UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2003
[_] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to ___________
Commission file number: 0-24031
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
South Carolina 57-0910139
------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1601 Shop Road, Suite E
Columbia, South Carolina 29201
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(Address of Principal Executive Offices) (Zip Code)
115 Atrium Way, Suite 228, Columbia, SC 29223
--------------------------------------------------
(Former Address, if Changed Since Last Report)
Small Business Issuer's Telephone Number, Including Area Code: 803-736-5595
------------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the small business issuer's
classes of common equity, as of the latest practicable date:
22,286,058 shares of no par value common stock outstanding at May 8, 2003
Transitional Small Business Disclosure Format (check one) ( ) Yes (X) No
1
Integrated Business Systems and Services, Inc.
Form 10-QSB
Quarter Ended March 31, 2003 Table of Contents
Page Number
PART I FINANCIAL INFORMATION -----------
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets as of March 31, 2003 and December 31, 2002 3
Consolidated Condensed Statements of Operations for the three months ended March 31,
2003 and 2002, respectively 4
Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2003
and 2002, respectively 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Risk Factors That May Affect Our Financial Condition and Operating Results 13
Item 3. Controls and Procedures 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Section 302 Certifications 28
Exhibit Index 30
Advisory Note Regarding Forward-Looking Statements
Some of the statements contained in this report on Form 10-QSB constitute
forward-looking statements. We caution readers of this report that these
statements involve a number of known and unknown risks and uncertainties 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,"
both of which are contained in Item 2 of Part I of this report, as well as those
factors set forth in other periodic reports and filings that we make with the
Securities and Exchange Commission. Copies of these filings may be obtained from
the Securities and Exchange Commission at its principal office in Washington, DC
at prescribed rates by calling 1-800-SEC-0330. These filings are also available
electronically through the Internet web site maintained by the Securities and
Exchange Commission at the Internet address: http://www.sec.gov.
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Integrated Business Systems and Services, Inc.
Consolidated Condensed Balance Sheets
March 31, 2003 December 31, 2002
ASSETS: (unaudited) (audited)
-----------------------------------------
Current assets:
Cash and cash equivalents $ 65,349 $ 55,874
Accounts receivable, trade, net 135,624 202,970
Interest receivable 27,873 26,539
Other prepaid expenses 38,195 63,809
-----------------------------------------
Total current assets 267,041 349,192
Capitalized software costs, net 196,763 241,294
Property and equipment, net 486,159 399,849
Related party receivable 17,400 18,200
Other assets 38,479 11,479
-----------------------------------------
Total assets $ 1,005,842 $ 1,020,014
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Notes payable $ 641,000 $ 696,000
Current portion of long-term debt 2,286,104 150,000
Accounts payable 148,398 190,423
Accrued liabilities:
Compensation and benefits 574,433 519,576
Payroll taxes 212,597 241,726
Professional fees 155,372 170,920
Interest payable 516,888 377,857
Other 175,643 133,614
Deferred revenue 64,801 73,327
-----------------------------------------
Total current liabilities 4,775,236 2,553,443
Long-term debt, net of current portion 121,322 2,051,488
-----------------------------------------
Total liabilities 4,896,558 4,604,931
-----------------------------------------
Shareholders' equity (deficiency):
Common stock, no par value per share, 100,000,000 shares authorized,
22,286,058 and 22,230,258 shares outstanding at
March 31, 2003 and December 31, 2002, respectively 19,917,586 19,877,678
Notes receivable officers/directors (131,080) (131,080)
Unearned compensation - (42,581)
Accumulated deficit (23,677,222) (23,288,934)
-----------------------------------------
Total shareholders' equity (deficiency) (3,890,716) (3,584,917)
-----------------------------------------
Total liabilities and shareholders' equity $ 1,005,842 $ 1,020,014
=========================================
The accompanying notes are an integral part of these consolidated condensed financial statements.
3
Integrated Business Systems and Services, Inc.
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months
Ended March 31,
--------------
2003 2002
-------------------------------
Revenues:
Services $ 766,664 $ 310,743
Licenses - 151,590
Maintenance and support 8,526 24,402
Hardware - third party 25,025 82,376
Other - 1,374
-------------------------------
Total revenues 800,215 570,485
Cost of revenues 261,454 451,881
-------------------------------
Gross profit 538,761 118,604
-------------------------------
Operating expenses:
Sales and marketing 102,428 183,480
Research and development 57,745 131,182
General and administrative 538,165 626,415
-------------------------------
Total operating expenses 698,338 941,077
-------------------------------
Loss from operations (159,577) (822,473)
-------------------------------
Interest and miscellaneous income 10,114 2,409
Interest expense (218,523) (456,020)
Loss on sale of assets (15,465) 0
Miscellaneous expenses (4,837) (3,138)
-------------------------------
Total other expenses (228,711) (456,749)
-------------------------------
Net Loss $ (388,288) $ (1,279,223)
-------------------------------
Basic loss per share $ (0.02) $ (0.07)
Basic weighted average shares outstanding 22,243,898 17,792,321
The accompanying notes are an integral part of these consolidated condensed financial statements.
4
Integrated Business Systems and Services, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2003 2002
---- ----
Net loss $ (388,288) $ (1,279,222)
Adjustments to reconcile net loss to cash provided by (used in):
Operating activities
Depreciation/amortizaton 37,229 38,182
Amortization of software costs 44,531 44,805
Non-cash interest expense 76,575 372,273
Issuance of stock in payment of accounts payable 11,158 62,446
Loss on disposition of fixed assets 15,465 -
Non-cash compensation 71,331 -
Changes in operating assets and liabilities:
Accounts receivable decrease 67,346 155,965
Interest receivable increase (1,334) (2,166)
Prepaid expenses and other assets increase (1,386) (38,018)
Accounts payable decrease (42,025) (39,847)
Accrued expenses increase 191,240 89,902
Deferred revenue increase (decrease) (8,526) 28,099
------------------------------------
Cash provided by (used in) in operating activities 73,316 (567,581)
------------------------------------
Investing activities
Purchases of property and equipment (139,004) (560)
Related party receivables, net 800 3,239
------------------------------------
Cash (used in) provided by investing activities (138,204) 2,679
Financing activities
Payments on notes payable, net (55,000) -
Payments on long-term debt - (125,000)
Proceeds from issuance of long-term debt 129,363 -
Proceeds from issuance of convertible long-term debt - 809,000
Proceeds from exercise of common stock options
and warrants - 1,376
------------------------------------
Cash provided by financing activities 74,363 685,376
------------------------------------
Net increase in cash 9,475 120,474
Cash and cash equivalents at beginning of period 55,874 6,100
------------------------------------
Cash and cash equivalents at end of period $ 65,349 $ 126,574
====================================
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
Integrated Business Systems and Securities, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis Of Presentation
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
consolidated 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 period
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2003. 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, 2002, as filed with
the Securities and Exchange Commission.
2. Basis Of Consolidation
In 2002 and 2003, 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
Net loss per share of Common Stock amounts presented on the face of the
consolidated statements of operations have been computed based on the weighted
average number of shares of Common Stock outstanding in accordance with the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 128, "Earnings Per Share." Stock warrants and stock options were not
included in the calculation of diluted loss per share because the Company has
experienced operating losses in all periods presented and, therefore, the effect
would be anti-dilutive.
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
condensed financial statements, at March 31, 2003 the company had a working
capital deficiency and an accumulated deficit of approximately $4.5 million and
$23.7 million, respectively. Ultimately, the company's viability as a going
concern is dependent upon its ability to continue 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 each or any of 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 Control Program -During September of 2001, in connection with the
company's executive managements' restructuring of internal operations and in
response to the need to reduce costs in connection with lower than expected
year-to-date revenues, the company commenced a comprehensive cost control
program. The implementation of that program is continuing. By the end of March
2003, the monthly cash payments necessary to fund continuing operational
expenses had decreased by over 70% as compared to the monthly cash required for
operations prior to the commencement of the cost control program.
Included in the cost control program are measures that have resulted in
substantial reductions in the largest cash expenditure categories of human
resource and payroll-related expenses. Through March of 2003, these measures
have included the reduction of over 50% in the number of employees; the deferral
of up to 61% in the compensation rates of executive officers; reductions of up
to 50% in the compensation rates for our remaining non-executive personnel;
reductions of approximately 13% in the rates paid for employee health insurance;
scale-backs in employee benefit programs; and substantial reductions in employee
travel, accommodation and hiring costs. In addition, the company has achieved
significant cash flow relief through the discontinuance of non-essential third
party consulting and service arrangements and the renegotiation of other third
party contracts, including those in the areas of public relations, investor
relations, financial advisory services, financial printing and industry
research. During the remainder of 2003, in addition to the reductions outlined
above, the company intends to pursue additional reductions in operating expenses
where appropriate.
6
In addition to the cost reductions summarized above, in the first quarter
of 2003, the company reduced its annual lease and facilities costs by
approximately 80%. During February of 2003, the company moved to newly up-fitted
offices closer to downtown Columbia. Under its former lease, which did not
expire until October 31, 2004, the company leased approximately 19,500 square
feet at an annual gross rent of approximately $345,000. The new facilities
comprise approximately 7,200 square feet at an annual gross rent of
approximately $36,000, with an annual up-fit cost of $30,000. The gross rent
under our new lease remains fixed during the entire ten-year term that expires
in 2013. If the need to expand should arise, the company has an option with its
current landlord to rent contiguous office space of approximately 4,775 square
feet at an annual gross rent of $19,100. In March 2003, the company successfully
terminated its former lease under which had already accrued past due obligations
of approximately $166,000. Under our termination and settlement agreement with
its former landlord, the entire payment obligation to its former landlord,
including obligations for past due rents and costs, is $160,000. This amount is
being paid down, without interest, in 24 monthly installments ending in February
2005. The move to its new facilities and the termination of the former lease has
reduced facilities costs by over $435,000 through the 19 months that remained
under the term of the former lease.
Capital Expenditures- The company currently does not have any commitments
or budgeted needs during the remainder of 2003 for any material capital
expenditures, including purchases of furniture, fixtures or equipment. In the
absence of any substantial infusion of growth capital or an unexpected increase
in its expected gross margin for 2003, the company does not expect its capital
expenditure plans for the next twelve months to change.
Debt and Other Payables- On December 31, 2001, the company achieved almost
complete debt service relief for 2002 and 2003 through the restructuring of
substantially all of its short-term and long-term debt into convertible
debentures and notes. Under the restructured debt instruments as originally in
effect, approximately 80% of the entire principal balance of the restructured
debt was not payable until January 1, 2004. Substantially all of the remaining
20% was payable during January of 2003. Effective January 1, 2003, the holders
of substantially all of that remaining 20% agreed to extend the January 2003
maturity date until January of 2004. In addition, the holders of the debt
scheduled to mature in January 2003 agreed to extend until May 31, 2003 the due
date for the first of the two annual interest installments that earlier had been
been extended to April 30, 2003.
In the months since the issuance of the its currently outstanding
convertible debt, a portion of the principal and accrued interest on the debt
has been converted by its holders into shares of its common stock. These and
other holders of the convertible debt may elect to convert additional amounts of
this debt into common stock prior to the maturity date in January of 2004. These
debt conversions have reduced, and if continued in 2003, will continue to reduce
the company's short-term debt obligations. For additional information regarding
our outstanding investor debt, please refer to the matters described above under
the caption "Sources of Operating Capital" and the matters described elsewhere
in this report under the caption "Risk Factors That May Affect Our Financial
Condition and Operating Results."
With respect to its trade accounts payable, the company has established
long-term payout arrangements with respect to substantially all of its unsecured
creditors. In addition, where permitted under securities laws, the company has
satisfied and expects to continue to satisfy certain of its unsecured
obligations to third parties through restricted stock grants.
7
Additional Capital- During 2002, the company raised approximately $984,000
through the private placement of common stock, two-year convertible debentures
and common stock purchase warrants. It may seek to raise additional funds 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 its common stock; the inclusion
of a going concern paragraph in its annual and quarterly financial reports; the
fact that its common stock is 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," the company believes it will experience
difficulty in obtaining additional financing until its operating results or
overall market conditions reflect sustained improvement.
As a consequence of its comprehensive restructuring and cost control
program described above, the company has achieved substantial cash flow relief
during the past twelve months. In the absence of any substantial infusion of
growth capital or a significant increase in customer revenues over the amounts
included in its budget for the remainder of 2003, the company has not budgeted
for any material increase in these monthly cash payments, and as noted above,
the company will continue in 2003 to pursue further reductions in its monthly
cash payment obligations. The company expects that the proceeds from revenues
generated from its operations will be adequate to meet its projected working
capital and other cash requirements for at least the next twelve months.
Management intends to closely monitor the company's progress and to further
reduce its expenses if its marketing and sales strategies do not result in
sufficient new revenues within a reasonable period of time. Any such reduction
will involve scaling back, delaying or postponing any development activities
that are not essential at that time in order for the company to achieve its
stated objectives. In any event, the company's working capital deficit may
continue to grow unless it is able to sustain revenues sufficient to meet
expenditure levels, or its expenditure levels are further reduced.
5. New Accounting Standards
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No.
148 amends SFAS No. 123, "Accounting for Stock Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require in both
annual and interim financial statements prominent disclosures about the method
of accounting for stock based employee compensation and the effect of the method
used on reported results. The company is required to follow the prescribed
disclosure format and has provided the additional disclosures required by SFAS
No. 148 for the quarterly period ended March 31, 2003.
On January 1, 2003, the company adopted Financial Accounting Standards
Board No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143").
SFAS No. 143 provides guidance on the recognition and measurement of an asset
retirement obligation and its associated retirement cost. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. The adoption of SFAS No. 143 did not materially
impact the Company's consolidated financial statements.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities and
Interpretation of ARB No. 51" ("Fin 46"). Many variable interest entities have
been commonly referred to as special-purpose entities or off-balance sheet
structures, but this interpretation applies to a larger population of entities.
In general, a variable interest entity ("VIE") is any legal structure used for
business purposes that either: (1) does not have equity investors with voting
rights, or (2) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. Under Fin 46, the VIE is
required to be consolidated by the company if it is subject to a majority of the
risk of loss from the VIE's activities or entitled to receive a majority of the
entity's residual returns. The consolidation requirements of FIN 46 apply to
VIEs created after January 31, 2003 and apply to existing VIEs in the first year
or interim period beginning after June 15, 2003. The company has adopted FIN 46,
and it did not have a material impact of the company's consolidated financial
statements.
8
6. Stock Based Compensation
The company accounts for stock options in accordance with APB Opinion
No.25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no
compensation expense is recognized for stock or stock options issued at fair
value. For stock options granted at exercise prices below the estimated fair
value, the company records deferred compensation expense for the difference
between the exercise price of the shares and the estimated fair value. The
deferred compensation expense is amortized ratably over the vesting period of
the individual options. For performance based stock options, the company records
compensation expense related to these options over the performance period.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123" as amended by FASB Statements No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS
148")), provides an alternative to APB 25 in accounting for stock based
compensation issued to employees. SFAS 123 provides for a fair value based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock based compensation
arrangements under APB 25, SFAS 123 requires disclosure of the pro forma effect
on net income and earnings per share as if the fair value based method
prescribed by SFAS 123 had been applied. The company intends to continue to
account for stock based compensation arrangements under APB No. 25 and has
adopted the pro forma disclosure requirements of SFAS 123.
Had compensation cost for options granted under the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
consistent with SFAS 123, the company's net income and earnings per share would
have changed to the pro forma amounts listed below:
Three Months Ended March 31,
2003 2002
------------------- -------------------
Net loss:
As reported $ (388,288) $ (1,279,222)
Add: stock-based compensation expense
included in reported net income 71,331 -
Deduct: stock-based compensation expense
determined under the fair value based
method for all awards (107,453) (168,769)
------------------- -------------------
Pro forma net loss $ (424,410) $ (1,447,991)
=================== ===================
Net loss per common share:
As reported:
Basic and diluted $ (0.02) $ (0.07)
Pro forma:
Basic and diluted $ (0.02) $ (0.08)
The pro forma disclosures required by SFAS 123 regarding net loss and net
loss per share are stated as if the company had accounted for stock options
using fair values. Compensation expense is recognized on a straight-line basis
over the vesting period of each option installment. Using the Black-Scholes
option-pricing model the fair value at the date of grant for these options was
estimated using the following assumptions:
Three Months Ended March 31,
2003 2002
---------------------- ---------------------
Dividend yield - -
Expected volatility 122% 131%
Risk-free rate of return 2.61-3.12% 4.55-4.77%
Expected option life, years 5 5
9
The weighted average fair value for options granted under the Option Plans
during the three months ended March 31, 2003 was $0.20. The weighted average
fair value for options granted under the Option Plans during the three months
ended March 31, 2002 was $0.68.
The Black-Scholes and other option pricing models were developed for use in
estimating fair value of traded options, which have no vesting restrictions and
are fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions. The Company's employee stock options have
characteristics significantly different than those of traded options, and
changes in the subjective assumptions can materially affect the fair value
estimate. Accordingly, in management's opinion, these existing models may not
necessarily provide a reliable single measure of the fair value of employee
stock options.
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
consolidated condensed financial statements and related notes set forth in this
quarterly report on Form 10-QSB under the caption "Part I - Financial
Information -Consolidated Condensed Financial Statements."
Results of Operations
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002.
Revenues. Our total operating revenues increased by $229,730 (or
approximately 40%) to $800,215 in the three months ended March 31, 2003, from
$570,485 in the comparable prior year period. This increase was primarily
attributable to the increase of $455,921 in our service revenue associated with
Fruit of the Loom, offset by a decrease of $151,590 in license revenue.
Cost of Revenues. Our total cost of revenues decreased $190,427 (or
approximately 42%) to $261,454 in the three months ended March 31, 2003, from
$451,881 in the comparable prior year period. This decrease was attributable to
several factors, including staff reductions and lower labor costs of personnel
necessary for project implementations, as well as the decrease in the human
resource costs necessary to support the maintenance obligations associated with
our license agreements. The reduction of these human resource costs was
primarily attributable to the increase in efficiencies in our overall customer
support operations and the successful execution during 2002 and in the first
quarter of 2003 of our comprehensive cost control program described below under
the heading "Liquidity and Capital Resources."
Gross Profit and Margins. Our gross profit increased $420,157 (or
approximately 354%) to $538,761 in the three months ended March 31, 2003, from
$118,604 in the comparable prior year period. We experienced a corresponding
gross margin increase to approximately 67% for the three months ended March 31,
2003 from approximately 21% for the comparable prior year period. This increase
was attributable to the increase in the first quarter of 2003, both in absolute
dollars and as a proportion of gross revenues, in our service revenues, where we
generate some of our second highest margins; the decrease in the first quarter
of 2003 in our third party hardware sales, where we generate our lowest margins;
and the successful execution of our comprehensive cost control program described
below under the heading "Liquidity and Capital Resources."
10
Sales and Marketing Expenses. Our sales and marketing expenses decreased
$81,052 (or approximately 44%) to $102,428 in the three months ended March 31,
2003, from $183,480 in the comparable prior year period. As a percentage of our
quarterly revenues, sales and marketing expenses in the first quarter of this
year decreased to 13% from 32% 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 control program described below under the
heading "Liquidity and Capital Resources."
Research and Development Expenses. Our research and development expenses
decreased $73,437 (or approximately 56%) to $57,745 in the three months ended
March 31, 2003, from $131,182 in the comparable prior year period. As a
percentage of our total quarterly revenues, research and development expenses in
the first quarter of 2003 decreased to 7% from 23% in the comparable quarter of
last year. The decrease for the first quarter of this year was primarily
attributable to the relatively larger allocation of human resources in the first
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 control program described below under the heading "Liquidity and
Capital Resources." Although our research and development expenses in the first
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 may increase in actual dollars on a quarterly
basis. We expect, however, that they will continue to decrease as a percentage
of our quarterly revenues, although not at the same rate as that was experienced
from 2002 to 2003.
General and Administrative Expenses. Our general and administrative
expenses, excluding interest expense, decreased $86,250 (or approximately 14%)
to $538,165 in the three months ended March 31, 2003, from $624,415 in the
comparable prior year period. As a percentage of our quarterly revenues, general
and administrative expenses in the first quarter of this year decreased to 67%
from 109% in the comparable quarter of last year. The decrease for the first
quarter of this year was primarily attributable to our comprehensive
restructuring and cost control program described below under the heading
"Liquidity and Capital Resources - Cost Control Program."
Non-Operating Items. Other income and expenses decreased $228,038 (or
approximately 50%) to $228,711 in the three months ended March 31, 2003, from
$456,749 in the comparable prior year period, primarily as a consequence of a
decrease in interest expense.
Interest expense decreased 52% (or approximately $237,497) to $218,523 in
the three months ended March 31, 2003 as compared to $456,020 in the comparable
prior year period. The decrease in interest expense is attributable in part to
the lower amount of our outstanding debt in 2003 as compared to 2002. The
greatest portion ($214,801) of the decrease, 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.
11
Cash Flow Analysis
Net cash provided by operating activities was $73,316 during the three
months ended March 31, 2003, representing an increase of $640,897 from the
$567,581 of net cash used in operating activities during the comparable prior
year period. This significant turn-around to net cash provided by operations
this quarter from net cash used in operations the first three months of last
year was primarily a consequence of the cost control program implemented by
executive management, as described in greater detail below under the caption
"Liquidity and Capital Resources."
Net cash used in investing activities was $138,204 during the three months
ended March 31, 2003, representing an increase of $140,883 from net cash
provided by investing activities of $2,679 during the comparable prior year
period. This increase was associated with cash used in purchases of capital
equipment and leasehold improvements in the first quarter of 2003 that were
required for our recent office move described below under the caption "Liquidity
and Capital Resources."
Net cash provided by financing activities was $74,363 during the three
months ended March 31, 2003, representing a decrease in cash provided by
financing activities of $611,013 from the $685,376 of net cash provided by
financing activities during the comparable prior year period. This decrease in
cash provided by financing activities 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 quarter of 2002 as compared to the
first quarter of this year and the increase in cash used in the first quarter of
2003 to pay down certain notes payable.
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. 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 $2.1 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 issuance of convertible
debt. During 2002, we raised approximately $984,000 through the private
placement of common stock, two-year convertible debentures, and common stock
purchase warrants.
Although we may seek to raise additional funds in 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 reflect sustained improvement.
Cost Control Program.
During September of 2001, in connection with 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 control program. The implementation of that program is
continuing. By the end of March 2003, our monthly cash payments necessary to
fund continuing operational expenses had decreased by over 70% as compared to
the monthly cash required for operations prior to the commencement of our cost
control program.
12
Included in our cost control program are measures that have resulted in
substantial reductions in our largest cash expenditure categories of human
resource and payroll-related expenses. Through March of 2003, these measures
have included the reduction of over 50% in the number of our employees; the
deferral of up to 61% in the compensation rates of our executive officers;
reductions of up to 50% in the compensation rates for our remaining
non-executive personnel; reductions of approximately 13% in the rates we pay for
employee health insurance; scale-backs in our employee benefit programs; 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 2003, in
addition to the reductions outlined above, we intend to pursue additional
reductions in operating expenses where appropriate.
In addition to the cost reductions summarized above, in the first quarter
of 2003, we reduced our annual lease and facilities costs by approximately 80%.
During February of 2003, we moved to newly up-fitted offices closer to downtown
Columbia. Under our former lease, which did not expire until October 31, 2004,
we leased approximately 19,500 square feet at an annual gross rent of
approximately $345,000. Our new facilities comprise approximately 7,200 square
feet at an annual gross rent of approximately $36,000, with an annual up-fit
cost of $30,000. Our gross rent under our new lease remains fixed during the
entire ten-year term that expires in 2013. If the need to expand should arise,
we have an option with our current landlord to rent contiguous office space of
approximately 4,775 square feet at an annual gross rent of $19,100. In March
2003, we successfully terminated our former lease under which we had already
accrued past due obligations of approximately $166,000. Under our termination
and settlement agreement with our former landlord, our entire payment obligation
to our former landlord, including obligations for past due rents and costs, is
$160,000. This amount is being paid down, without interest, in 24 monthly
installments ending in February 2005. The move to our new facilities and the
termination of our former lease has reduced our facilities costs by over
$435,000 through the 19 months that remained under the term of our former lease.
Capital Expenditures.
During the first quarter of 2003, we signed a $130,000 note payable for the
leasehold improvements associated with our new office space described below. The
note is amortized over 10 years and carries an annual interest rate of 10%. We
currently do not have any commitments or budgeted needs during the remainder of
2003 for any material capital expenditures, including purchases of furniture,
fixtures or equipment. In the absence of any substantial infusion of growth
capital or an unexpected increase in our expected gross margin for 2003, we do
not expect our capital expenditure plans for the next twelve months to change.
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 debt into convertible debentures and notes. Under the restructured
debt instruments as originally in effect, approximately 80% of the entire
principal balance of the restructured debt was not payable until January 1,
2004. Substantially all of the remaining 20% was payable during January of 2003.
Effective January 1, 2003, the holders of substantially all of that remaining
20% agreed to extend the January 2003 maturity date until January of 2004. In
addition, the holders of the debt scheduled to mature in January 2003 agreed to
extend until May 31, 2003 the due date for the first of the two annual interest
installments that earlier had been been extended to April 30, 2003.
In the months since the issuance of the company's currently outstanding
convertible debt, a portion of the principal and accrued interest on the debt
has been converted, by its holders, into shares of our common stock. These and
other holders of the convertible debt may elect to convert additional amounts of
this debt into common stock prior to the maturity date in January of 2004. These
debt conversions have reduced, and if continued in 2003, will continue to reduce
the company's short-term debt obligations. For additional information regarding
our outstanding investor debt, please refer to the matters described above under
the caption "Sources of Operating Capital" and the matters described elsewhere
in this report under the caption "Risk Factors That May Affect Our Financial
Condition and Operating Results."
13
With respect to our trade accounts payable, we have established long-term
payout arrangements with respect to substantially all of our unsecured
creditors. In addition, where permitted under securities laws, we have satisfied
and expect to continue to satisfy certain of our unsecured obligations to third
parties through restricted stock grants.
Additional Capital.
As noted above, during 2002, we raised approximately $984,000 through the
private placement of common stock, two-year convertible debentures and common
stock purchase warrants. We may seek to raise additional funds 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 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
reflect sustained improvement.
As a consequence of our comprehensive restructuring and cost control
program described above under the caption "Cost Control Program," we have
achieved substantial cash flow relief during the past twelve 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 2003, we have not budgeted for any material increase in these monthly cash
payments, and as noted above, we will continue in 2003 to pursue further
reductions in our monthly cash payment obligations. We expect that the proceeds
from revenues generated from our operations will be adequate to meet our
projected working capital and other cash requirements for at least the next
twelve months. Management intends to closely monitor 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 of time. Any such
reduction will involve scaling back, delaying or postponing any development
activities that are not essential at that time in order for the company to
achieve its stated objectives. In any event, our working capital deficit may
continue to grow unless we are able to sustain revenues sufficient to meet
expenditure levels, or our expenditure levels are further reduced.
Critical Accounting Policies.
We have adopted various accounting policies that govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements. Our significant accounting policies are described
in the footnotes to the consolidated financial statements included in our annual
report on Form 10-KSB for the year ended December 31, 2002. We consider these
accounting policies to be critical accounting policies. Certain accounting
policies require us to make estimates and assumptions about future events that
affect the amounts reported in our financial statements and in the accompanying
notes. Future events and their effects cannot be determined with certainty.
Therefore, the determination of estimates requires the exercise of judgment.
The judgments and assumptions we use are based on historical experience and
other factors that we believe to be reasonable under the circumstances. Because
of the nature of the judgments and assumptions we make, actual results could
differ from these judgments and from estimates that could have a material impact
on our reported results.
Regulatory Matters.
We are not aware of any current recommendations by regulatory authorities,
which, if they were to be implemented, would have a material adverse effect on
liquidity, capital resources, or operations.
14
Controls Evaluation
Limitations on the Effectiveness of Controls
The company's management, including the Chief Executive Officer and the
Chief Financial Officer, does not expect that our Disclosure Controls or our
Internal Controls (each, as defined below in Part I of this report under the
caption "Item 3. Controls and Procedures") will prevent all error and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Furthermore, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs.
Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple errors or mistakes.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation
The Chief Executive Officer and Chief Financial Officer evaluation of our
Disclosure Controls and our Internal Controls included a review of the controls'
objectives and design, the controls' implementation by the company, and the
effect of the controls on the information generated for use in this report. In
the course of the controls evaluation, we sought to identify data errors,
controls problems, or acts of fraud, and to confirm that appropriate corrective
actions, including process improvements, were being undertaken. This kind of
evaluation is performed on a quarterly basis so that the conclusions concerning
controls effectiveness can be reported in our quarterly reports on Form 10-QSB
and in our annual reports on Form 10-KSB that we will file with the Securities
and Exchange Commission. Our Internal Controls are also evaluated on an ongoing
basis by other personnel in our company and by our independent auditors in
connection with their audit and review activities. The overall goals of these
various evaluation activities are to monitor our Disclosure Controls and our
Internal Controls and to make modifications as necessary. Our intent in this
regard is that the Disclosure Controls and the Internal Controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant.
Among other matters, we sought in our controls evaluation to determine
whether there were any "significant deficiencies" or "material weaknesses" in
the company's Internal Controls, or whether the company had identified any acts
of fraud involving personnel who have a significant role in the company's
Internal Controls. This information was important, both for the controls
evaluation generally, and because Items 5 and 6 in the Section 302
Certifications of the included in this report, require that the Chief Executive
Officer and Chief Financial Officer disclose that information to our Board's
Audit Committee and to our independent auditors and to report on related matters
in this section of this report. In the professional auditing literature,
"significant deficiencies" are referred to as "reportable conditions." These are
control issues that could have a significant adverse effect on the ability to
record, process, summarize and report financial data in the financial
statements. A "material weakness" is defined in the auditing literature as a
particularly serious reportable condition where the internal control does not
reduce to a relatively low level the risk that misstatements caused by error or
fraud may occur in amounts that would be material in relation to the financial
statements and not be detected within a timely period by employees in the normal
course of performing their assigned functions. We also sought to deal with other
controls matters in the controls evaluation, and in each case, we considered
what revision, improvement and/or correction, if any, were necessary to make in
accord with our on-going procedures.
In accord with requirements of the Securities and Exchange Commission, the
Chief Executive Officer and Chief Financial Officer note that, since the date of
the controls evaluation to the filing date of this report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
15
Conclusions
Based upon the controls evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, subject to the limitations noted above,
our Disclosure Controls are effective to ensure that material information
relating to the company is made known to management, including the Chief
Executive Officer and Chief Financial Officer, particularly during the period
when our periodic reports are being prepared, and that our Internal Controls are
effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with generally accepted accounting principles.
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
All of our assets are pledged as collateral under all of our investor and other
debt. The Internal Revenue Service has placed a lien on all of our assets until
our second quarter 2002 payroll tax obligation to them is satisfied. A default
by us under our secured debt or the failure to satisfy our obligation to the
Internal Revenue Service 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 March 31, 2003, we had approximately $2.8 million in outstanding debt
under convertible debentures and notes that we issued in 2001 and in 2002. This
debt has a security interest in all of our assets, including our proprietary
technologies. Of this amount, approximately $300,000 in principal and interest
is due during the remainder of 2003, and the remainder is due during the first
quarter of 2004.
In the months since the issuance of the company's currently outstanding
convertible debt, holders of a portion of this debt have converted the principal
and accrued interest on all or a portion of their debt into common stock. These
and other holders of the convertible debt may indicate their desire to convert
additional amounts of their debt into common stock during the current year.
Although these conversions have reduced and will continue to reduce the
company's principal and interest obligations, we expect that in the first
quarter of 2004 we may still be faced with principle and interest obligations on
the remaining convertible debt that we will not be able to satisfy from
currently projected cash flows from operations. Accordingly, unless our cash
flow is substantially greater than currently projected, we will need to
renegotiate the amount and timing of payments on any substantial amount of this
debt that is not converted into equity prior to January 2004. While we believe
we will be able to restructure such debt under terms that are reasonable to the
company, we cannot provide any assurance that we will be able to finalize any
definitive agreement with the holders of any significant portion of this debt
that remains outstanding at the end of this year.
At March 31, 2003, we owed $203,326 in federal payroll taxes and $18,632 in
state payroll taxes, including interest and penalties. These taxes relate to
payrolls in the second and third quarters of 2002. Our tax obligations have
continued to decline since August of last year through the periodic tax payments
we have made and are continuing to make under arrangements with both federal and
state tax authorities. We expect to have all past due state payroll tax
obligations fully satisfied by the middle of 2003, and we expect to have all
past due federal tax obligations fully satisfied by the middle of 2004. In the
meantime, the Internal Revenue Service has placed a lien on all of our assets
until our second quarter 2002 payroll tax obligation (currently $105,308) to
them is satisfied.
16
In the event that we are unable to satisfy our prior payroll tax
obligations, or our repayment obligations under our secured debt, or we
otherwise default under the terms of such debt, the holders of this debt may
seek to foreclose their security interests and liens on our assets. 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.
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 2002 audited financial statements included in our
report on Form 10-KSB for the year ended December 31, 2002 identify factors
that, in the opinion of our independent accountants, raise substantial doubts
about our ability to continue as a going concern. For additional information
regarding this report, please refer to Note 4 to our unaudited condensed
consolidated financial statements included in this report on Form 10-QSB and to
Note 1 to our audited financial statements included in our annual report on Form
10-KSB filed with the Securities and Exchange Commission for the year ended
December 31, 2002.
Substantially all of our revenue over the past eighteen months has been
associated with only one customer, the loss of whom would severely jeopardize
our ability to maintain our operations.
In 2002, our largest customer accounted for more than 88% of our revenue,
and our second largest customer accounted for more than 10% of our revenue.
Consequently, the loss of our largest customer would have a material adverse
effect on our revenue and would likely result in the cessation of our operations
if we are not otherwise able to expand our revenue base. Even if we are
successful in growing the size and depth of our customer base, we have
historically generated substantially all of our revenue from a limited number of
customers, substantially all of which are in the manufacturing industry. We
remain focused on expanding our sales and marketing efforts toward companies in
other industries and other vertical markets, particularly for
business-to-business integration. 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 would hurt our ability to execute our business plan in
the short-term. Even if we expand our customer base, we believe that our current
customers will continue to provide a substantial portion of our revenue through
additional license, implementation services and maintenance fees. Moreover, if
we successfully 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. Any failure by us to
successfully address any new vertical markets will have an adverse effect on our
results of operations.
We have a large accumulated deficit, we expect future losses, and we may never
achieve or maintain profitability.
Excluding the third quarter of last year, we have experienced operating
losses in each of our fiscal years since January 1, 1995. As of December 31,
2002, we had an accumulated deficit of approximately $23.29 million. 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.
17
If expenditures related to our sales and marketing activities are not
accompanied or shortly followed by increased revenue, our quarterly and annual
operating losses could be greater than expected until we are able to delay or
reduce expenditures. While we achieved profitability during the third quarter of
2002, many factors, including the factors described in this report, may result
in our incurring losses in 2003. We need to significantly increase our quarterly
revenues or significantly reduce our quarterly expenses from their historical
levels in order for us to sustain the profitability achieved during the third
quarter of 2002.
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 2001 and the first eight months of
2002, we restructured our entire executive, administrative and operating teams
in order to achieve greater efficiencies in execution, better allocation of
skills across departments and better project tracking. In connection with that
restructuring, we have reduced by over 50% the number of our employees from a
high of approximately 60 employees during 2001 to 27 at the end of March 2003.
We anticipate that if we are able to achieve our anticipated growth in our
customer base during 2003, we will need to increase the number of our employees
in some areas later this year. 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.
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, 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.
18
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.
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 in our annual
report on Form 10-KSB for the year ended December 31, 2002, under the caption
"Item 1 - Description of Business - Competition and Markets."
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 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.
19
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.
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
20
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 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:
21
- - 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 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 year, 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.
22
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
March 31, 2003, we had 22,286,058 outstanding shares of common stock, with an
additional 8,121,556 shares of common stock issuable upon the exercise of
employee stock options and common stock purchase warrants and an additional
25,563,091 shares issuable upon conversion of debt which would total 55,914,905
shares at March 31, 2003, if all of the outstanding options and warrants were
exercised and all of the outstanding debt was converted.
Of the outstanding shares, 2,604,877 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. Approximately 7,464,995 of the
remaining outstanding shares are restricted securities issued under federal and
state exemptions from registration and may not be publicly sold. Once these
restricted shares, or the shares issuable pursuant to outstanding options,
warrants and convertible debt, become eligible for resale under Rule 144, or
their resale is otherwise registered by us with the Securities and Exchange
Commission, if the holders of these 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 twelve months. Nevertheless,
even if we are successful in realizing our expected 2003 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:
- - 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.
23
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.
Item 3. Controls and Procedures
Quarterly Evaluation of the Company's Disclosure Controls and Internal Controls
Within the 90 days prior to the filing date of this report on Form 10-QSB,
the company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"), and its "internal
controls and procedures for financial reporting" ("Internal Controls"). This
evaluation (the "Controls Evaluation") was done under the supervision and with
the participation of management, including our Chief Executive Officer and Chief
Financial Officer. Rules adopted by the Securities and Exchange Commission
require that in this section of this report we present the conclusions of the
Chief Executive Officer and Chief Financial Officer about the effectiveness of
our Disclosure Controls and Internal Controls based on and as of the date of the
Controls Evaluation.
24
Officer Certifications
Appearing immediately following the "Signatures" section of this report
there is a form of certification by our Chief Executive Officer and Chief
Financial Officer. The form of certification is required in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certification").
This section of the report that you are currently reading is the information
concerning the Controls Evaluation referred to in the Section 302
Certifications, and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented. Disclosure Controls and Internal Controls
Disclosure Controls are procedures that are designed with the objective of
ensuring that the information required to be disclosed in our reports filed
under the Securities Exchange Act of 1934, such as this report, is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. Disclosure Controls
are also designed with the objective of ensuring that such information is
accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Internal Controls are procedures that are
designed with the objective of providing reasonable assurance that (1) our
transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with generally accepted accounting principles.
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 March 31, 2003, we issued the securities
listed below in a transaction that was registered under the Securities Act of
1933 in reliance upon the exemption from registration contained in Section 4(2)
and Rule 506 of Regulation D of that act. Those sections of the act exempt from
registration any securities transactions that do not involve a general
solicitation and in which recipients of the securities acquiring them solely for
investment, provided the recipients also possess requisite financial
sophistication and, subject to some limitations, are provided with certain
information regarding the company. We believe that the recipient involved in
the transaction described below was given or had access to detailed financial
and other information with respect to our company and possessed requisite
financial sophistication.
On March 10, 2003, we issued 55,800 shares of our common stock to a third
party consultant as part of our compensation arrangement with the consultant.
Using the closing price of our stock as quoted on the Over-the-Counter-Bulletin
Board the aggregate fair market value of the shares was $11,160.
Item 3. Defaults Upon Senior Securities
This item is not applicable.
Item 4. Submission of Matters to Vote of Security Holders
This item is not applicable.
25
Item 5. Other Information
This item is not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. Please refer to the Exhibit Index that follows the
"Signatures" and "Certifications" pages of this report.
(b) Reports on Form 8-K. The company did not made a filing on Form 8-K
during the three months ended March 31, 2003.
Signatures and Certifications of the Chief Executive Officer and the Chief
Financial Officer of the Company
The following pages include the Signatures page for this report and
separate Certifications of the Chief Executive Officer and the Chief Financial
Officer of the company as required by Rule 13a-14 under the Securities Exchange
Act of 1934 in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
(the "Section 302 Certification"). The Section 302 Certification includes
references to an evaluation of the effectiveness of the design and operation of
the company's "disclosure controls and procedures" and its "internal controls
and procedures for financial reporting". Item 3 of Part I of this report
presents the conclusions of the Chief Executive Officer and the Chief Financial
Officer about the effectiveness of such controls based on and as of the date of
such evaluation (relating to Item 4 of the Section 302 Certification), and
contains additional information concerning disclosures to the company's Audit
Committee and independent auditors with regard to deficiencies in internal
controls and fraud (Item 5 of the Section 302 Certification) and related matters
(Item 6 of the Section 302 Certification).
26
SIGNATURES
Pursuant to 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 thereunto duly authorized.
Date: May 15, 2003 INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
(Registrant)
By: /s/ GEORGE E. MENDENHALL
---------------------------
George E. Mendenhall
Chief Executive Officer
By: /s/ WILLIAM S. MCMASTER
---------------------------
William S. McMaster
Chief Financial Officer
27
SECTION 302 CERTIFICATION
I, George E. Mendenhall, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Integrated Business
Systems and Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ GEORGE E. MENDENHALL
---------------------------
George E. Mendenhall
Chief Executive Officer
28
SECTION 302 CERTIFICATION
I, William S. McMaster, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Integrated Business
Systems and Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ WILLIAM S. MCMASTER
-------------------------
William S. McMaster
Chief Financial Officer
29
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 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).
10.2 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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)).
10.7 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).
10.8. 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).
10.9 Integrated Business Systems and Services, Inc. 2001 Stock Incentive Plan,
as amended (incorporated by reference to Exhibit 10.11 in the Company's
Form 10-QSB for the three-month period ended March 31, 2002).
10.10 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).
30
10.11 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).
10.12 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 Form 10-KSB for the year ended December 31, 2000).
10.13 Promissory Note dated March 15, 2002 between the Company and Fitz-John
Creighton McMaster (incorporated by reference to Exhibit 10.13 to the
Company's Form 10-QSB for the three month period ended September 30,
2002).
10.14 Promissory Note dated March 15, 2002 between the Company and Rice Street
Associates, LLC (incorporated by reference to Exhibit 10.14 in the
Company's Form 10-QSB for the three-month period ended September 30,
2002).
10.15 Second Amendment to and Restated Promissory Note dated August 15, 2001
between the Company and Kirkman Finlay III (incorporated by reference to
Exhibit in the Company's Form 10-QSB for the three-month period ended
September 30, 2002).
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 Exhibit 10.16 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 Exhibit 10.17 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 Exhibit 10.18 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 Exhibit 10.19 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 Exhibit 10.20 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 Exhibit
10.21 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 Exhibit
10.22 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 Exhibit 10.23 in
the Company's Form 10-QSB for the three-month period ended March 31,
2002).
31
10.24 Common Stock Purchase Warrant dated December 31, 2001 between the Company
and IBSS Class B Investors (incorporated by reference to Exhibit 10.24 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 Exhibit 10.25 in the Company's Form 10-QSB for the
three-month period ended March 31, 2002).
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 Exhibit 10.26 in the Company's Form 10-QSB for the
three-month period ended March 31, 2002).
10.27 Security Agreement dated June 12, 2001 by and between the Company and
Fitz-John Creighton McMaster (incorporated by reference to Exhibit 10.27
in the Company's Form 10-QSB for the three-month period ended September
30, 2002).
10.28 Security Agreement dated August 2, 2001 by and between the Company and
Rice Street Associates, LLC (incorporated by reference to Exhibit 10.28 in
the Company's Form 10-QSB for the three-month period ended September 30,
2002).
10.29 Security Agreement dated August 14, 2001 by and between the Company and
Kirkman Finlay III (incorporated by reference to Exhibit 10.29 in the
Company's Form 10-QSB for the three-month period ended September 30,
2002).
10.30 Integrated Business Systems and Services, Inc. 2002 Stock Option Plan
(incorporated by reference to Exhibit 10.30 in the Company's Form 10-QSB
for the three-month period ended September 30, 2002).
10.31 Letter Agreement between the Company and Donald R. Futch effective
September 1, 2002 with respect to cash compensation deferral (incorporated
by reference to Exhibit 10.31 in the Company's Form 10-KSB for the
twelve-month period ended December 31, 2002).
10.32 Letter Agreement between the Company and Stuart E. Massey effective
September 1, 2002 with respect to cash compensation deferral (incorporated
by reference to Exhibit 10.32 in the Company's Form 10-KSB for the
twelve-month period ended December 31, 2002).
10.33 Letter Agreement between the Company and William S. McMaster effective
September 1, 2002 with respect to cash compensation deferral (incorporated
by reference to Exhibit 10.33 in the Company's Form 10-KSB for the
twelve-month period ended December 31, 2002)..
10.34 Letter Agreement between the Company and George E. Mendenhall effective
September 1, 2001 with respect to cash compensation deferral (incorporated
by reference to Exhibit 10.34 in the Company's Form 10-KSB for the
twelve-month period ended December 31, 2002).
10.50 Lease Agreement between the Company and Pinebelt, LLC dated October 8,
2002 with respect to property at 1601 Shop Road, Ste E, Columbia, S.C.
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21 in the
Company's Form 10-KSB for fiscal year ended December 31, 2001).
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Integrated Business Systems and
Services, Inc. (the "Company") on Form 10-QSB for the period ended March 31,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, George E. Mendenhall, Chief Executive Officer of the Company,
certify to my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
May 15, 2003 /s/ GEORGE E. MENDENHALL
------------------------
George E. Mendenhall
Chief Executive Officer
Integrated Business Systems and Services, Inc.
33
EXHIBIT 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Integrated Business Systems and
Services, Inc. (the "Company") on Form 10-QSB for the period ended March 31,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, William S. McMaster, Chief Financial Officer of the Company,
certify to my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
May 15, 2003 /s/ WILLIAM S. MCMASTER
-----------------------
William S. McMaster
Chief Financial Officer
Integrated Business Systems and Services, Inc.
34