Sales and Marketing Expenses. Our sales and marketing expenses
decreased 73% (or approximately $410,000) to approximately $146,000 in the three
months ended June 30, 2002, from approximately $556,000 in the comparable prior
year period. As a percentage of our quarterly revenues, sales and marketing
expenses in the second quarter of this year decreased to 18.8% from 77% in the
comparable quarter of last year. Sales and marketing expenses decreased
primarily as a result of decreases in marketing salaries associated with staff
reductions, as well as decreases in third party professional fees and public
relations expenses realized as a consequence of our comprehensive restructuring
and cost reduction program described below under the heading "Liquidity and
Capital Resources - Cost and Expense Reduction Program."
General and Administrative Expenses. Our general and
administrative expenses, excluding interest expense, decreased 27% (or
approximately $236,000) to approximately $637,000 in the three months ended June
30, 2002, from approximately $873,000 in the comparable prior year period. As a
percentage of our quarterly revenues, general and administrative expenses in the
second quarter of this year decreased to 82.4% from 121% in
8
the comparable quarter of last year. The decrease for the second quarter of
this year was primarily attributable to our comprehensive restructuring and cost
reduction program described below under the heading "Liquidity and Capital
Resources - Cost and Expense Reduction Program."
Non-Operating Items. Interest income decreased 57.2% (or
approximately $3,200) to approximately $2,400 in the three months ended June 30,
2002, from approximately $5,600 in the comparable prior year period, as a result
of the smaller cash balances in 2002.
Interest expense increased 190.5% (or approximately $120,000) to
approximately $183,000 in the three months ended June 30, 2002 as compared to
approximately $63,000 in the comparable prior year period. The increase in
interest expense is attributable in part to the higher amount of our outstanding
debt in 2002. The greatest portion ($75,000) of the increase, however, is solely
attributable 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 and 2002, 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.
Loss on equity investment decreased from approximately $71,000 in
the second quarter of last year to zero in the second quarter of 2002. This
decrease was solely a consequence of our divestiture of our interest in WilCam
Systems, LLC in December 2001.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001.
- --------------------------------------------------------------------------
Revenues. Our total revenues decreased 16.25% (or approximately
$260,000) to approximately $1.34 million in the six months ended June 30, 2002,
from approximately $1.6 million in the comparable prior year period. This
decrease was primarily attributable to the factors described above in the
quarter-to-quarter comparisons for this category for the second quarters of the
current and prior year.
Cost of Revenues. Our total cost of revenues decreased 27% (or
approximately $289,000) to approximately $771,000 in the six months ended June
30, 2002, from approximately $1.06 million in the comparable prior year period.
This decrease was attributable to the factors described above in the
quarter-to-quarter comparisons for this category for the second quarters of the
current and prior year.
Gross Profit. Our gross profit increased 5% (or approximately
$27,000) to approximately $572,000 in the six months ended June 30, 2002, from
approximately $545,000 in the comparable prior year period. We experienced a
corresponding gross margin increase to 43% for the six months ended June 30,
2002 from approximately 34% in the comparable prior year period.
Research and Development Expenses. Research and development
expenses decreased 40% (or approximately $172,000) to approximately $253,000 in
the six months ended June 30, 2002, from approximately $425,000 in the
comparable prior year period. This decrease was primarily attributable to the
factors described above in the quarter-to-quarter comparisons for this category
for the second quarters of the current and prior year.
Sales and Marketing Expenses. Sales and marketing expenses
decreased 72% (or approximately $862,000) to approximately $328,000 in the six
months ended June 30, 2002, from approximately $1.19 million in
9
the comparable prior year period. This decrease was primarily attributable
to the factors described above in the quarter-to-quarter comparisons for this
category for the second quarters of the current and prior year.
General and Administrative Expenses. General and administrative
expenses decreased 27% (or approximately $470,000) to approximately $1.27
million in the six months ended June 30, 2002, from approximately $1.74 million
in the comparable prior year period. This decrease was primarily attributable to
the factors described above in the quarter-to-quarter comparisons for this
category for the second quarters of the current and prior year.
Non-Operating Items. Interest income decreased 74% (or
approximately $14,000) to approximately $5,000 in the six months ended June 30,
2002, from approximately $19,000 in the comparable prior year period. This
decrease was primarily attributable to the factors described above in the
quarter-to-quarter comparisons for this category for the second quarters of the
current and prior year.
Interest Expense increased 533% (or approximately $538,000) to
approximately $639,000 in the six months ended June 30, 2002 as compared to
approximately $101,000 for the comparable prior year period. Substantially all
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 as described above in the
quarter-to-quarter comparisons for this category for the second quarters of the
current and prior year.
Loss on equity investment decreased from approximately $148,000
in the six months ended June 30, 2001 to zero in the comparable period of 2002.
This decrease was attributable to the factor described above in the
quarter-to-quarter comparisons for this category for the second quarters of the
current and prior year.
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, their families and other
individuals and entities. 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 from operating revenues and through
borrowings from third parties. We raised net proceeds of approximately $1.22
million 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
$1.03 million 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
and second quarters of 2002, we raised approximately $939,000 through the
private placement of common stock, two-year convertible debentures, and common
stock purchase warrants. Although we expect to raise additional funds later in
2002 or in early 2003 from the private placement of additional debt, equity or
equity-linked securities, we expect that we will experience difficulty in
obtaining additional financing until our operating results or overall market
conditions improve.
Cost and Expense Reduction Program.
During September of 2001, in connection with our executive
managements' 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 and expense reduction program. The
implementation of that program is continuing. By the end of August 2002, we
expect our monthly cash payments necessary to fund continuing operational
expenses will have decreased by over 60% as compared to a year ago.
Included in our cost and expense reduction program are measures
that have resulted in substantial
10
reductions in our largest cash expenditure categories of human resource and
payroll-related expenses. Through the end of August 2002, these measures will
have included reductions of over 50% in the number of our employees; deferrals
of up to 65% in the compensation rates of our executive officers; reductions of
up to 50% in the compensation rates for our remaining non-executive personnel;
scale-backs in our employee benefit programs; reductions of approximately 13% in
the rates we pay for employee 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 intend to pursue additional reductions in the cash obligations
associated with our operating facilities, including reductions in our lease
payments, where appropriate.
We currently do not have any commitments or budgeted needs during
the remainder of 2002 for any material capital expenditures, including purchases
of furniture, fixtures and equipment. In the absence of any substantial infusion
of growth capital during 2002, we do not expect our capital expenditure plans
for 2002 to change.
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,
approximately 80% of the entire principal balance is not payable for up to two
years (January 1, 2004) with substantially all of the remaining 20% payable
during the first quarter of 2003. The first interest payment on our
restructured debt is not due until January 2003, and the next interest payment
on the remaining debt 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 $939,000 through the private placement of common stock, two-year
convertible debentures and common stock purchase warrants. We expect to raise
additional funds in 2002 or early in 2003 from the private placement of
additional debt, equity or equity-linked securities. Because of several factors,
including the operating, market and industry risks associated with an investment
in our common stock; the inclusion of a going concern paragraph in our annual
and quarterly financial reports; the fact that our common stock is no longer
traded on the Nasdaq Stock Market and is currently traded on the Over-the
Counter Bulletin Board maintained by the NASD; the continued weakness in the
capital markets in general and the technology sectors in particular; and the
other factors described in this report under the heading "Risk Factors That May
Affect Our Financial Condition and Operating Results", we believe we will
experience difficulty in obtaining additional financing until our operating
results or overall market conditions improve.
As a consequence of our comprehensive restructuring and cost
reduction program described above under the caption "Cost and Expense Reduction
Program", we have achieved substantial cash flow relief during the past 11
months. In the absence of any substantial infusion of growth capital or a
significant increase in customer revenues over the amounts included in our
budget for the remainder of 2002, we have not budgeted for any material increase
in this monthly cash payments, and as noted above, we may be in a position to
further reduce our monthly cash payment obligations during the remainder of
2002. We expect that the proceeds from revenues generated from our operations
and, to a lesser extent, the proceeds from our prior 2001 and 2002 capital
raising activities, will be adequate to meet our projected working capital and
other cash requirements for at least the next six 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 new 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 our revenues increase sufficiently to meet
expenditure levels or our expenditure levels are further reduced.
11
Cash Flow Analysis
Net cash used in operating activities decreased to approximately
$763,000 during the six months ended June 30, 2002, representing a decrease of
approximately $2.09 million from the approximately $2.85 million of net cash
used during the comparable prior year period. This significant decrease of over
70% in net cash used in the first six months of this year was primarily a
consequence of the cost cutting program implemented by executive management, as
described in greater detail above under the caption "Liquidity and Capital
Resources - Cost and Expense Reduction Program."
Net cash provided by investing activities increased to
approximately $6,000 during the six months ended June 30, 2002, representing an
increase of approximately $413,000 from net cash used in investing activities of
approximately $406,000 during the comparable prior year period. Almost all of
this increase was attributable to the $540,000 cash purchase of affiliate equity
in 2001 that was not repeated in 2002.
Net cash provided by financing activities decreased to
approximately $815,000 during the six months ended June 30, 2002, representing a
decrease of approximately $1.81 million from the approximately $2.62 million of
net cash provided during the comparable prior year period. This decrease was
attributable to the relatively larger amount of private financing in the form of
convertible debentures and sales of common stock that took place during the
first half of 2001 as compared to the first half of this year. The net cash
provided by financing activities in the first half of this year resulted
primarily from the private placement of approximately $839,000 in convertible
debentures and warrants and $100,000 in common stock.
RISK FACTORS THAT MAY AFFECT OUR FINANCIAL CONDITION AND 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 from those contemplated
by any forward-looking statements contained in this report.
Risks Related to Our Company
Substantially all of our debt is secured. A default by us under this debt could
result in a foreclosure on all of our assets and the discontinuation of our
operations. Funds from any resulting liquidation of all of our assets would not
be sufficient to fully repay our secured creditors. In such event, our unsecured
creditors and our shareholders would receive nothing.
At June 30, 2002, we had approximately $3.3 million in
outstanding debt under convertible debentures that we issued in 2001 and in
2002. This debt has a first priority security interest in all of our assets,
including our proprietary technologies. Of this amount, approximately $105,000
in principal is due during the remainder of 2002, approximately $576,000 is due
on January 1, 2003, and the remainder of this debt is due during the first
quarter of 2004. Interest payments on substantially all of our existing debt
that matures after 2002 are due in two installments in the first quarters of
2003 and 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
interests. In such event, if we are unable to reach a pay out arrangement
satisfactory to the holders of this secured debt or seek satisfactory debt
relief under federal bankruptcy laws, we believe that our company would no
longer be able to operate. In that event, we believe that it is most likely that
our company's assets would be sold and that the proceeds from such sale would
not be sufficient to satisfy the liens of our secured creditors. This would
leave no funds for the payment of any of our unsecured obligations to third
parties, including any judgment creditors that might arise, and would leave no
funds or assets available for distribution to our shareholders.
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Our most recent financial statements include a going concern paragraph.
Our independent accountants' report for our most recent year-end
audit and the notes to our year-end 2001 audited financial statements, as well
as the notes to our unaudited financial statements contained in our
publicly-filed reports for the first and second quarters of 2002 identify
factors that, in the opinion of our independent accountants, raised substantial
doubts about our ability to continue as a going concern.
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 June 30, 2002, we had an accumulated deficit of
approximately $22 million (unaudited). In addition, since 1997, we have
continued to allocate a substantial proportion of our internal resources to
activities associated with the development, marketing and sale 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. 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 allocate working capital
toward our sales and marketing strategies, although at a lower percentage of
revenue than our allocation of working capital in this area during our most
recent fiscal years.
If expenditures related to our sales and marketing activities are
not accompanied or shortly followed by increased revenue, our losses could be
greater than expected until we are able to delay or reduce expenditures. While
we believe profitability may be achievable in 2002 or 2003, many factors,
including the factors described in this report, may result in our incurring
losses in 2002 and in 2003. We will need to significantly increase our quarterly
revenues or significantly reduce our quarterly expenses from their historical
levels in order for us to achieve profitability.
The recent restructuring of our operations has strained our existing resources
and may 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. During the latter part of last year
and the first eight months of this year, we have 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 will have
reduced by over 50% the number of our employees from a high of approximately 60
employees during 2001 to less than 30 employees by the end of August 2002. We
anticipate that if we are able to achieve our anticipated growth in our customer
base during the remainder of 2002 and in 2003, we will need to increase the
number of our employees in some areas later this year or early in 2003. In the
meantime, the staffing requirements necessary to support our existing business
and our growth strategies have placed a significant strain on our currently
reduced management systems, infrastructure and resources. If we are able to
achieve our anticipated growth in our customer base, concurrently 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 and possibly limit our ability to expand our business as a whole.
13
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
sustainable trends or other future performance. If our revenues, operating
results or earnings are below the levels expected by investors or securities
analysts, our stock price is likely to decline.
In addition, we 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 any 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 has been and will 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 as 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, these factors 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.
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 factors 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 factors 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 our
sales process, the period between our initial contact with a new customer and
the time when we are able to 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 may 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
14
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 which would be likely to cause a decline
in our stock price.
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 substantially all 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 and 2003 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 prices 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 than we can to new technologies,
evolving industry trends or customer requirements. They are also positioned to
devote greater resources to the development, promotion and sale of their
products than we are. 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 cause our business and operating results to suffer. For additional
information on our competitive posture in our industry, please refer to the
description set forth under the caption "Item 1 - Description of Business -
Competition and Markets" that is included in our annual report on Form 10-KSB
filed with the Securities and Exchange Commission for the fiscal year ended
December 31, 2001.
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 more efforts toward the sale of our products through indirect sales
channels such as resellers, system integrators, application software vendors and
infrastructure technology companies. We plan to continue to invest resources
toward the development of our relationships with these third parties. We may not
be successful in the implementation of our sales strategies, and even if we are,
such strategies may 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.
15
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 advisors, and
their ability to operate effectively, both individually and as a group. Each of
our key employees is bound by an employment agreement with the company. Although
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, each of these policies has been assigned as
security for substantially all of our outstanding debt. Consequently, until we
have satisfied that debt (which matures in the first quarter of 2004), or we are
able to provide these respective lenders substitute collateral acceptable to
them, we will not receive any benefit from these policies in the event of the
death of either of these key officers. Moreover, if and when we are able to
terminate the assignment of these policies, recovery under such insurance may
not be adequate to compensate us for the full impact resulting from the death of
either of these officers. If any of our existing 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 materially harmed. If we are able to achieve our anticipated sales growth,
our success will also depend on our ability to recruit, retain and motivate
additional highly skilled sales, marketing and engineering personnel. We believe
we will 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
If we fail to recruit and retain sufficient numbers of these
highly skilled employees our ability to compete will be significantly harmed,
and our business will suffer.
Defects in, or slow performance of, our software products could diminish demand
for our products and expose us to 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 may be discovered could result in:
- - loss of revenue
- - product returns or order cancellations
- - delay in market acceptance of our products
- - 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, ordinances or 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 our 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
16
of operations and financial condition.
Risks Related to Our Industry
If we fail to adapt to the rapid technological change that 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 competing 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 to
enhance existing products and services to keep pace with technological
developments and emerging industry standards. We have invested significantly in
technology, and we 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 of our customers, 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 our customers' 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, causing our business to suffer.
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:
- - 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 enter into
non-disclosure agreements with our employees
17
upon hiring them, and with our 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 protected against infringement,
as a practical matter, existing laws may 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 upon 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. We have also 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 are similar to our software products.
Consequently, 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 any of 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 and may be negatively
affected by factors beyond our ability to control or predict.
The price of our common stock is subject to the volatility
generally associated with Internet, middleware, software and technology stocks
in general, and may also be affected by broader market trends unrelated to our
or our competitors' operating performances. Our stock price and the stock prices
of many other companies in the technology and emerging growth sectors have
historically experienced wide fluctuations, including rapid rises and declines
in stock prices that have often been unrelated to the operating performance of
such companies. In this connection, we note that since 2001, a substantial
downward trend, especially during the most recent six months, has been
experienced in the markets for stocks across substantially all market sectors,
and particularly in the technology sectors in which our stock may be included by
various market analysts. These downward trends and fluctuations are typically
the result of the combination of general economic, political and market
conditions, most recently including recessions, the threat of terrorist
activities, and concerns over the accuracy of financial reporting by several
large publicly traded corporations. These factors are beyond our ability to
control or predict. We believe that the downward trends in the securities
trading markets as a whole have had and will continue to have a comparable
adverse impact on the trading market for our common stock. We can provide no
assurance that these downward trends and the events giving rise to them will not
continue for the foreseeable future, or that they will not materially adversely
affect the market price of our common stock.
18
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
and has made the market price of our common stock vulnerable to significant
fluctuations. At June 30, 2002, we had 18,409,248 outstanding shares of common
stock, with an 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 27,789,957 at June 30, 2002.
Outstanding Shares - Of the 18,409,248 outstanding shares on June
30, 2002, 12,219,594 (or approximately 66%) were freely tradable in the public
market. Of the balance of approximately 6,189,654 shares (or approximately 34%),
(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 2,359,554 shares were issued
in private placements that were exempt from registration under the Securities
Act of 1933. As such, these 2,359,554 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, approximately 860,000 will become eligible for resale
in March 2003 and the remaining balance of 634,554 shares will become eligible
for resale in July 2003.
Shares Issuable in the Future - Of the 9,380,349 shares issuable
at June 30, 2002 upon the exercise of the vested and unvested stock options and
warrants and upon the conversion of debt, 3,141,469 (or approximately 34%)
shares will be freely tradable upon exercise or conversion of the underlying
instrument. Of the balance of 6,238,880 shares (or approximately 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 exercise 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 current cash balance and cash from expected
sales of our products and services should be sufficient to meet our working
capital and capital expenditure needs for at least the next six months.
Nevertheless, even if we are successful in realizing our expected 2002 sales
objectives, we expect that we will still require additional third party
financing in the future to implement our growth strategies and achieve our
long-term objectives. In light of the recent downward trends experienced by the
capital markets, 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 or 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:
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- - develop or enhance our products and services
- - continue to implement our sales and marketing strategies
- - 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 or result in the discontinuation of our operations.
Anti-takeover provisions in our articles of incorporation and state corporate
laws could discourage or prevent a takeover, even if an acquisition of our
company would be beneficial to our shareholders.
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, our 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 may be voted upon.
- - provisions in our bylaws establishing advance notice requirements for
nominations for election to 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 our 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.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any material litigation.
Item 2. Changes in Securities
During the three months ended June 30, 2002, we issued the
securities identified below pursuant to Section 4(2) and Rule 506 of Regulation
D of the Securities Act of 1933 which exempt from registration the issuance of
securities not involving a general solicitation in which the purchaser or
purchasers are purchasing the securities for investment. We believe that the
purchasers of the securities identified below were given or had access to
detailed financial and other information with respect to our company and
possessed requisite financial sophistication.
In April 2002, we received $30,000 from a private investor for
the issuance of two-year convertible debentures with detachable three-year
common stock purchase warrants for the purchase of 30,000 shares of our common
stock. 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 would revert 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 principal and interest an escalating percentage of funds over $1 million that
are received by us in future capital raising activities. The conversion price
per share under the debentures is the lower of $1.00 or 50% of the average
closing price of the common stock for the 30 calendar days prior to conversion.
The exercise price under the warrants is $1.60 per share. In June 2002, we
issued 523,985 shares to a private investor for gross proceeds of $100,000 and
the conversion of outstanding obligations of $42,000.
Item 3. Defaults Upon Senior Securities
This item is not applicable.
Item 4. Submission of Matters to Vote of Security Holders
(a) The company's annual meeting of the stockholders was held on June 13,
2002.
(b) Matters approved at the meeting:
(i) Election of Directors:
Number of Shares
----------------
Nominee for three-year term: For Abstain
--- -------
Carl Joseph Berger 9,323,808 1,383,530
(ii) Approval of an amendment increase the authorized shares under the
company's 2001 Stock Incentive Plan.
Number of Shares
-----------------
For Abstain Against
--- ------- -------
10,317,518 381,450 8,170
21
(iii) Proposal to ratify the appointment of Scott McElveen, LLP, as
the Company's independent auditors for the fiscal year ending
December 31, 2002.
Number of Shares
----------------
For Abstain Against
--- ------- -------
10,681,716 11,590 14,032
Item 5. Other Information
This item is not applicable.
Item 6. Exhibits and Reports on Form 8-K
The company did not make any filings on Form 8-K during the
three-month period ended June 30, 2002.
22
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)
Date: August 14, 2002 /s/ George E. Mendenhall
--------------------------------------------
George E. Mendenhall
Chief Executive Officer and Chairman of the Board
23
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's Amendment 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 (incorporated by
24
reference to the exhibit of the same number in the Company's Form 10-QSB
for the three-month period ended March 31, 2002).
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 (incorporated
by reference to the exhibit of the same number in the Company's Form 10-QSB
for the three-month period ended March 31, 2002).
10.17 Letter Agreement between the Company and Stuart E. Massey effective
September 1, 2001 with respect to cash compensation deferral (incorporated
by reference to the exhibit of the same number in the Company's Form 10-QSB
for the three-month period ended March 31, 2002).
10.18 Letter Agreement between the Company and William S. McMaster effective
September 1, 2001 with respect to cash compensation deferral (incorporated
by reference to the exhibit of the same number in the Company's Form 10-QSB
for the three-month period ended March 31, 2002).
10.19 Letter Agreement between the Company and Donald R. Futch effective
September 1, 2001 with respect to cash compensation deferral (incorporated
by reference to the exhibit of the same number in the Company's Form 10-QSB
for the three-month period ended March 31, 2002).
10.20 Letter Agreement between the Company and James V. Hopkins effective
September 1, 2001 with respect to cash compensation deferral (incorporated
by reference to the exhibit of the same number in the Company's Form 10-QSB
for the three-month period ended March 31, 2002).
10.21 Class A Secured Convertible Debenture dated December 31, 2001 between the
Company and IBSS Class A Investors(incorporated by reference to the exhibit
of the same number in the Company's Form 10-QSB for the three-month period
ended March 31, 2002).
10.22 Class B Secured Convertible Debenture dated December 31, 2001 between the
Company and IBSS Class B Investors (incorporated by reference to the
exhibit of the same number in the Company's Form 10-QSB for the three-month
period ended March 31, 2002).
10.23 Common Stock Purchase Warrant dated December 31, 2001 between the Company
and IBSS Class A Investors (incorporated by reference to the exhibit of the
same number in the Company's Form 10-QSB for the three-month period ended
March 31, 2002).
10.24 Common Stock Purchase Warrant dated December 31, 2001 between the Company
and IBSS Class B Investors (incorporated by reference to the exhibit of the
same number in the Company's Form 10-QSB for the three-month period ended
March 31, 2002).
10.25 Omnibus Security Agreement dated December 31, 2001 by and among the
Company, IBSS Class A Investors and IBSS Class B Investors (incorporated by
reference to the exhibit of the same number in the Company's Form 10-QSB
for the three-month period ended March 31, 2002).
25
10.26 Inter-Creditor Agreement dated December 31, 2001 by and among the Company,
IBSS Class A Investors and IBSS Class B Investors (incorporated by
reference to the exhibit of the same number in the Company's Form 10-QSB
for the three-month period ended March 31, 2002).
21 Subsidiaries of the Company (incorporated by reference to the exhibit of
the same number in the Company's Form 10-KSB for the fiscal year ended
December 31, 2001).
26