United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2002
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transaction 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.)
115 Atrium Way, Suite 228, Columbia, SC 29223
(Address of principal executive offices)
(803) 736-5595
(Issuer's telephone number)
(Former name, address or fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. (X) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
20,078,314 shares of no par value common stock outstanding at September 30, 2002
Transitional Small Business Disclosure Format (check one) ( ) Yes (X) No
Integrated Business Systems and Services, Inc.
Form 10-QSB
Quarter Ended September 30, 2002
Table of Contents
Page Number
PART I FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets as of September 30, 2002, and December 31, 2001 3
Consolidated Condensed Statements of Operations for the three months and nine months ended September 30,
2002 and 2001, respectively 4
Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2002 and 2001,
respectively 5
Notes to Consolidated Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Risk Factors That May Affect Our Financial Condition and Operating Results 15
Item 3. Controls and Procedures 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Section 302 Certifications 27
Exhibit Index 30
IMPORTANT ADVISORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report on Form 10-QSB constitute
forward-looking statements that involve risks and uncertainties. We caution
readers of this report that these statements involve a number of known and
unknown risks that may cause our actual results to be materially different from
those contemplated by these statements. Factors that might cause such a
difference include, but are not limited to, those discussed in this report under
the captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Factors That May Affect Our Financial Condition
and Operating Results," as well as those set forth in other periodic reports and
filings that we make with the Securities and Exchange Commission.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Integrated Business Systems and Services, Inc.
Consolidated Condensed Balance Sheets
September 30, 2002 December 31, 2001
ASSETS: (unaudited) (audited)
Current assets:
Cash and cash equivalents $ 43,065 $ 6,100
Accounts receivable, trade, net 247,126 347,969
Accounts receivable, other -0- 9,000
Related party notes receivable, net of loan loss
allowance of $207,200 50,000 50,000
Interest receivable 29,150 24,635
Unbilled revenue -0- 38,856
Other prepaid expenses 104,270 35,941
----------- -----------
Total current assets 473,611 512,501
Capitalized software costs, net 286,099 420,511
Property and equipment, net 450,051 564,067
Related party receivable 20,268 27,994
Other assets 1,479 4,154
----------- -----------
Total assets $ 1,231,508 $ 1,529,227
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Notes payable $ 678,134 $ 696,227
Accounts payable 219,495 405,145
Accrued liabilities:
Compensation and benefits 486,006 521,305
Payroll taxes 351,133 322,772
Professional fees 220,220 254,420
Interest payable 304,018 35,050
Other 80,774 44,049
Deferred revenue 86,605 93,377
----------- -----------
Total current liabilities 2,426,385 2,372,345
Long-term debt, net of current portion 2,492,035 2,145,037
Long-term accrued compensation 0 83,219
----------- -----------
Total liabilities 4,918,420 4,600,601
----------- -----------
Shareholders' equity (deficiency):
Common stock, no par value per share, 100,000,000 shares authorized,
20,078,314 and 17,774,694, shares outstanding
at September 30, 2002 and December 31, 2001, respectively 19,316,958 18,041,226
Notes receivable - stock (131,080) (131,080)
Accumulated deficit (22,025,437) (20,134,167)
Non-controlling interest in net assets (847,353) (847,353)
----------- -----------
Total shareholders' equity (deficiency) (3,686,912) (3,071,374)
----------- -----------
Total liabilities and shareholders' equity (deficiency) $ 1,231,508 $1,529,227
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
Integrated Business Systems and Services, Inc.
Consolidated Condensed Statements of Operations
(Unaudited)
Three Nine Months
Months Ended September 30,
Ended September 30,
2002 2001 2002 2001
Revenues:
Services $ 857,568 $ 516,390 $ 1,810,123 $1,587,125
Licenses 250,000 258,750 506,590 258,750
Maintenance and support 5,718 25,527 54,521 77,894
Hardware - third party 1,855 766,482 84,802 1,241,954
Other
0 1,162 2,325 3,553
----------- ----------- ------------ ------------
Total revenues 1,115,141 1,568,311 2,458,360 3,169,276
Cost of revenues 282,117 994,861 1,052,947 2,050,570
----------- ----------- ------------ ------------
Gross profit 833,024 573,450 1,405,413 1,118,706
Operating expenses:
Research and development 77,963 187,034 331,008 611,644
Sales and marketing 102,557 443,761 430,602 1,628,605
General and administrative 457,663 792,767 1,722,742 2,533,828
----------- ----------- ------------ ------------
Total operating expenses 638,183 1,423,562 2,484,352 4,774,077
----------- ----------- ------------ ------------
Income (Loss) from operations 194,841 (850,112) (1,078,939) (3,655,370)
Interest and miscellaneous income 168,754 5,590 173,554 24,903
Interest expense (346,582) (39,236) (985,887) (140,133)
Loss on equity investment 0 (80,792) 0 (228,530)
----------- ----------- ------------ ------------
Total other (expenses) income (177,828) (114,438) (812,333) (343,760)
----------- ----------- ------------ ------------
Net Income (Loss) $ 17,013 $(964,550) $(1,891,272) $(3,999,131)
=========== =========== ============ ============
Basic earnings per share $ 0.00 $ (0.06) $ (0.10) $ (0.26)
=========== =========== ============ ============
Basic weighted avg. shares outstanding 18,816,267 16,886,442 18,162,628 15,237,554
Diluted loss per share $ (0.01) $ (0.06) $ (0.10) $ (0.26)
=========== =========== ============ ============
Diluted weighted avg. shares outstanding 32,115,376 16,886,442 18,697,886 15,237,500
The accompanying notes are an integral part of these consolidated financial statements
4
Integrated Business Systems and Services, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2002 2001
Operating activities
Net loss
Adjustments to reconcile net loss to cash used in operating activities: $ (1,891,272) $ (3,999,131)
Depreciation 114,016 110,321
Amortization of software 134,412 134,414
Non-cash interest expense 695,093 0
Issuance of equity for accounts payable 104,446 0
Loss on equity investments 0 228,530
Gain on long-term compensation (83,219)
Changes in assets and liabilities:
Accounts receivable 109,843 (1,668,974)
Subscriptions receivable (9,000)
Interest receivable (4,515) (4,547)
Unbilled revenue 38,856 0
Prepaid expenses and other assets (68,329) (27,635)
Accounts payable (185,650) 478,547
Accrued expenses 261,689 521,217
Other assets (2,675)
Deferred revenue (6,772) 31,147
-------------- -------------
Cash used in operating activities (784,077) (4,205,111)
-------------- -------------
Investing activities
Purchases of property and equipment (560) (148,409)
Investments 0 50,000
Investment in affiliate companies 0 (540,000)
Related party note receivable 163,000
Related party receivable 7,726 0
-------------- -------------
Cash provided by (used in) investing activities 7,166 (475,409)
-------------- -------------
Financing activities
Proceeds from (payments on) notes payable, net 839,000 2,283,625
Payments on notes payable (136,221) 0
Sale of common stock 100,000 400,000
Proceeds from exercise of common stock options and warrants 11,097 1,435,996
Cash provided by financing activities
813,876 4,119,621
Net increase (decrease) in cash 36,965 (560,899)
Cash and cash equivalents at beginning of period 6,100 700,892
-------------- -------------
Cash and cash equivalents at end of period $ 43,065 $ 139,993
============== =============
The accompanying notes are an integral part of these consolidated financial statements.
5
Integrated Business Systems and Services, Inc.
Notes To Consolidated Condensed Financial Statements
(Unaudited)
1. Basis Of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
condensed interim financial information and with the instructions to Form 10-QSB
and Item 310 of Regulation S-B promulgated by the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of those of a normal recurring nature) considered necessary for a fair
presentation have been included. Operating results for the three-month and
nine-month periods ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the fiscal year ending December 31, 2002.
For further information, please refer to the audited financial statements and
footnotes thereto included in the company's Form 10-KSB for the year ended
December 31, 2001, as filed with the Securities and Exchange Commission.
2. Basis Of Consolidation
In 2001 and 2002, the consolidated financial statements include the
accounts of Integrated Business Systems and Services, Inc. and its
majority-owned subsidiary, Synamco, LLC (collectively, the "company").
3. Earnings Per Share
The computations of basic earnings (loss) per share and diluted earnings
(loss) per share are in conformity with the provisions of Statement of Financial
Accounting Standards No. 128.
Basic income (loss) per share is calculated as income available to common
stockholders divided by the weighted average common shares outstanding. Diluted
earnings per share is calculated as diluted income (loss) available to common
stockholders divided by the diluted weighted average number of common shares.
Diluted weighted average number of common shares has been calculated using the
treasury stock method for Common Stock equivalents, which includes common stock
issuable pursuant to stock options and common stock warrants and, the
if-converted method for convertible debt. The following is provided to reconcile
the earnings per share calculations:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------------ ---------------------------------
2002 2001 2002 2001
---------------- ---------------- -------------- ---------------
Income (loss) applicable to common shares $ 17,013 $ (964,550) $ (1,891,272) $ (3,999,132)
Effect of dilution:
Convertible debt (450,962) -- -- --
Stock options -- -- -- --
---------------- ---------------- -------------- ---------------
Loss applicable to shares outstanding, diluted $ (433,949) $ (964,550) $ (1,891,272) $ (3,999,132)
================ ================ ============== ===============
Weighted average common shares outstanding,
basic 18,816,267 16,886,442 18,697,886 15,237,554
Effect of dilution:
Convertible debt 13,299,109 -- -- --
Stock options -- -- -- --
---------------- ---------------- -------------- ---------------
Weighted average common shares outstanding,
diluted $ 32,115,376 $ 16,886,442 $ 18,697,886 $ 15,237,554
================ ================ ============== ===============
6
4. Going Concern
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the consolidated
financial statements, at September 30, 2002 the company had a working capital
deficiency and an accumulated deficit, including minority interests, of
approximately $1.95 million and $22 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 and Expense Reductions. During September of 2001, the company
commenced a comprehensive internal restructuring and cost control program. The
implementation of that program is continuing and has resulted through October of
2002 in a reduction of over 60% in the company's monthly gross cash expense run
rate from that experienced during the same prior year period. Continuation of
that cost control program is expected to further reduce the company's monthly
cash expense run rate.
Investor Debt and Other Payables. On December 31, 2001, the company
achieved significant debt service relief for 2002 and 2003 through the
restructuring of substantially all of its short-term and long-term investor debt
into convertible debentures and notes. Under the restructured debt instruments,
approximately 80% of the entire principal balance is not payable until the first
quarter of 2004. Substantially all of the remaining 20% of principal is payable
during the first quarter of 2003. The first interest payment on the restructured
debt is due in January 2003, and the second interest payment is due upon
maturity in 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 have also indicated their desire to
convert additional amounts of their debt into common stock during the current
fourth quarter. Although these conversions have reduced and will continue to
reduce the company's principal and interest obligations, in the first quarter of
2003, the company will still be faced with principle and interest obligations on
the remaining convertible debt that it will not be able to satisfy from
currently projected cash flows from operations. Accordingly, the company is
currently in the process of renegotiating with the holders of this debt the
amount and timing of payments to be made on such remaining debt. While the
company believes it will be able to restructure such debt on terms that are
reasonable to the company, the company has not yet finalized a definitive
agreement with the holders of this remaining debt. 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" and "Risk Factors That May Affect Our Financial Condition and
Operating Results."
The company has also established long-term payout arrangements with respect
to substantially all of its unsecured trade accounts payable. In addition, where
permitted under securities laws, the company has utilized and expects to
continue to utilize restricted stock grants to satisfy unsecured obligations to
third parties.
7
Additional Capital. Since December 31, 2001, the company has raised
approximately $939,000 in additional investor funding through the private
placement of common stock, two-year convertible debentures and common stock
purchase warrants. The company is seeking to raise additional capital during
2002 or early in 2003 through the private placement of convertible debt or
equity securities. Because of several factors, including the operating, market
and industry risks associated with an investment in its common stock, the fact
that the company's common stock is no longer traded on the Nasdaq Stock Market
and is currently traded on the Over-the-Counter Bulletin Board maintained by the
NASD, and the continued weakness in the capital markets in general and the
technology sectors in particular, the company expects that it will experience
difficulty in obtaining additional financing until its operating results or
overall market conditions reflect sustained improvement.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provides information that we believe
is relevant to an assessment and understanding of our results of operations and
financial condition. This discussion should be read in conjunction with the
condensed consolidated financial statements and related notes set forth in this
quarterly report on Form 10-QSB under the caption "Part I - Financial
Information - Financial Statements."
Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001.
Revenues. Our total operating revenues decreased 29% (or approximately
$453,000) to $1,115,141 in the three months ended September 30, 2002, from
$1,568,311 in the comparable prior year period. This decrease was primarily
attributable to the decrease of $764,627 in our hardware sales revenue, offset
by an increase of $341,178 in service revenue.
Cost of Revenues. Our total cost of revenues decreased 72% (or
approximately $713,000) to $282,117 in the three months ended September 30,
2002, from $994,861 in the comparable prior year period. This decrease was
attributable to increased operational efficiencies achieved as a consequence of
our restructuring and cost control program, including staff reductions and lower
labor costs of personnel necessary for project implementations, as well as to
the decrease in hardware costs associated with the comparable decrease in
hardware revenues for this quarter of 2002.
Gross Profit. Our gross profit increased 45% (or approximately $260,000) to
$833,024 in the three months ended September 30, 2002, from $573,450 in the
comparable prior year period. We experienced a corresponding gross margin
increase to approximately 75% for the three months ended September 30, 2002 from
approximately 37% for the comparable prior year period.
Research and Development Expenses. Our research and development expenses
decreased 58% (or approximately $109,000) to $77,963 in the three months ended
September 30, 2002, from $187,034 in the comparable prior year period. As a
percentage of our total quarterly revenues, research and development expenses in
the third quarter of 2002 decreased to 7% from 12% in the comparable quarter of
last year. The decrease for the third quarter of this year was primarily
attributable to the relatively larger allocation of resources in the third
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 - Cost Control Program." Although our research and development
expenses in the third 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.
Sales and Marketing Expenses. Our sales and marketing expenses decreased
77% (or approximately $341,000) to $102,557 in the three months ended September
30, 2002, from $443,761 in the comparable prior year period. As a percentage of
our quarterly revenues, sales and marketing expenses in the third quarter of
this year decreased to 9% from 28% 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 - Cost Control Program."
General and Administrative Expenses. Our general and administrative
expenses, excluding interest expense, decreased 42% (or approximately $335,000)
to $457,663 in the three months ended September 30, 2002, from $792,767 in the
comparable prior year period. As a percentage of our quarterly revenues, general
and administrative expenses in the third quarter of this year decreased to 41%
from 51% in the comparable quarter of last year. The decrease for the third
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."
9
Non-Operating Items. Interest and miscellaneous income increased 2916% (or
approximately $163,000) to $168,754 in the three months ended September 30,
2002, from $5,590 in the comparable prior year period, as a result of the
recapture of severance cost expensed in 2001.
Interest expense increased 783.33% (or approximately $307,000) to $346,582
in the three months ended September 30, 2002 as compared to $39,236 in the
comparable prior year period. The increase in interest expense is attributable
in part to the higher amount of our outstanding debt in 2002 as compared to
2001. The greatest portion ($234,651) of the increase, however, is solely
attributable to the intrinsic value approach that was applied to both the common
stock purchase warrants and the conversion features of our private placements of
convertible debt in 2001 and 2002, all as required by the application of
Accounting Principles Board Opinion No. 14, Emerging Issues Task Force ("EITF")
Issue No. 98-5 and EITF Issue No. 00-27.
The directive of these accounting policies is to attribute an appropriate
value to the conversion feature imbedded in convertible debt where the
conversion price is either below the market price of the common stock at the
commitment date, or where such price may adjust during the life of the debt to a
price that is below the market price of the common stock at the time of the
adjustment. The entire value of the imbedded conversion feature is charged to
interest expense and credited to additional paid in capital at the time of the
commitment. These accounting policies also require recognition of the fair value
of any warrants issued in connection with debt financing. The fair value is
charged to a debt discount that is amortized to interest expense over the life
of the related debt instrument, and an equal amount is credited to additional
paid in capital.
Loss on equity investment decreased from $80,792 in the third quarter of
last year to zero in the third quarter of 2002. This decrease was solely a
consequence of our divestiture of our interest in WilCam Systems, LLC in
December 2001.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001.
Revenues. Our total revenues decreased 22% (or approximately $711,000) to
approximately $2.5 million in the nine months ended September 30, 2002, from
approximately $3.2 million in the comparable prior year period. This decrease
was primarily attributable to the factors described above in the
quarter-to-quarter comparisons for this category for the third quarters of the
current and prior year.
Cost of Revenues. Our total cost of revenues decreased 49% (or
approximately $998,000) to approximately $1.05 million in the nine months ended
September 30, 2002, from approximately $2.05 million in the comparable prior
year period. This decrease was attributable to the factors described above in
the quarter-to-quarter comparisons for this category for the third quarters of
the current and prior year.
Gross Profit. Our gross profit increased 26% (or approximately $287,000) to
approximately $1.4 million in the nine months ended September 30, 2002, from
approximately $1.1 million in the comparable prior year period. We experienced a
corresponding gross margin increase to 57% for the nine months ended September
30, 2002 from approximately 35% in the comparable prior year period.
Research and Development Expenses. Research and development expenses
decreased 46% (or approximately $281,000) to $331,008 in the nine months ended
September 30, 2002, from $611,644 in the comparable prior year period. This
decrease was primarily attributable to the factors described above in the
quarter-to-quarter comparisons for this category for the third quarters of the
current and prior year.
Sales and Marketing Expenses. Sales and marketing expenses decreased 75%
(or approximately $1.2 million) to $430,602 in the nine months ended September
30, 2002, from approximately $1.6 million in the comparable prior year period.
This decrease was primarily attributable to the factors described above in the
quarter-to-quarter comparisons for this category for the third quarters of the
current and prior year.
10
General and Administrative Expenses. General and administrative expenses
decreased 32% (or approximately $811,000) to approximately $1.7 million in the
nine months ended September 30, 2002, from approximately $2.5 million in the
comparable prior year period. This decrease was primarily attributable to the
factors described above in the quarter-to-quarter comparisons for this category
for the third-quarters of the current and prior year.
Non-Operating Items. Interest and miscellaneous income increased 597% (or
approximately $149,000) to $173,554 in the nine months ended September 30, 2002,
from $24,902 in the comparable prior year period. This increase was primarily
attributable to the factors described above in the quarter-to-quarter
comparisons for this category for the third quarters of the current and prior
year.
Interest expense increased 604% (or approximately $846,000) to $985,887 in
the nine months ended September 30, 2002 as compared to $140,133 for the
comparable prior year period. A substantial portion ($467,017) of this increase
was related solely to the intrinsic value approach that was applied to both the
common stock purchase warrants and the conversion features of our private
placements of convertible debt in 2001 as described above in the
quarter-to-quarter comparisons for this category for the third quarters of the
current and prior year.
Loss on equity investment decreased from $228,530 in the nine months ended
September 30, 2001 to zero in the comparable period of 2002. This decrease was
attributable to the factor described above in the quarter-to-quarter comparisons
for this category for the third quarters of the current and prior year.
Liquidity and Capital Resources
Sources of Operating Capital.
Prior to 1997, we financed our operations primarily through our revenues
from operations, including funded research and development revenues, and
occasional short-term loans from our principals, their families and other
individuals and entities. Since the middle of 1997, we have financed our
operations primarily through private and public offerings of common stock and
convertible debt, and to a lesser extent from operating revenues and through
borrowings from third parties. We raised net proceeds of approximately $1.22
million in our November 1997 initial public offering. Since that time, we have
raised additional equity of approximately $12.3 million through several private
placements of common stock and stock purchase warrants and the conversion of
approximately $1.7 million of convertible debt into equity. During 2001, we
raised an aggregate of approximately $5.1 million in additional capital,
consisting of approximately $1.03 million from the exercise of common stock
options and warrants, approximately $409,000 from the private placement of
common stock, and approximately $3.66 million from the issuance of convertible
debt. During the first nine months of 2002, we raised approximately $939,000
through the private placement of common stock, two-year convertible debentures,
and common stock purchase warrants. Although we are seeking to raise additional
funds later in 2002 or in early 2003 from the private placement of additional
debt, equity or equity-linked securities, we expect that we will experience
difficulty in obtaining additional financing until our operating results or
overall market conditions 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 October 2002, our monthly cash payments necessary to
fund continuing operational expenses had decreased by over 60% as compared to a
year ago.
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 the end of October 2002, these
measures have included reductions of over 50% in the number of our employees;
deferrals of up to 65% in the compensation rates of our executive officers;
reductions of up to 50% in the compensation rates for our remaining
non-executive personnel; scale-backs in our employee benefit programs;
reductions of approximately 13% in the rates we pay for employee health
insurance; and substantial reductions in employee travel, accommodation and
hiring costs. In addition, we have achieved significant cash flow relief through
the discontinuance of non-essential third party consulting and service
arrangements and the renegotiation of other third party contracts, including
those in the areas of public relations, investor relations, financial advisory
services, financial printing and industry research. During the remainder of
2002, in addition to the reductions outlined above, we intend to pursue
additional reductions in the cash obligations associated with our operating
facilities, including reductions in our lease payments, where appropriate.
11
We currently do not have any commitments or budgeted needs during the
remainder of 2002 for any material capital expenditures, including purchases of
furniture, fixtures and equipment. In the absence of any substantial infusion of
growth capital during 2002 or 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, approximately 80% of the entire principal balance is not
payable until January 1, 2004 with substantially all of the remaining 20%
payable during January of 2003. The first interest payment on our restructured
debt is due in January 2003, and the next interest payment on the remaining debt
is due upon its maturity in 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 have also indicated their desire to
convert additional amounts of their debt into common stock during the current
fourth quarter. Although these conversions have reduced and will continue to
reduce the company's principal and interest obligations, in the first quarter of
2003, the company will still be faced with principal and interest obligations on
the remaining convertible debt that it will not be able to satisfy from
currently projected cash flows from operations. Accordingly, the company is
currently in the process of renegotiating with the holders of this remaining
debt the amount and timing of payments to be made on such debt. While the
company believes it will be able to restructure such debt under terms that are
reasonable to the company, the company has not yet finalized a definitive
agreement with the holders of this remaining 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."
We have also established long-term payout arrangements with respect to
substantially all of our unsecured trade accounts payable. In addition, where
permitted under securities laws, we have satisfied and expect to continue to
satisfy certain of our unsecured obligations to third parties through restricted
stock grants.
12
Additional Capital.
As noted above, since December 31, 2001, we have raised approximately
$939,000 through the private placement of common stock, two-year convertible
debentures and common stock purchase warrants. We are seeking to raise
additional funds in 2002 or early in 2003 from the private placement of
additional debt, equity or equity-linked securities. Because of several factors,
including the operating, market and industry risks associated with an investment
in our common stock; the inclusion of a going concern paragraph in our annual
and quarterly financial reports; the fact that our common stock is no longer
traded on the Nasdaq Stock Market and is currently traded on the
Over-the-Counter Bulletin Board maintained by the NASD; the continued weakness
in the capital markets in general and the technology sectors in particular; and
the other factors described in this report under the heading "Risk Factors That
May Affect Our Financial Condition and Operating Results," we believe we will
experience difficulty in obtaining additional financing until our operating
results or overall market conditions 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 2002 and 2003, we have not budgeted for any material increase in these
monthly cash payments, and as noted above, we may be in a position to further
reduce our monthly cash payment obligations during the remainder of 2002 and in
2003. We expect that the proceeds from revenues generated from our operations
and, to a lesser extent, the proceeds from our 2002 capital raising activities,
will be adequate to meet our projected working capital and other cash
requirements for at least the next six months. Management intends to closely
follow the company's progress and to further reduce our expenses if our
marketing and sales strategies do not result in sufficient new revenues within a
reasonable period. Any such reduction will involve scaling back, delaying or
postponing those development activities that are not essential to the company
achieving its stated objectives. In any event, our working capital deficit will
continue to grow unless we are able to sustain revenues sufficient to meet
expenditure levels, or our expenditure levels are further reduced.
Cash Flow Analysis
Net cash used in operating activities decreased to $784,077 during the nine
months ended September 30, 2002, representing a decrease of approximately $3.4
million from the approximately $4.2 million of net cash used during the
comparable prior year period. This significant decrease of over 81% in net cash
used in the first nine months of this year was primarily a consequence of the
cost cutting program implemented by executive management, as described in
greater detail above under the caption "Liquidity and Capital Resources - Cost
and Expense Reduction Program."
Net cash provided by investing activities increased to $7,166 during the
nine months ended September 30, 2002, representing an increase of approximately
$483,000 from net cash used in investing activities of $475,409 during the
comparable prior year period. Almost all of this increase was attributable to
the $540,000 cash purchase of affiliate equity in 2001 that was not repeated in
2002.
Net cash provided by financing activities decreased to approximately
$814,000 during the nine months ended September 30, 2002, representing a
decrease of approximately $3.3 million from the approximately $4.1 million of
net cash provided during the comparable prior year period. This decrease was
attributable to the relatively larger amount of private financing in the form of
convertible debentures and sales of common stock that took place during the
first half of 2001 as compared to the first half of this year. The net cash
provided by financing activities in the first half of this year resulted
primarily from the private placement of approximately $839,000 in convertible
debentures and warrants and $100,000 in common stock.
13
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 at December 31, 2001,
as filed on our annual report on Form 10-KSB. We consider these accounting
policies to be critical accounting policies. Certain accounting policies involve
significant judgments and assumptions by us, but do not have a material impact
on the carrying value of our assets and liabilities and results of operations.
The judgments and assumptions we use are based on historical experience and
other factors that which 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 which could have an impact
on our carrying values of assets and liabilities and our results of operations.
Regulatory Matters
We are not aware of any current recommendations by regulatory authorities,
which, if they were to be implemented, would have a material effect on
liquidity, capital resources, or operations.
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
action, including process improvements, were being undertaken. This type of
evaluation will be done on a quarterly basis so that the conclusions concerning
controls effectiveness can be reported in our quarterly reports on Form 10-QSB
and our annual reports on Form 10-KSB. 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.
14
Among other matters, we sought in our 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
Chief Executive Officer and Chief Financial Officer 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.
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 substantially all of our
debt, and the Internal Revenue Service has indicated that it intends to place 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 September 30, 2002, we had approximately $3.3 million in outstanding
debt under convertible debentures that we issued in 2001 and in 2002. This debt
has a security interest in all of our assets, including our proprietary
technologies. Of this amount, approximately $105,000 in principal is due during
the remainder of 2002, approximately $576,000 of principal is due on January 1,
2003, and the remainder of this debt is due during the first quarter of 2004.
Interest payments on substantially all of our existing debt that matures after
2002 are due in two installments in the first quarters of 2003 and 2004.
At September 30, 2002, we owed $297,589 in federal payroll taxes and
$53,380 in state payroll taxes. These taxes relate to payrolls in the second and
third quarters of this year. Our tax obligations have continued to decline since
August of this 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 these tax obligations fully satisfied by the
middle of next year. In the meantime, the Internal Revenue Service has indicated
to us that it intends to place a lien on all of our assets until our second
quarter payroll tax obligation (currently $262,089) to them is satisfied.
15
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 have also indicated their desire to
convert additional amounts of their debt into common stock during the current
fourth quarter. Although these conversions have reduced and will continue to
reduce the company's principal and interest obligations, in the first quarter of
2003, we will 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, we are currently in the
process of renegotiating the amount and timing of payments to be made on such
remaining debt. While we believe we will be able to restructure such debt under
terms that are reasonable to the company, we have not yet finalized a definitive
agreement with the holders of this remaining debt.
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 2001 audited financial statements, as well as the
notes to our unaudited financial statements contained in this report and in our
publicly-filed reports for the first and second quarters of 2002 identify
factors that, in the opinion of our independent accountants, raised substantial
doubts about our ability to continue as a going concern.
We have a large accumulated deficit, we expect future losses, and we may never
achieve or maintain profitability.
We have experienced operating losses in each of our fiscal years since
January 1, 1995. As of September 30, 2002, we had an accumulated deficit of
approximately $22 million (unaudited). In addition, since 1997, we have
continued to allocate a substantial proportion of our internal resources to
activities associated with the development, marketing and sale of our current
suite of new software products. During the last three years, we have also
undertaken a complete restructuring of our sales and marketing organization and
have commenced several new customer acquisition strategies. This strategy of
increased emphasis on new product development and the suspension of much of our
traditional sales activities while we began implementing our sales team
reorganization resulted in a substantial reduction in our traditional service
revenues during the affected periods. Despite our history of losses, we believe
it is vital to our future success that we continue to allocate working capital
toward our sales and marketing strategies, although at a lower percentage of
revenue than our allocation of working capital in this area during our most
recent fiscal years.
16
If expenditures related to our sales and marketing activities are not
accompanied or shortly followed by increased revenue, our losses could be
greater than expected until we are able to delay or reduce expenditures. While
we achieved profitability during the third quarter of this year, many factors,
including the factors described in this report, may result in our incurring
losses in 2002 and 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 this year.
The recent restructuring of our operations has strained our existing resources
and may cause our business to suffer.
Our ability to successfully offer products and services and implement our
business plan in our rapidly evolving markets requires an effective planning and
management process. During the latter part of last year and the first eight
months of this year, we 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 less than
30 employees at the end of October 2002. 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 early in 2003. In the
meantime, the staffing requirements necessary to support our existing business
and our growth strategies have placed a significant strain on our currently
reduced management systems, infrastructure and resources. If we are able to
achieve our anticipated growth in our customer base, concurrently with the need
to expand, train and manage our workforce, we expect that we will also be
required to manage an increasing number of relationships with these new
customers, various strategic alliance partners and other third parties. Failure
to expand any of the foregoing areas efficiently and effectively could interfere
with and possibly limit our ability to expand our business as a whole.
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:
o the difficulty in predicting the size and timing of our customer
orders
o the mix of our products and services sold and the mix of our
distribution channels
o the lengthy sales cycle for some of our products
o the market acceptance of our products
o the terms and timing of our financing activities
o whether we are able to successfully expand our sales and marketing
programs
o the possible loss of any of our key personnel
o the difficulty in predicting the amount and timing of employee stock
option exercises
17
Our revenues and operating results depend upon the volume and timing of
customer orders and payments, and the date of product delivery. New software
licensing, service and maintenance contracts may not result in revenues in the
quarter in which the contracts are signed, and we may not be able to predict
accurately when revenues from these contracts will be recognized. A substantial
portion of our revenues has been and will continue to be derived from large
licensing and software implementation orders. We expect this trend to continue
for the foreseeable future. We also expect that increases in the dollar size of
individual license transactions will increase the risk of fluctuation in future
quarterly results. We realize substantially higher gross margins on our license
revenues as compared to our services and maintenance revenues. Consequently, our
margins for any particular quarter will be highly dependent on the mix of
license, service and maintenance revenues in that quarter. If we cannot generate
large customer orders, or our customers delay or cancel their orders in a
particular quarter, these factors will have a material adverse effect on our
revenues, and more significantly on a percentage basis, on our net income or
loss in that quarter.
Variations in the time it takes us to sell our products may cause fluctuations
in our operating results.
Our customers generally consider a wide range of factors before committing
to purchase our products, including product benefits, the ability to operate
with existing and future computer systems, the ability to accommodate increased
transaction volumes, and product reliability. Some of our customers are
addressing these factors for the first time when they consider whether to buy
our products and services. As a result, we or other parties must educate
potential customers on the use and benefits of our products and services. In
addition, the purchase of our products generally involves a significant
commitment of capital and other resources by a customer. This commitment often
requires significant technical review, assessment of competitive products, and
approval at a number of management levels within a customer's organization.
The length of our sales cycles may vary based on the industry in which the
potential customer operates, and is difficult to predict for any particular
license transaction. Because of the number of factors influencing our sales
process, the period between our initial contact with a new customer and the time
when we are able to recognize revenue from that customer varies widely in
length. Our sales cycles typically range from two to six months. For larger
opportunities with new customers, however, these cycles may be longer. The
length and variability of our sales cycles makes it difficult to predict whether
particular sales will be concluded in any given quarter. If one or more of our
license transactions are not consummated in a given quarter, our results of
operations for that quarter may be below our expectations and the expectations
of analysts and investors which would be likely to cause a decline in our stock
price.
We have historically derived substantially all of our revenue from a small
number of customers in the manufacturing industry, and our revenue could decline
if we lose a major customer or significant downturns occur in any of our
customers' industries.
We have generated substantially all of our revenue from a limited number of
customers, substantially all of which are in the manufacturing industry. In
2000, we began expanding our sales and marketing efforts toward companies in
other industries and other vertical markets, particularly for
business-to-business integration and enablement of application service
providers. Nevertheless, we expect that a small number of customers in the
manufacturing industry will continue to account for a substantial portion of our
revenue for the foreseeable future. Any significant decline in the demand for,
and market acceptance of, our software in the manufacturing industry of any of
our customers would hurt what we anticipate for our 2002 and 2003 results of
operations. We believe that many of our current customers will continue to
provide a substantial portion of our revenue through additional license,
implementation services and maintenance fees. In 2001, our largest customer
accounted for more than 51% of our revenue, and our second largest customer
accounted for more than 44% of our revenue. Consequently, the loss of even one
customer could have a material adverse effect on our revenue. Moreover, as we
continue to market our products in new vertical markets, we expect that
customers in some of those new vertical markets are likely to have different
requirements and may require us to change our product design or features, sales
methods, support capabilities or pricing policies. If we fail to successfully
address these new vertical markets, we may experience decreased sales in future
periods.
18
If we do not effectively compete with new and existing competitors, our revenues
and operating margins will decline.
The market for our products is intensely competitive, evolving, and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. As a result of increased competition, we may have to
reduce the prices of our products and services, and we may experience reduced
gross margins and loss of market share, any one of which could significantly
reduce our future revenues and operating results. Many of our current and
potential competitors have longer operating histories, significantly greater
financial, technical, product development and marketing resources, as well as
better name recognition and larger customer bases than we do. These competitors
may be able to develop products comparable or superior to those offered by us,
or adapt more quickly than we can to new technologies, evolving industry trends
or customer requirements. They are also positioned to devote greater resources
to the development, promotion and sale of their products than we are.
Accordingly, we may not be able to compete effectively in our markets, and
competition may intensify and harm our business and its operating results. If we
are not successful in developing enhancements to existing products and new
products in a timely manner, garnering customer acceptance or generating average
licensing prices, our gross margins may decline and cause our business and
operating results to suffer. For additional information on our competitive
posture in our industry, please refer to the description set forth under the
caption "Item 1 - Description of Business - Competition and Markets" that is
included in our annual report on Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 2001.
We must expand our network of distribution partners in order to successfully
sell our products.
We have recently implemented a sales model under which we are focusing more
efforts toward the sale of our products through indirect sales channels such as
resellers, system integrators, application software vendors and infrastructure
technology companies. We plan to continue to invest resources toward the
development of our relationships with these third parties. We may not be
successful in the implementation of our sales strategies, and even if we are,
such strategies may not result in an increase in our revenues. If we fail to
maintain our existing relationships with indirect sales channel arrangements or
fail to establish new ones, or if our revenue does not increase correspondingly
with the expenses we incur in pursuing such relationships, our business will
suffer.
If we do not retain our key management personnel and attract and retain other
highly skilled employees, our business will suffer.
Our future success depends on the skills, experience and performance of our
senior management team, other key personnel and advisors, and their ability to
operate effectively, both individually and as a group. Each of our key employees
is bound by an employment agreement with the company. Although we maintain "key
man" insurance in the amount of $1 million on the lives of each of George E.
Mendenhall, Chairman and Chief Executive Officer, and Stuart E. Massey,
Executive Vice President, each of these policies has been assigned as security
for substantially all of our outstanding debt. Consequently, until we have
satisfied that debt (which matures in the first quarter of 2004), or we are able
to provide these respective lenders substitute collateral acceptable to them, we
will not receive any benefit from these policies in the event of the death of
either of these key officers. Moreover, if and when we are able to terminate the
assignment of these policies, recovery under such insurance may not be adequate
to compensate us for the full impact resulting from the death of either of these
officers. If any of our existing senior management or other key research,
engineering and development or sales and marketing personnel were to leave the
company, it would be difficult to replace them, and our business would be
materially harmed. If we are able to achieve our anticipated sales growth, our
success will also depend on our ability to recruit, retain and motivate
additional highly skilled sales, marketing and engineering personnel. We believe
we will face significant competition for individuals with the skills required to
develop, market and support our products and services. We believe that
attracting and retaining these personnel is particularly difficult for us
because:
o the market for connectivity infrastructure software is still emerging
o our company and our products are not yet widely known in the
marketplace
o the relative scarcity of qualified technical personnel in the
Columbia, South Carolina metropolitan area makes it difficult to
attract and retain technical personnel
19
If we fail to recruit and retain sufficient numbers of these highly skilled
employees our ability to compete will be significantly harmed, and our business
will suffer.
Defects in, or slow performance of, our software products could diminish demand
for our products and expose us to costly liability which would adversely affect
our operating results.
The Synapse software products we offer are internally complex. Complex
software may contain errors or defects, particularly when first introduced or
when new versions or enhancements are released. Although we conduct extensive
testing, we may not discover software defects that affect our current or new
products or enhancements until after they are sold. Although we have not
experienced any material software defects to date, any errors, defects or slow
performance that may be discovered could result in:
o loss of revenue
o product returns or order cancellations
o delay in market acceptance of our products
o diversion of our development resources
o distraction of our management
o damage to our customer relationships and our reputation
o increased service and warranty costs
o costly litigation defense
Our license and service agreements with our customers typically contain
provisions designed to limit our exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in our license and service agreements may not be effective as a result of
existing or future federal, state or local laws, ordinances or judicial
decisions. Although we have not experienced any product liability claims to
date, sale and support of our products entails the risk of such claims, which
could be substantial in light of our customers' use of many of our products in
mission-critical applications. We do not maintain product liability insurance.
If a claimant brings a product liability claim against us, it could have a
material adverse effect on our business, results 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:
o rapid technological change
o frequent new product introductions and enhancements
o uncertain product life cycles
o changing customer requirements
o 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.
20
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:
o patent law
o copyright law
o trademark and trade secret laws
o confidentiality procedures and agreements
o licensing arrangements
o 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.
21
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 nine months, has been
experienced in the markets for stocks across substantially all market sectors,
and particularly in the technology sectors in which our stock may be included by
various market analysts. These downward trends and fluctuations are typically
the result of the combination of general economic, political and market
conditions, most recently including recessions, the threat of terrorist
activities, and concerns over the accuracy of financial reporting by several
large publicly traded corporations. These factors are beyond our ability to
control or predict. We believe that the downward trends in the securities
trading markets as a whole have had and will continue to have a comparable
adverse impact on the trading market for our common stock. We can provide no
assurance that these downward trends and the events giving rise to them will not
continue for the foreseeable future, or that they will not materially adversely
affect the market price of our common stock.
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
September 30, 2002, we had 20,078,314 outstanding shares of common stock, with
an additional 6,582,722 shares of common stock issuable upon the exercise of
employee stock options and common stock purchase warrants and an additional
14,809,302 shares issuable upon conversion of debt, which would total 41,470,338
shares at September 30, 2002, if all the options, warrants and conversions were
exercised.
Of the outstanding shares, 2,604,877 shares were held by members of management
and may be publicly sold only pursuant to the volume and manner of sale
restrictions of Rule 144 under the Securities Act of 1933. Approximately
5,313,051 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.
22
We expect that our current cash balance and cash from expected sales of our
products and services should be sufficient to meet our working capital and
capital expenditure needs for at least the next six months. Nevertheless, even
if we are successful in realizing our expected 2002 sales objectives, we expect
that we will still require additional third party financing in the future to
implement our growth strategies and achieve our long-term objectives. In light
of the recent downward trends experienced by the capital markets, we cannot be
certain that we will be able to obtain additional debt or equity financing on
favorable terms, or at all. If we obtain additional equity financing, our
shareholders may experience significant dilution of their ownership interests
and the per share value of our common stock could decline. If we engage in debt
financing, we may be required to accept terms that restrict our ability to incur
additional indebtedness or that force us to maintain specified liquidity or
other ratios, any of which could harm our business. If we need additional
capital and cannot raise it on acceptable terms, we may not be able to, among
other things:
o develop or enhance our products and services
o continue to implement our sales and marketing strategies
o acquire complementary technologies, products or businesses
o expand operations, in the United States or internationally
o hire, train and retain employees
o respond to competitive pressures or unanticipated working capital
requirements
Our failure to do any of these things could result in lower revenues and could
seriously harm or result in the discontinuation of our operations.
Anti-takeover provisions in our articles of incorporation and state corporate
laws could discourage or prevent a takeover, even if an acquisition of our
company would be beneficial to our shareholders.
In many cases, shareholders receive a premium for their shares when a
company is purchased by another enterprise. Various provisions in our articles
of incorporation, our bylaws and South Carolina corporate laws could deter and
make it more difficult for a third party to bring about a merger, sale of
control, or similar transaction without approval of our board of directors, even
if the transaction would be beneficial to our shareholders. These provisions
tend to perpetuate existing management. As a result, our shareholders may be
deprived of opportunities to sell some or all of their shares at prices that
represent a premium over market prices. These provisions, which could make it
less likely that a change in control will occur, include:
o 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.
o 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.
o 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.
o provisions in our bylaws relating to meetings of shareholders which
limit who may call a meeting and what matters may be voted upon.
o 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.
o state law provisions that require two-thirds of the shareholders to
approve mergers and similar transactions, and amendments to our
articles of incorporation.
23
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.
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 September 30, 2002, we issued the securities
identified below pursuant to Section 4(2) and Rule 506 of Regulation D of the
Securities Act of 1933 which exempt from registration the issuance of securities
not involving a general solicitation in which the purchaser or purchasers are
purchasing the securities for investment. We believe that the purchasers of the
securities identified below were given or had access to detailed financial and
other information with respect to our company and possessed requisite financial
sophistication.
24
In September 2002, we issued 1,669,066 shares of common stock to two of our
private investors in connection with that investor's conversion of all of the
convertible debentures that were acquired by those investor in the fourth
quarter of 2001 and the first quarter of 2002. For a description of these
debentures, please refer to "Item 2. Changes in Securities" set forth under Part
II of the company's quarterly report on Form 10-QSB filed with the Securities
and Exchange Commission for the quarter ended March 31, 2002.
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.
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 which follows the
"Signatures" and "Certifications" pages of this report.
(b) Reports on Form 8-K. In connection with the filing of its Form 10-QSB
for the quarter ended June 30, 2002, the company made a filing on Form 8-K on
August 14, 2002 regarding the submission by the company's Chief Executive
Officer and Chief Financial Officer to the Securities and Exchange Commission of
the certifications required by Section 906 of the Sarbanes-Oxley Act of 2002.
The company made a filing on Form 8-K in connection with the August 14,
2002 filing of its Form 10-QSB for the quarter ended June 30, 2002. That Form
8-K disclosed the notification of the officer certification as to the Form
10-QSB as required by the Sarbanes Oxley Act of July 30, 2002.
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).
25
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: November 14, 2002 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
26
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) (incorporated by reference to Exhibit 10.12 to the Company's
10-KSB for the year ended December 31, 2000).
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).
26
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).
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 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.
10.14 Promissory Note dated March 15, 2002 between the Company and Rice Street
Associates, LLC.
10.15 Second Amendment to and Restated Promissory Note dated August 15, 2002
between the Company and Kirkman Finlay III.
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).
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.
10.28 Security Agreement dated August 2, 2001 by and between the Company and
Rice Street Associates, LLC.
10.29 Security Agreement dated August 14, 2001 by and between the Company and
Kirkman Finlay III.
10.30 Integrated Business Systems and Services, Inc. 2002 Stock Option Plan.
21 Subsidiaries of the Company (incorporated by reference to the exhibit of
the same number in the Company's Form 10-KSB for the fiscal year ended
December 31, 2001).
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.
28
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: November 14, 2002 /s/ GEORGE E. MENDENHALL
George E. Mendenhall
Chief Executive Officer
27
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: November 14, 2002 /s/ WILLIAM S. MCMASTER
William S. McMaster
Chief Financial Officer
29
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 ending September
30, 2002 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.
November 14, 2002 /s/ GEORGE E. MENDENHALL
George E. Mendenhall
Chief Executive Officer
Integrated Business Systems and Services, Inc.
29
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 ending September
30, 2002 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.
November 14, 2002 /s/ WILLIAM S. MCMASTER
William S. McMaster
Chief Financial Officer
Integrated Business Systems and Services, Inc.
30