Attached files
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2010
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OR
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o
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from __________ to ___________
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Commission File No. 0-30853
INTERNATIONAL MONETARY SYSTEMS, LTD.
(Exact name of registrant as specified in its charter)
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Wisconsin
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39-1924096
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(State of incorporation)
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(I.R.S. Employer Identification No.)
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16901 West Glendale Drive New Berlin, Wisconsin 53151
(Address of principal executive offices & Zip Code)
(Registrant's telephone number, including area code) (262) 780-3640
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common par value $.0001 per share
Indicate by checkmark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by checkmark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company x
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Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act). Yes o No x
As of March 1, 2011 the Registrant had issued and outstanding 10,544,800 shares of common stock. The aggregate market value of the voting Common Stock (par value $.0001 per share) held by non-affiliates on June 30, 2010 (the last business day of our most recently completed second quarter) was $5,313,983 using the ask price on June 30, 2010.
INTERNATIONAL MONETARY SYSTEMS, LTD.
Form 10-K Annual Report
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PART I
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Page
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Item 1.
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3
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Item 2.
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5
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Item 3.
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6
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Item 4.
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6
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PART II
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Item 5.
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6
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Item 6.
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7
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Item 7.
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7
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Item 8.
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11
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Item 9.
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11
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Item 9 A(T).
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11
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Item 9 B.
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12
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PART III
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Item 10.
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12
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Item 11.
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14
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Item 12.
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20
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Item 13.
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21
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Item 14.
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22
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Item 15.
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23
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CERTAIN CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this annual report on Form 10-K contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking Statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Readers should carefully review this quarterly report in its entirety, including but not limited to our financial statements and the notes thereto. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
PART I
In this report, "IMSL", "IMS", "The Company", "we", "us" and "our" refer to the Registrant, International Monetary Systems, Ltd., a Wisconsin corporation, and its subsidiaries.
Introduction
International Monetary Systems, Ltd. was incorporated in 1989 under the laws of the State of Wisconsin. The Company owns, manages and operates trade exchanges and other related businesses.
Trade exchanges, or barter networks, are financial service firms which permit companies and individuals to exchange goods and services utilizing an electronic currency known as "trade dollars", the use of which is described below. Currently, IMS services more than 16,000 barter customers. We have continually expanded our customer base, principally through enrolling new members in our existing markets, acquiring other barter exchanges, and by encouraging our members to increase their trade volume.
Our corporate headquarters mailing address is 16901 West Glendale Drive, New Berlin, Wisconsin 53151, and our telephone numbers are (800) 559-8515 and (262) 780-3640; the telephone number for our primary facsimile line is (262) 780-3655. Our Internet addresses are www.internationalmonetary.com and www.imsbarter.com.
The Modern Barter Industry
The modern barter industry took shape in its current form in 1969 with the creation of the first retail barter exchange in North America. Currently there are an estimated 250 barter system firms - including several with multiple licensees – operating in the United States and Canada. These exchanges provide services that involve an estimated 200,000 member companies.
Retail trade exchanges range in size from those operated by a single person from a small office to large firms operating out of multiple offices located over a wide area. The 35 largest commercial exchange firms handle approximately 50% of the estimated $700 million in transactions that flow through the barter system annually. Most trade exchanges are private companies that make extensive use of computers to track their members, match transactions, and provide necessary accounting.
The National Association of Trade Exchanges and the International Reciprocal Trade Association are the two professional associations most active in the industry.
How Barter Works
In a typical barter transaction, a member offers to sell products or services in return for the exchange's trade dollars, typically referenced as "T$", which are paid to the member by the purchaser in the transaction. For example, T$100 refers to $100 worth of trade dollars that are used to acquire a product or service priced at $100 in U.S. currency. If the purchase price is greater than the amount of earned trade dollars in the buyer's account, the exchange may grant a trade dollar line of credit to the buyer. Periodically, each member has to account for any deficit in its trade account just as it would with a conventional loan or other credit facility.
As compensation for providing its services, the trade exchange generally charges a one-time membership fee, monthly maintenance fees and/or a percentage of the price of each transaction (usually 10% to 15%). These fees are typically paid by the member to the trade exchange in cash and trade dollars.
Barter transactions which represent sales revenue are taxable as ordinary income to the recipient of the trade dollars in the conventional dollar amount of the trade dollars received, and conversely are deductible as ordinary expense by a purchaser in the conventional dollar amount of the trade dollars paid. Members' barter sales are reportable by the trade exchange to the Internal Revenue Service on Form 1099-B.
Advantages and Disadvantages
Barter offers a number of advantages to those who utilize it. A principle advantage to trade exchange members is referred to as "barter leverage". This refers to the fact that the typical barter exchange member is purchasing a product or service in exchange for its own product or service. Consequently, each purchase results in a potential sale. And since the actual cash cost of producing the product or service is typically less than its retail sale price, a person utilizing barter is actually purchasing for a real cash cost that is only a fraction of the price of the product or service purchased. In effect, the barter exchange member buys at wholesale, but sells its own goods or services at retail. Frequently, the member will charge a higher price for barter than for cash to cover the charges due to the trade exchange. However, the benefit to the person bartering for the product or service is still significant as a result of the purchase being accomplished through barter.
For example, a trade exchange member may incur a $1,000 cash cost to produce a product or to purchase it at wholesale. If the member then barters this product for a good or service priced at $1,500, representing the retail price at which it is normally sold, the member has effectively bought the good or service for a cost of only $1,000 in cash. Barter leverage is particularly effective in the case of products that have become hard to sell. Rather than write down their value, the producer may be able to secure full value by bartering them through the trade exchange. Barter leverage works most effectively when trading for something that is perishable, such as hotel rooms or airline tickets. Once the hotel room lies vacant or the airline seat is unfilled for a flight, its value is lost forever. In those cases, exchange of the room or seat in barter offers an effective way to gain value from something that would otherwise have been rendered worthless. Due to barter leverage, the value of barter to exchange members will more than likely offset the fees charged by the barter exchange.
Barter also provides an effective means by which a member may enter new markets, gain trial usage by potential customers, or increase market share. The member may well find that he can reach a customer who would not otherwise have tried his product or service if the full price had to be paid in cash, but who will try his goods or services, sometimes in large amounts or on extended terms, when the price is being paid in goods or services of the purchaser in the form of trade dollars. Because of the need to clear trade dollars over time, barter exchanges become affinity marketing networks, in which members seek out opportunities to do business with one another.
The principal disadvantage of barter is that, in comparison to the general cash-based economy, a more limited supply of products and services is available.
International Monetary Systems, Ltd. (IMSL) is a holding company that currently has three operating subsidiaries: Continental Trade Exchange, Ltd., doing business as International Monetary Systems (IMS), National Trade Association, Inc. (NTA), and INLM CN Inc. (Canada). All are part of the IMS barter system which operates in the United States and Canada.
The IMS Barter Network
As a leader in the barter industry, IMS has created a network of more than 15,000 barter clients who trade their goods and services with each other. Through their participation in our barter program, these companies and individuals are provided with an effective revenue management tool which enables them to identify and capture incremental income, move surplus inventories and profitably capitalize on their excess capacity. IMS functions as a third-party record keeper - a status granted by the Internal Revenue Service - and also manages the barter system.
To provide clients with a flexible and effective means of trading, IMS has created an alternative monetary system with its own unique currency. Upon enrolling in the program, each member is assigned a barter account (much like a traditional bank account) through which it receives IMS trade dollars - the medium of exchange for the barter system. Under the T.E.F.R.A. act of 1982, we are required to report all barter sales to the IRS. For accounting and tax purposes, the IRS has ruled that trade dollars are treated the same as cash. Accordingly, the Company may in any period report significant revenue, profits and increases in net assets from transactions denominated in IMS trade dollars or other non-cash consideration.
The IMS barter system began operations in July of 1985 and has had a record of consistent and steady growth, both organic and through acquisitions of other barter networks. During the past decade, we have acquired twenty two independent trade exchange operations. We believe that the barter industry, much like the banking industry, is ready for a period of substantial consolidation and, therefore, we intend to continue acquiring strategically located trade exchanges that will enable us to achieve and maintain a dominant market position. A dominant position within a market gives us better visibility within that market, allows us to offer a wider range of customer products and services for the benefit of our clients, and ensures that we will achieve greater economies of scale.
Other Related Businesses
In addition to expanding our IMS barter operations, we will consider acquiring other related businesses that synergize with and enhance the barter network.
Not applicable to smaller reporting companies.
Our Company's executive offices and principal operating facilities occupy 11,000 square feet of leased space located at 16901 West Glendale Drive, New Berlin, Wisconsin, under a lease from Glendale Investments, LLC, a Wisconsin limited liability company owned by Donald F. Mardak, Dale L. Mardak and John E. Strabley, officers and directors of IMSL. Rent and other terms of our lease, which expires September 30, 2013, are believed by us to be comparable to those available for similar space from unaffiliated, third-party lessors in the same area.
The Company currently leases 3,900 square feet of office space located at 1595 Elmwood Avenue, Rochester, New York, from Stephen Webster, a member of the board of directors of the Company. The triple net lease commenced in February 2007, and expires December 31, 2011. The Company believes that the rental payments required and other terms of the lease are comparable to those available for similar space from unaffiliated, third-party lessors in the area.
The Company also leases the following office spaces:
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Location
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Sq. Ft.
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1545 University Avenue, Green Bay, WI
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400
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5350 Commerce Blvd., Rohnert Park, CA
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2,800
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8938 Cotter Street, Lewis Center, OH
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6,840
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1317 Oakdale Road, Modesto, CA
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1,000
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7429 East Brainard Rd, Chattanooga, TN
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1.230
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103 East Main Street, Plainview, CT
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7,600
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6402 McLeod Drive, Las Vegas, NV
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833
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7670 Wolff Court, Westminster, CO
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1,896
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7449 North Natchez Ave., Niles, IL
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7,000
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438 S. Greenwood, Wichita, KS
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1,200
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3418 Frankfort Ave, Louisville, KY
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250
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1751 2nd Avenue, New York, NY
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1,400
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One Edgewood Drive, Norwood, MA
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1,910
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3100 Steeles Avenue West, Concord, Ontario, Canada
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826
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The leases on all other properties aside from the New Berlin, Wisconsin facility and the office in Rochester, NY, are from unaffiliated parties and are each on a month-to-month basis or a lease of less than 4 years. Upon the expiration of our current leases, we expect that, in each case, we will be able to obtain either a renewal lease, if desired, or a new lease at an equivalent or better location.
The lease for the Niles, IL location expired in December, 2010. In January, 2011, the Company relocated the office to another facility in Niles, IL which is approximately 7,000 square feet.
In the ordinary course of business, the Company is occasionally involved in litigation, both as plaintiff and defendant. Management either litigates or settles claims after evaluating the merits of the actions and weighing the costs of settling vs. litigating.
In December 2010, International Monetary Systems, Ltd. reached a settlement agreement with its former Chief Financial Officer regarding his employment contract with the Company. The settlement agreement required a lump sum payment of $100,000 in December, 2010 and monthly installment payments of $20,000 from February through December, 2011.
A suit in federal district court by a former employee alleging harassment was withdrawn by the plaintiff in February, 2010.
During 2010, the Company was plaintiff in a suit filed in April, 2009, in Federal court, against the former owner of a trade exchange the Company purchased in 2005, and several former employees, alleging unfair business practices and theft of trade secrets. A settlement agreement was reached in this suit in March, 2010, and the final settlement consummated with the return of 79,164 shares of company stock.
The Company was also plaintiff in a legal action filed in a state court alleging breach of non-compete agreement and unfair business practices against a former employee of a trade exchange previously purchased. A settlement agreement was reached in September, 2010 under which the employee is no longer employed in the barter industry in the market in question.
There are no other material legal actions pending against the Company.
PART II
There were no sales of unregistered securities during 2010.
Trading information for the last two fiscal years:
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High
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Low
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Fiscal 2010
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First quarter ended March 31, 2010
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$ | 0.85 | $ | 0.75 | ||||
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Second quarter ended June 30, 2010
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$ | 1.80 | $ | 0.56 | ||||
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Third quarter ended September 30, 2010
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$ | 1.30 | $ | 0.72 | ||||
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Fourth quarter ended December 31, 2010
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$ | 0.99 | $ | 0.61 | ||||
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Fiscal 2009
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First quarter ended March 31, 2009
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$ | 0.48 | $ | 0.42 | ||||
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Second quarter ended June 30, 2009
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$ | 0.84 | $ | 0.78 | ||||
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Third quarter ended September 30, 2009
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$ | 0.45 | $ | 0.45 | ||||
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Fourth quarter ended December 31, 2009
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$ | 0.81 | $ | 0.75 | ||||
As of December 31, 2010, the approximate number of holders of record of our Common Stock was 700.
The Company has declared no dividends.
ITEM 6 – SELECTED FINANCIAL DATA - Not applicable to smaller reporting companies.
In addition to current and historical information, this Annual Report on Form 10-K contains forward-looking statements. These statements relate to our future operations, prospects, potential products, services, developments, business strategies or our future financial performance. These statements can generally be identified by the use of terms such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “target,” “will” or the negative of these terms or other similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual events or results may differ materially. We undertake no obligation to update or revise publicly any forward-looking statement after the date of this report, whether as a result of new information, future events or otherwise.
The following commentary should be read in conjunction with the financial statements and related notes contained elsewhere in this report.
2010 was a year of transition and litigation for International Monetary Systems. The Company spent a good deal of time and resources settling litigation and tax examinations, while streamlining operations and strengthening controls.
Following are some of the highlights of 2010:
Return to Shareholders
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During the year 198,790 shares of the Company’s outstanding common stock were repurchased into treasury. This represents approximately 1.8% of the outstanding shares of the Company.
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The Company’s stock generally traded in a higher range in 2010 than in 2009.
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Operations
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In 2010, there was a loss from operations of $333,620, compared to income of $539,305 last year. The 2010 loss included approximately $182,000 in legal fees and a charge of $220,000 related to settlement of an employment contract. Also incurred were approximately $316,000 of other professional fees that are not expected to recur. Adjusted for these non-recurring expenses, net operating income was approximately $385,000.
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International Monetary Systems, Ltd. had EBITDA (earnings before interest, taxes, depreciation and amortization) of $1,297,547 or approximately $.12 per share. Exclusive of the non-recurring items noted above, EBITDA would be approximately $2,016,000 in 2010.
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Cash flow from operations totaled approximately $960,000 or $.09 per share.
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Total liabilities were reduced by $1,161,468 during the year.
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Corporate finance, accounting, and human resources were relocated to the corporate headquarters in Milwaukee, WI
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from offices in northern California, resulting in increased operating efficiencies and lower administrative costs.
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In August 2010, the Company implemented its new TNT barter software, which allows for enhanced sales, operations and reporting.
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RESULTS OF OPERATIONS
To evaluate operations, management monitors, among other measures, EBIDTA, cash flow, trade volume, revenue generated from said trade volume, number of customers and levels of significant operating expense categories. Key metrics to evaluate the health of the Company include cash position, ratio of current assets to current liabilities, debt levels, and equity trading activity.
Cash Flows from Operations
Net cash flows from operations totaled $960,630 in 2010 compared to $2,155,283 in 2009.
EBITDA (earnings before interest, taxes, depreciation and amortization)
EBITDA was $1,297,547 in 2010 versus $2,252,138 in 2009.
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Adjustments to reconcile GAAP Net Income (Loss) to EBITDA
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2010
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2009
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Net income (loss)
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$ | (490,133 | ) | $ | 206,817 | |||
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Interest expense
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200,642 | 228,936 | ||||||
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Taxes
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(42,118 | ) | 104,206 | |||||
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Depreciation & amortization
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1,629,156 | 1,631,809 | ||||||
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Impairment
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- | 80,370 | ||||||
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Total EBITDA
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$ | 1,297,547 | $ | 2,252,138 | ||||
Excluding the legal and settlement expenses described above, EBITDA would be approximately $2,016,000 in 2010.
Revenue
During the year ended December 31, 2010, IMS processed more than $106 million in trade sales transactions, generating gross revenue of $13,704,307 compared to $13,968,152 in 2009. The 1.9 % decrease is primarily due an increase of $261,000 in trade dollar sales discounts, which offset revenue from several large transactions in the corporate barter division.
Occasionally, the Company sells IMS trade dollars for cash. Additional barter income arising from several large transactions in our corporate division made more trade dollars available to the Company in 2010. The Company converted these trade dollars to cash via sales to employees, directors and others at a discount, and payment of bonuses to employees in trade dollars.
Operating Expenses
Total other operating expenses increased from $13,428,847 in 2009 to $14,037,927 in 2010, an increase attributable to approximately $498,000 of non-recurring professional fees associated with settling litigation, tax audits and abandonment of a secondary stock offering, and $220,000 of settlement expense. We continue to see savings from the continuation of a cost containment and realignment exercise where redundant costs in acquired markets were eliminated and the Company’s outside sales force was restructured and reduced.
Employee costs increased 2.9% from $7,727,461 in 2009 to $7,949,398 in 2010, due to a new tele-selling program and the discontinuance of the temporary wage reduction for senior management and several key employees.
Occupancy expenses, included in selling, general and administrative costs, decreased from $1,208,104 to $1,128,590, or 6.6%, due to consolidation of some offices and relocation to smaller offices for others.
Selling expense decreased slightly from $665,394 in 2009 to $589,567 in 2010, due to less national advertising for brand awareness.
In 2010, other general and administrative expenses increased from $2,041,020 to $2,741,216, due to the non-recurring professional fees and legal settlement expenses described above.
FINANCIAL CONDITION
LIQUIDITY, COMMITMENTS FOR CAPITAL RESOURCES, AND SOURCES OF FUNDS
At December 31, 2010, the Company had net working capital of $149,378.
In 2010, IMS experienced positive cash flows from operations of approximately $960,000. Our principal source of liquidity from operations has been cash earnings from membership charges, monthly service fees and transaction processing charges. We believe that cash from operations will be adequate to provide for our continuing liquidity needs.
The Company continues to generate cash from operations sufficient to meet its debt retirement obligations. During the third quarter of 2010, several purchase notes were paid in full, which frees cash flow of approximately $16,000 per month. Also, another purchase note requiring payments of approximately $9,000 per month was paid in full in December 2010. Several of the Company’s offices, notably the Chicago office, will be moved in early 2011 resulting in an estimated savings of approximately $21,000 per month.
We believe that current cash needs can be met with the current cash balance and from working capital generated over the next 12 months. Additionally, the Company has lines of credit with various financial institutions with unused borrowing capacity totaling approximately $400,000 which may be drawn as needed.
FUTURE PLANS
On February 28, 2011, the Company purchased the assets of a small trade exchange in Peterborough Ontario. The Company is not currently obligated to purchase any other trade exchange or business. However, we will continue to seek opportunities to acquire additional quality exchanges in the future.
BOARD OF DIRECTORS
The Compensation Committee of the board of directors as of December 31, 2010, are Wayne Dalin, Thomas Delacy, Wayne Emmer, Donald Mardak and Gerald Van Dyn Hoven.
The Audit Committee members are Wayne Dalin, Thomas Delacy, Wayne Emmer, and Gerald Van Dyn Hoven.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's applications of accounting policies. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition, consideration of impairment of intangible assets and income taxes, as more fully described in Note 1 to the financial statements.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements or other relationships with unconsolidated entities.
Not applicable to small reporting companies.
Our consolidated financial statements and related notes, and the report of LBB &Associates Ltd., LLP and Webb & Company, P. A., independent auditors, with respect thereto, as described in the Index to Financial Statements, appear elsewhere in this report at pages F-1 through F-29.
In April, 2010, Webb and Company, P.A. resigned due to the expiration of the partner’s 5 year term on the engagement and the absence of a replacement partner. LBB & Associates Ltd., LLP was engaged as the Company’s independent auditors soon thereafter.
The management of International Monetary Systems, Ltd. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management conducted an evaluation of the effectiveness of the internal controls over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. Based on management’s assessment and those criteria, management believes that the internal controls relative to financial reporting as of December 31, 2010, were effective with regards to IT access controls over the accounting applications.
Management’s internal control report was not subject to attestation by the Corporation’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit small reporting companies to provide only management’s report.
Changes in Internal Controls
In our Annual Report filed on April 2, 2010, we reported that management believed that the internal control over financial reporting as of December 31, 2009, was not effective with regards to IT access controls over the accounting applications. The Company has implemented a program to restrict IT access by strengthening controls, thereby remediating the weakness.
In January, 2010, the majority of our daily accounting and financial reporting was relocated from our California office to our corporate offices in Wisconsin. This move helped to strengthen controls by allowing for greater separation of duties and enhancing oversight and control by senior management.
There were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the current quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting
No items noted.
PART III
Executive Officers and Directors
The following table sets forth information concerning our executive officers and directors, including their names, ages and the positions they hold with IMSL.
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Name
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Age
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Position
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Donald F. Mardak
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74
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Principal Executive Officer, President and Director
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John E. Strabley
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47
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Executive Vice President and Director
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Dale L. Mardak
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50
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Senior Vice President and Director
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David A. Powell
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52
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Chief Financial Officer, Principal Financial and Accounting Officer, and Treasurer
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Patricia A. Katisch
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65
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Corporate Secretary
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Wayne Emmer
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56
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Director
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Gerald Van Dyn Hoven
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54
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Director
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Thomas Delacy
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46
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Director
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Wayne Dalin
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66
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Director
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Stephen Webster
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66
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Director
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Donald F. Mardak has been the Principal Executive Officer, President and a director of IMSL since our inception in 1988. From 1970 to 1974, Mr. Mardak was a partner in Learning Unlimited, a division of Hal Leonard Publishing Corp. In 1974, he founded Don Mardak Piano & Organ Centers, Ltd., a chain of retail piano and organ stores in the Greater Milwaukee area. In 1985, Mr. Mardak founded the Continental Trade Exchange barter network under the name "Continental Trading Company", a sole proprietorship. Continental Trading Company was incorporated in 1988 as Continental Trade Exchange, Ltd. and is now our primary operating subsidiary. Mr. Mardak is a two-term president of NATE, the National Association of Trade Exchanges (1995-96 and 1999-2000) and served on the board of directors of the organization for seven years. NATE is the principal barter industry trade association.
John E. Strabley has been the Executive Vice President of IMSL since 1992 and a director since 1997. Mr. Strabley joined Continental Trade Exchange, Ltd. as a trade broker in 1991. In 1992, he was promoted to General Manager and, in August of that year, was appointed as Vice President of Continental Trade Exchange and IMSL. In 1995, Mr. Strabley passed the barter industry certification examination and was awarded with the industry's highest designation of CTB - Certified Trade Broker. In 1997, Mr. Strabley became a director of both Continental Trade Exchange, Ltd. and IMSL.
Dale L. Mardak has been Senior Vice President of IMSL since 1995, and a director since 1997. He joined Continental Trade Exchange, Ltd. in 1993 as a trade broker and was appointed trade director in 1995. In 1997, he was appointed Treasurer and a director of both Continental Trade Exchange, Ltd. and IMSL. In 1999, Mr. Mardak received the designation of CTB - Certified Trade Broker.
David A. Powell was appointed as the Company’s interim Chief Financial Officer on April 1, 2010, with the interim title removed in May, 2010. He is a Certified Public Accountant with 10+ years experience in public accounting and more than 15 years private industry experience, holding a variety of senior financial positions with a number of companies. Prior to joining IMS, he has served as finance and operations manager for the insurance subsidiaries of US Bancorp for 12 years, and most recently spent several years as corporate controller for a number of privately held companies. Since joining IMS in July, 2009, he has been involved in tax compliance, risk management, and accounting and financial reporting.
Patricia A. Katisch is the owner of Katisch & Associates, a marketing consulting and public relations firm she has operated since 2002. From 1998 - 2001, Ms. Katisch was an Associate Dean in the College of Professional Studies at Marquette University. Previous to that, she founded and published the Women's Yellow Pages of Greater Milwaukee and was the producer of the Wisconsin World of Women Show.
Wayne Emmer is the President of Illinois Cement Co., a position he has held since August of 1998. Wayne is also a former member of the Parkview Christian Academy School Board.
Gerald Van Dyn Hoven has been the president of the Van Dyn Hoven Automotive Group for more than 20 years. Jerry is a director of American National Bank - Fox Cities, and is a member of the Board of Trustees of Equitable Reserve Association.
Thomas Delacy the president and CEO of Independent Inspections, Ltd., a company that provides municipal inspection services for several cities. Tom has held this position for more than 15 years.
Wayne Dalin has been a Certified Public Accountant for more than 30 years and is a retired principal in Dalin, Lindseth & Company.
Stephen Webster was the former owner of Alliance Barter, of Rochester New York for more than 25 years. He is a past president of the National Association of Trade Exchanges (NATE) and the International Reciprocal Trade Association (IRTA). Steve is also a member of the Barter Hall of Fame. He is currently a real estate developer and private investor.
Relationships
Donald F. and Judy E. Mardak are husband and wife. John E. Strabley is their son-in-law, and Dale L. Mardak is their son. Kimberly A. Strabley, the daughter of Donald F. and Judy E. Mardak and the wife of John E. Strabley, is also employed as IMS travel director and reciprocal accounts manager.
Directors
All of our directors are serving three-year terms. Messrs. Van Dyn Hoven, Strabley and Webster serve a three-year term expiring at the 2013 annual meeting of shareholders. Mr. Donald F. Mardak, Messrs. Emmer and Dalin are serving three-year terms expiring at the 2011 annual meeting of shareholders. And Messrs. Delacy and Dale L. Mardak serve a three-year term expiring at the 2012 annual meeting of shareholders.
Director's Compensation
In 2010 we paid our outside directors cash of $200 to $500 per board meeting, an annual fee of 8,000 shares of IMS stock, and 2,000 trade dollars. Our Named Executive Officers or other employees are not compensated additionally as board members. No stock options have been issued to our outside directors.
During 2010 we issued an aggregate of 48,000 shares of our common stock valued at $43,680 to Messrs. Gerald Van Dyn Hoven, Wayne Emmer, Thomas Delacy, Wayne Dalin, Stephen Webster and Patricia Katisch as compensation for their services.
Additionally, beginning July 1, 2010, Mr. Dalin receives a monthly fee of $1,000 for serving as chairman of the audit committee.
The table below summarizes the total compensation paid by us to our outside directors for the fiscal year ended December 31, 2010.
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Name
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Fees Earned or Paid In Cash
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Stock Awards (1)
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Option Awards
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Non-Equity Incentive Plan Compensation
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Nonqualified Deferred Compensation Earnings
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All Other Compensation
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Total
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|||||||||||||||||||||
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Wayne Dalin
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$ | 7,350 | $ | 7,280 | $ | - | $ | - | $ | - | $ | 3,000 | $ | 17,630 | ||||||||||||||
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Thomas Delacy
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$ | 800 | $ | 7,280 | $ | - | $ | - | $ | - | $ | 2,000 | $ | 10,080 | ||||||||||||||
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Wayne Emmer
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$ | 1,000 | $ | 7,280 | $ | - | $ | - | $ | - | $ | 2,000 | $ | 10,280 | ||||||||||||||
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Patricia Katisch
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$ | 1,600 | $ | 7,280 | $ | - | $ | - | $ | - | $ | 2,000 | $ | 10,880 | ||||||||||||||
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Gerald Van Dyn Hoven
|
$ | 1,600 | $ | 7,280 | $ | - | $ | - | $ | - | $ | 2,000 | $ | 10,880 | ||||||||||||||
|
Stephen Webster
|
$ | 800 | $ | 7,280 | $ | - | $ | - | $ | - | $ | 2,000 | $ | 10,080 | ||||||||||||||
(1) For all directors, this is the fair value of the 8,000 shares of stock issued, at the date of issue.
Limitation of Liability and Indemnification
Our bylaws provide for the elimination, to the fullest extent permissible under Wisconsin law, of the liability of our directors to us for monetary damages. This limitation of liability does not affect the availability of equitable remedies such as injunctive relief. Our bylaws also provide that we shall indemnify our directors and officers against certain liabilities that may arise by reason of their status for service as directors or officers, other than liabilities arising from certain specified misconduct. We are required to advance their expenses incurred as a result of any proceeding against them for which they could be indemnified, including in circumstances in which indemnification is otherwise discretionary under Wisconsin law. At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of our company in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding which may result in a claim for such indemnification.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and persons who own more than ten percent of a registered class of our equity securities to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of our Common Stock and other IMSL equity securities. Officers, directors and beneficial owners of more than ten percent of such equity securities are required by SEC regulations to furnish us with copies of all Section 16(a) reports filed by them.
One independent director, Wayne Emmer, filed a late report, which showed 9 transactions not reported timely.
The following table summarizes the compensation paid to or accrued by our principal executive officer and the two most highly compensated executive officers other than the principal executive officer, who were serving as executive officers at the end of December 31, 2010, for the fiscal years ended December 31, 2010 and 2009.
SUMMARY COMPENSATION TABLE
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Name and Principle Position
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Year
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Salary
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Bonus
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Stock Awards
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Option Awards
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Pension Value and Nonqualified Deferred Compensation Earnings
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Non-Equity Incentive Plan Compensation
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All Other Compensation (1)
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Total
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||||||||||||||||||||||||
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Donald F. Mardak, Principal Executive Officer & President
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2010
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230,000 | 2,500 | -- | -- | -- | -- | 18,323 | 250,823 | ||||||||||||||||||||||||
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2009
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203,166 | -- | -- | -- | -- | -- | 14,337 | 217,503 | |||||||||||||||||||||||||
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John E. Strabley, Executive Vice President & Director
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2010
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175,121 | 2,500 | 18,687 | 196,308 | ||||||||||||||||||||||||||||
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2009
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154,583 | 750 | -- | -- | -- | -- | 6,626 | 161,959 | |||||||||||||||||||||||||
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Dale L. Mardak, Senior Vice President & Director
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2010
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164,999 | 2,500 | 12,564 | 180,063 | ||||||||||||||||||||||||||||
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2009
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144,888 | 750 | 7,287 | 152,925 | |||||||||||||||||||||||||||||
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David A. Powell, Principal Financial Officer & Treasurer (2)
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2010
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115,587 | 2,000 | 6,316 | 16,814 | 140,717 | |||||||||||||||||||||||||||
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Danny W. Weibling, Principal Financial Officer & Treasurer (3)
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2010
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53,414 | -- | 103,635 | 157,049 | ||||||||||||||||||||||||||||
|
2009
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167,833 | 500 | -- | -- | -- | -- | 5,394 | 173,727 | |||||||||||||||||||||||||
(1) Represents auto allowances and health benefits.
(2) Effective April 1, 2010
(3) On April 1, 2010, Mr. Weibling terminated his employment with the Company.
Employment Agreements
On March 10, 2007, we renewed the employment agreements with Donald F. Mardak, our president, Danny W. Weibling, then our Principal Financial Officer and John E. Strabley, and Dale L. Mardak our senior vice presidents, for three year terms. On November 20, 2008 the board of directors approved amending the contracts to freeze the compensation schedule at the 2008 salaries, in exchange for which each contract was modified to add one additional year to the original term.
Terms of each were:
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●
|
Automatic renewal clause for additional one-year periods thereafter, unless terminated by either IMSL or the employee..
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|
●
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Eighteen month non compete clause
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|
●
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Confidentiality of trade secrets clause.
|
|
●
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An annual auto allowance of $6,000-$18,000, depending on position.
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|
●
|
Health insurance benefits
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|
●
|
Stock options at the discretion of the CEO.
|
|
●
|
Change of control provisions. In the event of a merger, acquisition of IMSL or sale of substantially all of its assets, Donald Mardak's contract provided for compensation equal to two years' salary plus a lump sum payment of $400,000, John Strabley's and Dale Mardak's contracts provided for compensation equal to one year's salary plus a lump sum payment of $200,000. David Powell was to receive one year’s salary plus a lump sum payment of $100,000.
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On March 31, 2009, each of the above officers agreed to a 10% reduction in salary. The base salaries became $207,000, $171,000, $157,500 and $148,500, respectively. In January, 2010, the salary reduction was rescinded and the salaries were reinstated to the 2008 levels.
On February 28, 2011, the Compensation Committee of the board finalized employment agreements with Donald Mardak, Principal Executive Officer, John Strabley and Dale Mardak, Named Executive Officers, and David Powell, Principal Financial Officer, effective March 1, 2011, as follows:
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●
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Salaries of $250,000, $192,000, $185,000, and $135,000, respectively, with increases to be determined annually by the board.
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|
●
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Bonuses ranging from $6,000 to $30,000, contingent on meeting pre-tax income goals.
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|
●
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Stock options at the discretion of the Board of Directors
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|
●
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Automatic renewal clause for additional one-year periods thereafter, unless terminated by either IMSL or the employee.
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|
●
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Twelve month non-compete clause and confidentiality of trade secrets clause.
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|
●
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Annual auto allowances of $6,000-$18,000, depending on position.
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|
●
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Health insurance benefits.
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|
●
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Donald Mardak, John Strabley, and Dale Mardak will receive severance payments of two years’ salary and lump sum payments of $400,000, $300,000 and $300,000 respectively in the event of involuntary termination.
|
|
●
|
In the event that a new Board of Directors substantially reduces their role in the Company, Donald Mardak, John Strabley and Dale Mardak will receive lump sum payments of $600,000, $400,000 and $400,000 respectively.
|
|
●
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All agreements contain a change of control provision. In the event of a merger, acquisition of IMSL or sale of substantially all of its assets, Donald Mardak's contract provides for compensation equal to two years' salary plus a lump sum payment of $400,000, John Strabley's and Dale Mardak's contracts provide for compensation equal to two years' salary plus a lump sum payment of $300,000. David Powell will receive one year’s salary plus a lump sum payment of $150,000.
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Outstanding Equity Awards at Fiscal Year End
There were no unexercised options or stock that had not vested for any of our Named Executive Officers for the fiscal years ended December 31, 2010 and 2009.
CODE OF ETHICS
The Board of Directors has adopted a Code of Business Conduct and Ethics that applies to, among other persons, our President (being our principal executive officer) as well as all employees. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:
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honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
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|
full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us;
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|
compliance with applicable governmental laws, rules and regulations;
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|
the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
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accountability for adherence to the Code of Business Conduct and Ethics
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Our Code of Business Conduct and Ethics requires, among other things, that all of our company's personnel are accorded full access to our President with respect to any matter that may arise relating to the Code of Business Conduct and Ethics. Further, all of our company's personnel are to be accorded full access to our Board of Directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our President.
In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our company's President. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the President, the incident must be reported to any member of our Board Of Directors. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company's Code of Business Conduct and Ethics by another.
We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to 16901 West Glendale Drive, New Berlin, WI 53151.
The following table provides certain information with respect to the beneficial ownership of our common stock, as of December 31, 2010, by:
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● each person known by us to beneficially own more than 5% of our common stock;
|
|
● each of our directors and our named executive officers; and
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|
● all of our directors and executive officers as a group.
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We believe that, subject to applicable community and marital property laws, the beneficial owners of our common stock listed below have sole voting and dispositive power with respect to such shares.
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Name of Beneficial Owner
|
Shares beneficially owned as of December 31, 2010
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|||||||
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Number
|
Percent
|
|||||||
|
Donald F. Mardak (1)
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2,964,000 | 28.11 | % | |||||
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Dale L. Mardak (2)
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232,000 | 2.20 | % | |||||
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John E. Strabley (3)
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112,667 | 1.07 | % | |||||
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David A. Powell (4)
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30,521 | 0.29 | % | |||||
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Stephen Webster
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148,001 | 1.40 | % | |||||
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Thomas Delacy
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105,334 | 1.00 | % | |||||
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Gerald Van Dyn Hoven
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83,667 | 0.79 | % | |||||
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Wayne Emmer
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53,334 | 0.51 | % | |||||
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Wayne Dalin
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57,577 | 0.55 | % | |||||
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Patricia Katisch
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21,334 | 0.20 | % | |||||
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All directors and executive officers as a group (10 persons)
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3,808,435 | 36.12 | % | |||||
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Other Beneficial Owners
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||||||||
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Robert Libauer
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906,502 | 8.60 | % | |||||
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Praetorian Capital Management LLC (5)
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1,492,966 | 14.43 | % | |||||
There are no stock options or awards available to any officer or director. All shares listed on the above table are owned by the individual. No shares listed on the above table are shares that the individual has the right to acquire within the next 60 days.
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(1)
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Does not include 112,667 shares held by his wife, Judy E. Mardak, as to which Mr. Mardak disclaims beneficial ownership. All shares owned by Donald F. and Judy E. Mardak are now held in a revocable living trust.
|
|
(2)
|
Does not include 1,400 shares held by his wife, Lisa L. Mardak, as to which Mr. Mardak disclaims beneficial ownership.
|
|
(3)
|
Does not include 213,334 shares held by his wife, Kimberly A. Strabley, as to which Mr. Strabley disclaims beneficial ownership.
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|
(4)
|
13,855 shares are owned jointly with his wife, Janice L. Powell, in a revocable living trust.
|
|
(5)
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Does not include 366,667 shares of exercisable warrants.
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Certain Transactions
We currently lease our executive offices and principal operating facilities, consisting of 11,000 square feet of space located at 16901 West Glendale Drive, New Berlin, Wisconsin, from Glendale Investments, LLC., a Wisconsin limited liability company owned by Donald F. Mardak, Dale L. Mardak and John E. Strabley, officers and directors of our company, under a triple net lease which commenced in October, 2008 and expires September 30, 2010. For the fiscal year ended December 31, 2010, we made rental payments of $ 101,219 and in the fiscal year ended December 31, 2009, we made rental payments of $91,500 to Glendale Investments, LLC. We believe that the rental payments required and other terms of our lease are comparable to those available for similar space from unaffiliated, third-party lessors in the area.
We currently lease 3,900 square feet of office space located at 1595 Elmwood Avenue, Rochester, New York, from Stephen Webster, a member of the board of directors of the Company. The triple net lease commenced in February 2007, and expires December 31, 2011. Monthly rental payments are $6,644. The Company believes that the rental payments required and other terms of the lease are comparable to those available for similar space from unaffiliated, third-party lessors in the area. Total payments in 2010 and 2009 were $79,728 each year.
On March 31, 2009, IMS received $50,000 from an officer of the Company in exchange for an interest-only convertible note, at 8% per annum, due July 10, 2010. This note was renewed in July, 2010 and again in January, 2011. It is now due July 2012. At any time the note can be converted into 83,334 shares of IMS common stock at $.60 per share, the fair value of the common stock on the date of the note. Quarterly interest payments started June 30, 2009.
On March 31, 2009 IMS received $50,000 from a member of the board of directors of the Company in exchange for an interest-only convertible note, at 8% per annum, due March 31, 2011. In January, 2011, this note was renewed through March 31, 2013. At any time the note can be converted into 83,334 shares of IMS common stock at $.60 per share, the fair value of the common stock on the date of the note. Quarterly interest payments started June 30, 2009.
Conflicts of Interest
Certain potential conflicts of interest are inherent in the relationships between our affiliates and us. From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with ours with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of IMSL and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither we nor our shareholders will have any right to require participation in such other activities.
Further, because we intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, including for example the lease agreement described above under "Certain Relationships and Related Transactions - Certain Transactions", potential conflicts may arise between the respective interests of IMSL and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.
With respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require that (1) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (2) the transaction be approved by a majority of our disinterested outside directors and (3) the transaction be fair and reasonable to IMSL at the time it is authorized or approved by our directors.
LBB and Associates Ltd., LLP is serving as our independent registered public accounting firm for the year ended December 31, 2010, while Webb & Company, P.A. served as our independent registered public accounting firm for fiscal year 2009. The following table shows the fees that were billed for the audit and other services provided by each of these firms for the 2010 and 2009 fiscal years.
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2010
|
2009
|
|||||||
|
Audit Fees
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$ | 43,750 | $ | 63,324 | ||||
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Audit-Related Fees
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- | - | ||||||
|
Tax Fees
|
- | - | ||||||
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All Other Fees
|
- | - | ||||||
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Total
|
$ | 43,750 | $ | 63,324 | ||||
Audit Fees -- This category includes the audit of our annual financial statements, review of financial statements included in our Form 10-Q Quarterly Reports and services that are normally provided by the independent auditors in connection with engagements for those fiscal years.
Audit-Related Fees -- This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under "Audit Fees." The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.
Tax Fees -- This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees -- This category consists of fees for other miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent auditors. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit fees paid to the auditors with respect to fiscal year 2010 and 2009 were pre-approved by the audit committee.
The Company is filing the following exhibits herewith:
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Exhibit
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||
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Number
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Description
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|
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3.1
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Articles of Incorporation of the Registrant *
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|
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3.2
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Articles of Amendment of the Registrant *
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|
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3.3
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Bylaws of the Registrant *
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10.1
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Lease Agreement, between Glendale Investments, LLC. and the Registrant *
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|
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31.1
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Certificate of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **
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31.2
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Certificate of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **
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32.1
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Certificate of the Principal Executive Officer to Section 906 of the Sarbanes-Oxley Act of 2002 **
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32.2
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Certificate of the Principal Financial Officer to Section 906 of the Sarbanes-Oxley Act of 2002 **
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|
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* Incorporated by reference to the registration statement of the Company on Form SB-2 File No. 333-94597
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||
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** Filed herein
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Consolidated financial statements as of December 31, 2010 and 2009 are contained herein.
Pursuant to the requirements of Section 13 or 15(d) 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.
INTERNATIONAL MONETARY SYSTEMS, LTD.
|
Dated: March 11, 2011
|
By:
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/s/ Donald F. Mardak
|
|
|
Donald F. Mardak, President
|
|||
|
(Principal Executive Officer)
|
|||
|
Dated: March 11, 2011
|
By:
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/s/ David A. Powell
|
|
|
David A. Powell, Chief Financial Officer
|
|||
|
(Principal Financial Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
SIGNATURE
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TITLE
|
DATE
|
||
|
/s/ Donald F. Mardak
|
Principal Executive Officer,
|
March 11, 2011
|
||
|
President and Director
|
||||
|
Donald F. Mardak
|
||||
|
/s/ David A Powell
|
Principal Financial Officer,
|
March 11, 2011
|
||
|
Principal Accounting Officer
|
||||
|
David A Powell
|
||||
|
/s/ Dale L. Mardak
|
Senior Vice President
|
March 11, 2011
|
||
|
and Director
|
||||
|
Dale L. Mardak
|
||||
|
/s/ John E. Strabley
|
Executive Vice President
|
March 11 2011
|
||
|
and Director
|
||||
|
John E. Strabley
|
||||
|
/s/ Thomas E. Delacy
|
Director
|
March 11, 2011
|
||
|
Thomas E. Delacy
|
||||
|
/s/ Wayne R. Dalin
|
Director
|
March 11, 2011
|
||
|
Wayne R. Dalin
|
||||
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORTS OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRMS
For the Years Ended December 31, 2010 and 2009
INTERNATIONAL MONETARY SYSTEMS, LTD.
TABLE OF CONTENTS
|
Page
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – December 31, 2009 year.
|
F-2
|
|
FINANCIAL STATEMENTS
|
|
|
Consolidated Balance Sheets
|
F-3
|
|
Consolidated Statements of Operations and Comprehensive Income (Loss)
|
F-4
|
|
Consolidated Statements of Changes in Stockholders’ Equity
|
F-5
|
|
Consolidated Statements of Cash Flows
|
F-6 - F-7
|
|
Notes to Consolidated Financial Statements
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F-8 - F-29
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
International Monetary Systems, Ltd.
New Berlin, WI
We have audited the accompanying consolidated balance sheet of International Monetary Systems, Ltd. as of December 31, 2010, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholder equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Monetary Systems, Ltd. at December 31, 2010, and the results of its operations and comprehensive income (loss) and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
LBB & Associates Ltd., LLP
Houston, Texas
February 28, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
International Monetary Systems, Ltd. and Subsidiaries
We have audited the accompanying consolidated balance sheet of International Monetary Systems, Ltd. and Subsidiaries as of December 31, 2009, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholder equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Monetary Systems, Ltd. and Subsidiaries at December 31, 2009 and the results of its operations and comprehensive income (loss), and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
WEBB & COMPANY, P. A.
Boynton Beach, Florida
March 20, 2010
INTERNATIONAL MONETARY SYSTEMS, LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
|
2010
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current assets
|
||||||||
|
Cash
|
$ | 804,108 | $ | 894,396 | ||||
|
Restricted cash
|
41,829 | 149,682 | ||||||
|
Marketable securities
|
157,014 | 115,110 | ||||||
|
Accounts receivable, net
|
1,075,965 | 1,201,403 | ||||||
|
Refundable income taxes
|
-- | 133,000 | ||||||
|
Earned trade account
|
285,282 | 33,561 | ||||||
|
Prepaid expenses
|
184,513 | 103,027 | ||||||
|
Total current assets
|
2,548,711 | 2,630,179 | ||||||
|
Other assets
|
||||||||
|
Property and equipment, net
|
727,549 | 921,473 | ||||||
|
Membership lists, net
|
6,826,464 | 8,153,093 | ||||||
|
Goodwill
|
3,435,479 | 3,435,479 | ||||||
|
Assets held for investment
|
179,181 | 174,659 | ||||||
|
Total non-current assets
|
11,168,673 | 12,684,704 | ||||||
|
Total assets
|
$ | 13,717,384 | $ | 15,314,883 | ||||
|
LIABILITIES
|
||||||||
|
Current liabilities
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 1,294,213 | $ | 1,290,464 | ||||
|
Credit lines and current portions of long term debt
|
465,120 | 782,608 | ||||||
|
Current portion of common stock subject to guarantee
|
640,000 | 706,500 | ||||||
|
Current portion of convertible notes payable, related parties
|
-- | 50,000 | ||||||
|
Total current liabilities
|
2,399,333 | 2,829,572 | ||||||
|
Long-term liabilities
|
||||||||
|
Long term debt, net of current portion
|
1,491,377 | 1,523,445 | ||||||
|
Common stock subject to guarantee, less current portion
|
178,500 | 620,000 | ||||||
|
Convertible notes payable to related parties, less current portion
|
120,000 | 50,000 | ||||||
|
Deferred compensation
|
290,000 | 275,000 | ||||||
|
Deferred income taxes
|
1,336,904 | 1,679,565 | ||||||
|
Total long-term liabilities
|
3,416,781 | 4,148,010 | ||||||
|
Total liabilities
|
5,816,114 | 6,977,582 | ||||||
|
Commitments and contingencies
|
||||||||
|
STOCKHOLDERS’ EQUITY
|
||||||||
|
Preferred stock, $.0001 par value, 20,000,000 authorized, 0 outstanding
|
- | - | ||||||
|
Common stock, $.0001 par value 280,000,000 authorized 10,544,800 and 10,343,467 issued and outstanding December 31, 2010 and December 31, 2009, respectively
|
1,050 | 1,030 | ||||||
|
Paid in capital
|
13,542,436 | 12,772,904 | ||||||
|
Treasury stock, 904,049 and 646,095 shares, respectively
|
(3,170,571 | ) | (2,428,422 | ) | ||||
|
Accumulated other comprehensive income (loss)
|
16,118 | (10,581 | ) | |||||
|
Accumulated deficit
|
(2,487,763 | ) | (1,997,630 | ) | ||||
|
Total stockholders’ equity
|
7,901,270 | 8,337,301 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 13,717,384 | $ | 15,314,883 | ||||
See accompanying notes to consolidated financial statements.
INTERNATIONAL MONETARY SYSTEMS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2010 and 2009
|
2010
|
2009
|
|||||||
|
Gross revenue
|
$ | 13,704,307 | $ | 13,968,152 | ||||
|
Operating Expenses
|
||||||||
|
Employee costs
|
7,949,398 | 7,727,461 | ||||||
|
Selling, general and administrative
|
4,057,286 | 4,069,577 | ||||||
|
Depreciation and amortization
|
1,629,156 | 1,631,809 | ||||||
|
Unusual items - cost of legal settlements
|
402,087 | -- | ||||||
|
Total operating expenses
|
14,037,927 | 13,428,847 | ||||||
|
Income (loss) from operations
|
(333,620 | ) | 539,305 | |||||
|
Other income (expense)
|
||||||||
|
Interest income
|
2,011 | 654 | ||||||
|
Interest expense
|
(200,642 | ) | (228,936 | ) | ||||
|
Total other income (expense)
|
(198,631 | ) | (228,282 | ) | ||||
|
Income (loss) before income taxes
|
(532,251 | ) | 311,023 | |||||
|
Income tax (expense) benefit
|
42,118 | (104,206 | ) | |||||
|
Net income (loss)
|
(490,133 | ) | 206,817 | |||||
|
Components of comprehensive income (loss):
|
||||||||
|
Unrealized gain on available for sale investments
|
16,685 | 21,938 | ||||||
|
Foreign currency translation gain
|
10,014 | 18,321 | ||||||
|
Comprehensive net income (loss)
|
$ | (463,434 | ) | $ | 247,076 | |||
|
Net income (loss) per
|
||||||||
|
common share – basic
|
$ | (0.04 | ) | $ | 0.02 | |||
|
– dilutive
|
$ | (0.04 | ) | $ | 0.02 | |||
|
Weighted average common
|
||||||||
|
shares outstanding – basic
|
10,462,465 | 9,731,062 | ||||||
|
– dilutive
|
10,462,465 | 9,731,602 | ||||||
See accompanying notes to consolidated financial statements.
INTERNATIONAL MONETARY SYSTEMS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2010 and 2009
|
2010
|
2009
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net income (loss)
|
$ | (490,133 | ) | $ | 206,817 | |||
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
1,629,156 | 1,631,809 | ||||||
|
Impairment loss
|
-- | 80,370 | ||||||
|
Stock issued for services
|
172,423 | 96,200 | ||||||
|
Bad debt expense
|
108,673 | (303,923 | ) | |||||
|
Deferred compensation
|
15,000 | 15,000 | ||||||
|
Loss on disposal of assets
|
1,024 | - | ||||||
|
Changes in assets and liabilities
|
||||||||
|
Accounts receivable
|
16,765 | 503,903 | ||||||
|
Earned trade account
|
(251,721 | ) | (26,570 | ) | ||||
|
Tax refund receivable
|
133,000 | (84,500 | ) | |||||
|
Deferred tax benefit
|
- | 75,000 | ||||||
|
Inventory
|
- | 33,839 | ||||||
|
Prepaid expenses
|
(34,647 | ) | 6,683 | |||||
|
Accounts payable and accrued expenses
|
3,751 | 601,566 | ||||||
|
Deferred tax liability
|
(342,661 | ) | (359,435 | ) | ||||
|
Trade payable
|
- | (321,476 | ) | |||||
|
Net cash provided by operating activities
|
960,630 | 2,155,283 | ||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
(Increase) decrease in restricted cash
|
107,853 | (480,379 | ) | |||||
|
Capital expenditures
|
(109,209 | ) | (152,962 | ) | ||||
|
(Increase) in marketable securities
|
(25,219 | ) | (8,365 | ) | ||||
|
(Increase) in cash surrender value
|
(4,523 | ) | (6,236 | ) | ||||
|
Net cash used by investing activities
|
(31,098 | ) | (647,942 | ) | ||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from notes payable
|
- | 125,092 | ||||||
|
Proceeds from convertible notes payable, related parties
|
20,000 | 100,000 | ||||||
|
Payments on credit lines
|
(20,602 | ) | (119,443 | ) | ||||
|
Payments on notes payable
|
(236,997 | ) | (885,176 | ) | ||||
|
Payments on convertible notes payable
|
(91,957 | ) | (59,608 | ) | ||||
|
Proceeds from issuance of stock
|
- | 826,500 | ||||||
|
Purchase of treasury stock
|
(699,860 | ) | (897,859 | ) | ||||
|
Net cash used by financing activities
|
(1,029,416 | ) | (910,494 | ) | ||||
|
Effect of exchange rate changes
|
9,596 | 18,322 | ||||||
|
Net increase (decrease) in cash
|
(90,288 | ) | 615,169 | |||||
|
Cash at beginning of period
|
894,396 | 279,227 | ||||||
|
Cash at end of period
|
$ | 804,108 | $ | 894,396 | ||||
INTERNATIONAL MONETARY SYSTEMS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2010 and 2009
Continued
|
2010
|
2009
|
|||||||
|
SUPPLEMENTAL DISCLOSURES
|
|
|
||||||
|
Cash paid for interest
|
$ | 202,737 | $ | 228,936 | ||||
|
Cash paid for income taxes
|
$ | 420,761 | $ | 58,296 | ||||
|
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
|
Unrealized net gain (loss) on equity investments
|
$ | 16,685 | $ | (21,302 | ) | |||
|
Release of common stock guarantees
|
$ | 658,000 | $ | 1,301,500 | ||||
|
Adjustment for stock guarantee agreement
|
$ | 150,000 | $ | - | ||||
|
Common stock issued for prepaid services
|
$ | 46,840 | $ | - | ||||
INTERNATIONAL MONETARY SYSTEMS, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2010 and 2009
| Accumulated | Total | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Comprehensive | Deferred | Accumulated | Treasury Stock | Stockholder | |||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income | Compensation | Deficit | Shares | Amount | Equity | ||||||||||||||||||||||||||
|
Balance December 31, 2008
|
- | $ | - | 10,270,939 | $ | 1,028 | $ | 11,702,173 | $ | (50,840 | ) | $ | (25,467 | ) | $ | (2,204,447 | ) | (387,090 | ) | $ | (1,403,216 | ) | $ | 8,019,231 | ||||||||||||
|
Foreign currency translation adjustment
|
- | - | - | - | - | 18,321 | - | - | - | - | 18,321 | |||||||||||||||||||||||||
|
Unrealized gain on available for sale securities
|
- | - | - | - | - | 21,938 | - | - | - | - | 21,938 | |||||||||||||||||||||||||
|
Net income for 2009
|
- | - | - | - | - | - | - | 206,817 | - | - | 206,817 | |||||||||||||||||||||||||
|
Total comprehensive income
|
- | - | - | - | - | - | - | - | - | - | 247,076 | |||||||||||||||||||||||||
|
Stock issued for services
|
- | - | 122,333 | 7 | 69,226 | - | (24,000 | ) | - | 3,000 | 1,500 | 46,733 | ||||||||||||||||||||||||
|
Deferred comp expensed
|
- | - | - | - | - | - | 49,467 | - | - | - | 49,467 | |||||||||||||||||||||||||
|
Stock converted to notes
|
- | - | (50,000 | ) | (5 | ) | (299,995 | ) | - | - | - | - | - | (300,000 | ) | |||||||||||||||||||||
|
Treasury stock purchases
|
- | - | - | - | - | - | - | - | (262,005 | ) | (1,026,706 | ) | (1,026,706 | ) | ||||||||||||||||||||||
|
Stock split adjustments
|
- | - | 195 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
|
Repurchase of shares under common stock guarantee
|
- | - | - | - | 1,301,500 | - | - | - | - | - | 1,301,500 | |||||||||||||||||||||||||
|
Balance December 31, 2009
|
- | $ | - | 10,343,467 | $ | 1,030 | $ | 12,772,904 | $ | (10,581 | ) | $ | - | $ | (1,997,630 | ) | (646,095 | ) | $ | (2,428,422 | ) | $ | 8,337,301 | |||||||||||||
|
Foreign currency translation adjustment
|
- | - | - | - | - | 10,014 | - | - | - | - | 10,014 | |||||||||||||||||||||||||
|
Unrealized gain on available for sale securities
|
- | - | - | - | - | 16,685 | - | - | - | - | 16,685 | |||||||||||||||||||||||||
|
Net income(loss)
|
- | - | - | - | - | - | - | (490,133 | ) | - | - | (490,133 | ) | |||||||||||||||||||||||
|
Total comprehensive income
|
- | - | - | - | - | - | - | - | - | - | (463,434 | ) | ||||||||||||||||||||||||
|
Stock issued for services and prepaid expenses
|
- | - | 201,333 | 20 | 194,243 | - | - | - | 20,000 | 25,000 | 219,263 | |||||||||||||||||||||||||
|
Adjustment for stock guarantee agreement
|
- | - | - | - | (150,000 | ) | - | - | - | - | - | (150,000 | ) | |||||||||||||||||||||||
|
Treasury stock purchases
|
- | - | - | - | - | - | - | - | (44,789 | ) | (41,860 | ) | (41,860 | ) | ||||||||||||||||||||||
|
Return of shares from litigation settlement
|
- | - | - | - | 67,289 | - | - | - | (79,164 | ) | (67,289 | ) | - | |||||||||||||||||||||||
|
Repurchase of shares under common stock guarantee
|
- | - | - | - | 658,000 | - | - | - | (154,001 | ) | (658,000 | ) | - | |||||||||||||||||||||||
|
Balance December 31, 2010
|
- | - | 10,544,800 | $ | 1,050 | 13,542,436 | $ | 16,118 | $ | - | $ | (2,487,763 | ) | (904,049 | ) | $ | (3,170,571 | ) | $ | 7,901,270 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
INTERNATIONAL MONETARY SYSTEMS, LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2010 and 2009
|
NOTE 1 -
|
INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Organization
International Monetary Systems, Ltd. (IMS - the Company) is a Wisconsin holding company located in New Berlin, Wisconsin, with three wholly-owned operating subsidiaries: Continental Trade Exchange, Ltd (CTE) and National Trade Association, both of which operate a barter (trade) exchange in the United States, and INLM CN Inc., which operates a barter (trade) exchange in Canada.
Operations of Barter Exchanges
A barter (trade) exchange is a business network, a membership organization comprised of businesses that buy and sell among the network without using cash. It is a small, private economy with a unique currency called a barter dollar or trade dollar. It is a third-party record keeper which provides an alternative payment system
Member businesses do not actually engage in direct barter. Rather, they sell products or services to other members, accepting payment in trade dollars which they then use to buy the products or services of other members of the network. Transactions are recorded through manual and electronic data transmission using a 24-hour telephone and Internet authorization system. Some members consign their products to the barter exchange to hold as saleable inventory. Others sell gift certificates or tickets that are redeemable for their goods or services.
The barter exchange maintains the accounting records for all sales and purchases, provides monthly statements, files annual tax forms 1099-B, enrolls businesses to the network, proactively markets member products and services, maintains a member web site, facilitates transactions, and provides personal customer support services to members and clients.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents to the extent the funds are not held for investment purposes.
Restricted Cash
As a condition to issuing the guarantee on the purchase of certain exchanges, IMS agreed to deposit a monthly amount into an escrow account for the repurchase of common stock under guaranteed transactions. As of December 31, 2010 and 2009, the Company has made all required deposits into the escrow account.
Fair Value of Financial Instruments
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, restricted cash, prepaid expense and other assets, accounts payable, accrued liabilities, notes payable and deferred compensation approximate their fair value due as of December 31, 2010 because of their short-term natures.
Revenue Sources
The Company and its subsidiaries earn revenues in both traditional dollars (cash income) and in trade dollars. Cash income is earned through fees assessed when a member joins, through transaction fees generated when clients earn or spend trade dollars, through monthly maintenance fees, finance charges on delinquent accounts receivable, event fees, and inventory sales.
Trade revenue is similarly generated through initial membership fees, monthly maintenance fees, transaction fees, event fees, and inventory sales. Occasionally the Company will accept a favorable trade ratio in lieu of a cash fee. The Company uses earned trade dollars to purchase various goods and services required in its operations. All barter transactions are reported at the estimated fair value of the products or services received. Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured.
Transaction fees are recognized upon receipt of transactional information accumulated by our systems or reported by our clients. Membership fees, monthly maintenance fees, finance charges, and other fees are billed monthly to members’ accounts, and are recognized in the month the revenue is earned.
Occasionally, the Company sells IMS trade dollars for US dollars. The cash received in these sales are included in gross revenue and the carrying value of the trade dollars sold is netted against the sales proceeds.
Principles of Consolidation
The consolidated financial statements for 2010 and 2009 include the accounts of the Company and its wholly owned subsidiaries Continental Trade Exchange, Ltd., National Trade Association, Inc., and INLM CN, Inc. Significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Marketable Securities
Marketable equity securities are classified into three categories: (1) held-to-maturity securities reported at amortized cost, (2) trading securities reported at fair value with unrealized gains and losses included in earnings, and (3) available-for-sale securities reported at fair value with unrealized gains and losses reported in other comprehensive income (loss). Costs are determined by the specific identification method.
Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.
Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.
Receivables and Allowance for Doubtful Accounts
Accounts receivable are stated at face value, net of the allowance for bad debts. Finance charges on receivables are calculated using the simple interest method on the amount outstanding.
The allowance for bad debts is maintained at a level that is management’s best estimate of probable bad debts incurred as of the balance sheet date. Management’s determination of the adequacy of the allowance is based on an evaluation of the accounts receivable, past collection experience, current economic conditions, volume, growth and composition of the accounts receivable, and other relevant factors. Actual results may differ from these estimates. The allowance is increased by provisions for bad debts charged against income. The allowance for bad debts was $394,128 and $492,338 as of December 31, 2010 and 2009, respectively.
Inventory
Inventory consisted primarily of jewelry and other merchandise held for sale by the Company. Inventory is carried at the lower of actual cost of acquisition, or fair value. The inventory was sold at cost in 2009.
Earned Trade Account
As part of the operations of the subsidiaries, the Company earns trade dollars which are used to purchase goods and services required in operations. This account is increased principally for service, membership and transaction fees, and is decreased by the Company’s purchase of goods and services. An impairment loss is recognized if it becomes apparent that the fair value of the trade dollars in the account is less than the carrying amount, or if it is probable that the Company will not use all of the balance.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight line methods over the estimated useful lives of five to thirty-nine years. When property or equipment is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is included in the income statement. The costs of repair and maintenance are included in expense as incurred.
Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than assets’ carrying amount.
Software Development Costs
Extensive software has been developed to manage and track trade activity and member account balances and calculate fees in the Exchange. Qualifying costs are accounted for in accordance with ASC 350. Accordingly, costs incurred in the planning and post-implementation stages are expensed as incurred, and costs related to development have been capitalized. Qualifying software development costs are included in property and equipment in the consolidated balance sheets and are amortized over their estimated useful life of 60 months.
Goodwill and Membership Lists
Goodwill and membership lists are stated at cost and arise when additional exchanges are purchased. Membership lists are amortized over the estimated life of ten years.
The Company has adopted FASB ASC 350, which requires that goodwill and intangible assets with indefinite lives be tested annually for impairment. In 2009, the Company recorded an impairment loss of $80,370 relative to membership lists of the Louisville, KY and Boston, MA operations. No impairment loss was recorded in 2010.
Assets Held for Investment
Assets held for investment consist of various works of art and two parcels of undeveloped land, all valued at the lower of cost or fair market value, and the cash surrender value of a life insurance policy being used to help fund the deferred compensation arrangement described in note 7.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740. Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Concentrations of Risk
Cash
Cash includes deposits at financial institutions with original maturities of three months or less. The Company at times has cash in banks in excess of FDIC insurance limits and places its temporary cash investments with high credit quality financial institutions. At December 31, 2010 and 2009, respectively, the Company had approximately $545,000 and $358,000 in cash balances at financial institutions which were in excess of the FDIC insured limits of $250,000.
Accounts Receivable
The Company grants credit to its customers, all of whom are members of Continental Trade Exchange, National Trade Association and INLM CN. Customers are located throughout 20 states and in Canada. The Company routinely assesses the financial strength of its customers and, therefore, believes that its accounts receivable credit risk exposure is limited.
Segment Reporting
The Company operates in one segment and, therefore, segment information is not presented.
Advertising
Advertising costs, which are principally included in selling expenses, are expensed as incurred. Advertising expense was $140,014 and $436,698 for the years ended December 31, 2010 and 2009, respectively.
Stock-Based Compensation
Effective January 1, 2006, the Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors based on estimated fair values, as required by FASB ASC 718. ASC 718 is being applied on the modified prospective basis. Accounting for Stock based compensation ("ASC 718") and accordingly, recognized no compensation expense related to the stock-based plans as stock options granted to employees and directors were equal to the fair market value of the underlying stock at the date of grant.
Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, as required by FASB ASC 505. In accordance with ASC 505, the stock options or common stock warrants are valued using the Black-Scholes option pricing model on the basis of the market price of the underlying common stock on the “valuation date,” which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes option pricing model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.
Comprehensive Income
FASB ASC 220 establishes rules for reporting and displaying comprehensive income and its components. Comprehensive income is the sum of net loss as reported in the consolidated statements of operations and other comprehensive income transactions as reported in the consolidated statement of changes in stockholders' equity. Other comprehensive income transactions that currently apply to the Company result from unrealized gains or losses on equity investments and from changes in exchange rates used in translating the financial statements of its wholly owned subsidiary INLM CN, Inc. of Canada.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiary have been translated into U.S. dollars in accordance with FASB ASC 830. All balance sheet accounts have been translated using the exchange rate in effect at the balance sheet date. Income statement amounts have been translated using an appropriately weighted average exchange rate for the year. The translation gains and losses of $10,014 and $18,321 resulting from the changes in exchange rates during 2010 and 2009, respectively, have been reported in accumulated other comprehensive income, except for gains and losses resulting from the translation of intercompany receivables and payables, which are included in earnings for the period.
Earnings (Loss) Per Share
Basic and diluted net gain or loss per common share is computed based upon the weighted average common shares outstanding as defined by FASB ASC 260. As of December 31, 2010 and 2009 there were 1,619,148 and 1,322,288 common share equivalents outstanding which consisted of:
|
2010
|
2009
|
|||||||
|
Shares issuable upon the
|
||||||||
|
conversion of notes payable
|
1,252,481 | 955,621 | ||||||
|
Shares issuable upon the
|
||||||||
|
exercise of warrants
|
366,667 | 366,667 | ||||||
| 1,619,148 | 1,322,288 | |||||||
These shares were not included in the computations of income or loss per share because their effect was anti dilutive.
Recent Accounting Pronouncements
Management does not anticipate that the recently issued but not yet effective accounting pronouncements will materially impact the Company’s financial condition.
|
NOTE 2 -
|
MARKETABLE SECURITIES
|
The Company has classified certain of its investments as trading securities which are reported at fair value, defined as the last closing price for the listed securities. The unrealized gains and losses which the Company recognizes from its trading securities are included in earnings. The Company also has investments classified as available-for-sale, which are also required to be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity (net of the effect of income taxes). Fair value is also defined as the last closing price for the listed security.
The amortized cost of equity securities as shown in the accompanying balance sheets and their estimated market value at December 31, 2010 and 2009 are as follows:
|
2010
|
2009
|
|||||||
|
Available for sale securities:
|
||||||||
|
Cost
|
$ | 140,329 | $ | 107,966 | ||||
|
Unrealized gain or (loss)
|
16,685 | 7,144 | ||||||
|
Marketable equity securities classified as current
|
$ | 157,014 | $ | 115,110 | ||||
The changes in unrealized gains (losses) from available-for-sale securities included as a component of equity for the years ended December 31, 2010 and 2009 were as follows:
|
2010
|
2009
|
|||||||
|
Unrealized gain (loss)
|
$ | (1,034 | ) | $ | 21,302 | |||
The majority of the investment in marketable equity securities has been pledged to secure the liability for deferred compensation (Note 8).
|
NOTE 3 -
|
INTANGIBLE ASSETS |
Intangible assets consist of membership lists, goodwill and a covenant not to compete, and for the years ended December 31, 2010 and 2009 are as follows:
|
2010
|
2009
|
|||||||
|
Membership lists
|
$ | 13,345,448 | $ | 13,345,448 | ||||
|
Accumulated amortization
|
(6,518,984 | ) | (5,192,355 | ) | ||||
|
Net
|
$ | 6,826,464 | $ | 8,153,093 | ||||
|
Goodwill
|
$ | 3,448,602 | $ | 3,448,602 | ||||
|
Accumulated amortization
|
(13,123 | ) | (13,123 | ) | ||||
|
Net
|
$ | 3,435,479 | $ | 3,435,479 | ||||
Aggregate amortization expense was $1,327,047 and $1,343,794 for the years ended December 31, 2010 and 2009, respectively. In 2009, the Company recorded an impairment loss of $80,370 on membership lists of the Louisville, KY and Boston, MA operations. Estimated future amortization expense is as follows:
|
2011
|
$ | 1,321,226 | ||
|
2012
|
1,277,701 | |||
|
2013
|
1,187,008 | |||
|
2014
|
1,122,879 | |||
|
thereafter
|
1,917,650 | |||
| $ | 6,826,464 |
|
NOTE 4 -
|
PROPERTY AND EQUIPMENT
|
Property and equipment consisted of the following as of December 31, 2010 and 2009:
|
2010
|
2009
|
|||||||
|
Office furniture, equipment, computers and software
|
$ | 1,904,634 | $ | 1,906,801 | ||||
|
Leasehold improvements
|
253,814 | 211,202 | ||||||
| 2,158,448 | 2,118,003 | |||||||
|
Accumulated depreciation
|
(1,430,899 | ) | (1,196,530 | ) | ||||
| $ | 727,549 | $ | 921,473 | |||||
Depreciation expense during the years ended December 31, 2010 and 2009 was $302,109 and $288,015, respectively.
|
NOTE 5 -
|
DEBT
|
| 2010 | 2009 | |||||||
| Credit Lines | ||||||||
|
$500,000 revolving credit line with a financial institution, interest at LIBOR plus 3.24% per annum(3.49% at December 31, 2010), matures in June, 2011, secured by virtually all assets of the Company. This line of credit is guaranteed by Donald Mardak.
|
$ | 203,866 | $ | 154,420 | ||||
|
$122,000 unsecured business credit line with a financial institution, with no maturity date and an interest rate of prime plus 6% per annum (11% at December 31, 2010).
|
-- | 69,967 | ||||||
|
$50,000 unsecured business credit line with a financial institution, with no maturity date and an interest rate of 4.25% per annum.
|
21,917 | 21,998 | ||||||
|
Notes Payable
|
||||||||
|
Note payable to an individual assumed in connection with the purchase of a trade exchange in 2003. The original note was $207,500 discounted to $161,510 with maturity in February, 2010, and monthly payments of $2,500.
|
-- | 4,953 |
|
Unsecured note payable for $300,000 issued in 2007 in connection with the acquisition of a trade exchange. Terms include thirty-six monthly payments of $9,267 including interest at 6% per annum beginning January 10, 2008.
|
-- | 106,041 | ||||||
|
Unsecured note payable for $125,000 issued in 2008 in connection with the acquisition of a trade exchange. Terms included monthly payments of $5,540 and interest at 6% per annum.
|
-- | 43,340 | ||||||
|
On July 17, 2009, the Company redeemed 18,222 shares of IMS common stock from the former owner of a trade exchange purchased. He was paid $82,000 ($6,000 per month starting August 2009) in cash per the stock guarantee agreement. The stock was placed in treasury. A discounted note in the amount of $79,907 was issued for the transaction using an imputed interest rate of 4.25% per annum.
|
-- | 51,119 | ||||||
|
On August 20, 2009, the Company redeemed 11,111 shares of IMS common stock from the former owner of a trade exchange purchased in 2008. The former owner was paid $50,000 ($4,500 per month starting in September 2009) in cash per the stock guarantee agreement. The stock was placed in treasury. A discounted note in the amount of $48,944 was issued for the transaction using an imputed interest rate of 4.25% per annum.
|
-- | 31,544 | ||||||
|
A loan from a private investor of $100,000 was made in November, 2009, due in May, 2012, with quarterly interest payments at 10% per annum and principal payments of $5,000 per month beginning in February, 2011.
|
100,000 | 100,000 | ||||||
|
On January 15, 2009, IMS issued notes payable totaling $300,000 in exchange for release of the stock guarantee on, and the return of 300,000 shares of IMS stock. The notes were interest only at 4.5% per annum. In December, 2009, the Company and the note holder renegotiated the agreement so that interest is now at 7% per annum and annual principal payments begin January 21, 2011. In November, 2010, the notes were again renewed to pay interest only for the year 2011, with principal payments to begin January, 2012. Principal payments can range from $0 to $100,000 at the discretion of the note holders. If mutually agreed, the Company can issue stock to repay principal at share price equivalent of $6.00 per share
|
300,000 | 300,000 | ||||||
|
Convertible Notes Payable
|
||||||||
|
$1,200,000 of notes payable, with 60 monthly payments of $15,858 including interest of 10% per annum, and a balloon payment of $746,367 due September 2013. The investor has the option to convert the principle balance to shares of IMS common stock at $1.86 per share.
|
1,030,714 | 1,122,671 | ||||||
|
Loans of $100,000 and $200,000 were made to IMS by a private investor in 2008. The due dates of the notes were July, 2009 to April, 2010, with quarterly interest payments of 10% per annum. The notes were convertible to 41,667 shares of IMS stock at $2.40 per share, and 62,893 shares of IMS stock at $3.18 per share, at the option of the holder. On July 15, 2009, the $100,000 note was renewed to mature in July, 2011. The conversion agreement was also changed so that the note may now be converted to 151,515 shares of common stock at $.66 per share. On April 22, 2010, the $200,000 note was renewed. It is now due in July, 2012, pay interest at 10% per annum, and, at the lender’s option, is convertible into 266,667 shares at $0.75 per share.
|
300,000 | 300,000 | ||||||
|
Total notes payable and long-term debt
|
1,956,497 | 2,306,053 | ||||||
|
Less current portion
|
465,120 | 782,608 | ||||||
|
Notes payable and long-term debt, net of current portion
|
$ | 1,491,377 | $ | 1,523,445 |
| Common Shares Subject to Guarantees | ||||||||
| As part of various prior acquisition agreements which included stock consideration by the Company, the Company guaranteed the stock price of the stock consideration based on the fair market value of the stock at the time of the applicable acquisition agreements. Accordingly, the guaranteed values of the shares are recorded as a liability on the accompanying financial statements. | ||||||||
|
Guarantee issued in 2002 redeemable in trade dollars at $3.00 per share at the discretion of the guarantee holder.
|
$ | 100,000 | $ | 125,000 | ||||
|
Guarantee issued in February 2007 to a member of the board of directors in connection with the purchase of a trade exchange formerly owned by him. A monthly payment of $40,000 is made to a restricted cash account and used to repurchase the stock at a price of $4.50 per share.
|
613,500 | 1,201,500 | ||||||
|
Guarantee issued in connection with the amendment of an Asset Purchase Agreement between IMS and the former owner of a barter exchange acquired in a prior year. The amended agreement guarantees the 50,000 shares of IMS common stock held by the former owner to a price of $3.00 per share. The former owner has the right to redeem 1,667 shares of IMS common stock for $5,000 in cash, per month, starting March 1, 2010. The guarantee expires on the earlier of March 1, 2013 or fulfillment by the Company of its obligation under the agreement. As a result of this amendment, the Company reclassified $150,000 from additional paid-in capital to common shares subject to guaranteed (liability) during the period ended March 31, 2010.
|
105,000 | -- | ||||||
|
Total common shares subject to guarantees
|
818,500 | 1,326,500 | ||||||
|
Less current portion
|
640,000 | 706,500 | ||||||
|
Long term portion of common shares subject to guarantees
|
$ | 178,500 | $ | 620,000 |
Related Party Convertible Notes Payable
|
Interest-only convertible note issued March 31, 2009, at 8% per annum, due July 10, 2010. At any time the note can be converted into 83,334 shares of IMS common stock at $.60 per share, the fair value of the common stock on the date of the note. Quarterly interest payments started June 30, 2009. This note has been renewed and now has a maturity date of July 10, 2012.
|
$ | 50,000 | $ | 50,000 | ||||
|
Interest-only convertible note issued March 31, 2009, at 8% per annum, due March 31, 2011. At any time the note can be converted into 83,334 shares of IMS common stock at $.60 per share, the fair value of the common stock on the date of the note. Quarterly interest payments started June 30, 2009. This note has been renewed on the same terms and now has a maturity date of March 31, 2013.
|
50,000 | 50,000 | ||||||
|
Note payable to an officer and shareholder in the amount of $20,000 issued in June 2010. It is due June 10, 2012 and requires quarterly interest payments at 8% per annum. At the option of the officer, the note may be converted to 23,256 shares of the Company’s common stock at a fixed rate of $.86 per share, the price on the origination date of the note.
|
20,000 | -- | ||||||
|
Total notes payable and long-term debt
|
120,000 | 100,000 | ||||||
|
Less: Current portion
|
-- | 50,000 | ||||||
|
Notes payable and long-term debt, net of current portion
|
$ | 120,000 | $ | 50,000 |
Aggregate Maturities
|
2011
|
1,105,120 | |||
|
2012
|
714,401 | |||
|
2013
|
1,015,476 | |||
|
2014
|
60,000 | |||
|
2015
|
- | |||
| $ | 2,894,997 |
Interest expense for the years ended December 31, 2010 and 2009 was $200,642 and $228,936, respectively.
A convertible note holder has an option to purchase stock at a price of $1.86, with the amount being the difference between current outstanding principal balance and the original note payable amount. As of December 31, 2010, this amount was $169,286.
The Company has an outstanding letter of credit with a financial institution in the amount of $75,000 related to an office lease security deposit. This letter of credit expires on August 31, 2011.
|
NOTE 6 -
|
DEFERRED COMPENSATION
|
As part of an acquisition, the Company assumed a deferred compensation liability of $2,500 per month for 120 months, payable to a key employee after retirement.
The value of future payments required under the agreement is being charged to operations over the period of expected active employment until the employee reaches her retirement date, in December, 2012.
Assets intended to fund this liability include an investment in marketable securities (Note 2) with a balance of $157,014 and $115,110, as of December 31, 2010 and 2009, respectively, and a life insurance policy with a $300,000 death benefit and a cash surrender value as of December 31, 2010 and 2009, of $54,634 and $49,361, respectively. All incidents of ownership accrue to the Company, which is the designated beneficiary. There are no loans outstanding on the insurance policy.
|
NOTE 7 -
|
INCOME TAXES
|
Income tax expense for the years ended December 31, 2010 and 2009 reflect a higher or lower effective tax rate due to certain expenses that are not deductible for tax purposes, such as the impairment loss of the membership list and 50% of meals and entertainment. The difference between actual and expected tax liability also includes the effects of timing differences in deducting certain expenses such as bad debts, charitable contributions and depreciation, as well as the effects of different financial accounting and tax bases of certain assets.
Income tax expense consists of the following components:
|
Years Ending December 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Federal
|
||||||||
|
Current
|
$ | 272,425 | $ | 355,016 | ||||
|
Deferred
|
(289,809 | ) | (222,261 | ) | ||||
|
State and Local
|
||||||||
|
Current
|
28,119 | 33,711 | ||||||
|
Deferred
|
(52,853 | ) | (62,260 | ) | ||||
| $ | (42,118 | ) | $ | 104,206 | ||||
The following table reconciles the reported income taxes and the income taxes that would be computed by applying the Company’s normal tax rate to income before taxes for the periods ended December 31:
|
Years Ended December 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Statutory rate applied to earnings (loss) before income taxes
|
$ | (212,902 | ) | $ | 124,132 | |||
|
Increase (decrease) in income taxes resulting from:
|
||||||||
|
Nondeductible impairment loss
|
- | 32,148 | ||||||
|
Change in allowance for doubtful accounts
|
(31,820 | ) | (117,844 | ) | ||||
|
Depreciation variances
|
35,206 | 21,785 | ||||||
|
Audit settlements
|
133,000 | - - | ||||||
|
Utilization of net operating loss carryover
|
- | 18,240 | ||||||
|
Other
|
34,398 | 25,745 | ||||||
| $ | (42,118 | ) | $ | 104,206 | ||||
The tax effects of temporary differences that gave rise to significant portions of deferred tax liabilities are as follows:
|
December 31
|
|||||
|
2010
|
2009
|
||||
|
Deferred income tax liabilities:
|
|
|
|||
|
Primarily difference in tax basis of
|
|||||
|
Membership lists and goodwill
|
$ |
1,336,904
|
$ |
1,679,565
|
|
|
NOTE 8 -
|
STOCKHOLDERS’ EQUITY
|
Reverse Stock Split
On August 7, 2009 a 1 for 6 reverse stock split became effective. The new symbol on that date became ITNM. All share and per share amounts have been retroactively adjusted. As a result of the split, a rounding adjustment added 195 shares to the total number of outstanding shares of common stock. All stock related disclosures have been restated to report post split share quantities.
Purchase-Related Transactions
On January 2, 2009, the Company redeemed 100,000 shares of IMS common stock from the former owner of an acquired trade exchange, who was paid $450,000 in cash per the stock guarantee agreement. Payment was made from restricted cash, and the stock was placed in treasury.
On January 15, 2009, the portion of the agreement, for the purchase of an acquired trade exchange, that specified that 50,000 of shares IMS common stock were to be issued, was cancelled. The stock had not yet been issued. In exchange two notes payable were issued totaling $300,000. The notes are interest only at 4.5% per annum, and annual principal payments begin January 21, 2009. Principal payments range from $0 to $120,000 at the discretion of the note holders. This also resulted in the release of $300,000 of the stock guarantee.
On May 1, 2009, the Company redeemed 4,000 shares of IMS common stock from the former owner of an acquired trade exchange, who was paid $24,000 in cash per the stock guarantee agreement. The stock was placed in treasury.
On May 26, 2009, the Company redeemed 41,666 shares of IMS common stock from the former owner of an acquired trade exchange, who was paid $187,500 in cash per the stock guarantee agreement. Payment was made from restricted cash, and the stock was placed in treasury.
On May 31, 2009, the Company redeemed 8,334 shares of IMS common stock from the former owner of an acquired trade exchange, who was paid $25,000 in trade dollars per the stock guarantee agreement. The stock was placed in treasury.
On July 17, 2009, the Company redeemed 18,222 shares of IMS common stock from the former owner of an acquired trade exchange, who was paid $82,000 ($6,000 per month starting August 2009) in cash per the stock guarantee agreement. The stock was placed in treasury. A discounted note in the amount of $79,907 was issued for the transaction using an imputed interest rate of 4.25%.
On August 20, 2009, the Company redeemed 11,111 shares of IMS common stock from the former owner of an acquired trade exchange, who was paid $50,000 ($4,500 per month starting in September 2009) in cash per the stock guarantee agreement. The stock was placed in treasury. A discounted note in the amount of $48,943 was issued for the transaction using an imputed interest rate of 4.25%.
On October 9, 2009 IMS repurchased 42,000 shares of common stock at $4.50 per share using restricted cash of $189,000, thereby releasing $189,000 of the common stock guarantee
On January 22, 2010, IMS repurchased 41,667 shares of common stock at $4.50 per share using restricted cash of $187,500, thereby releasing $187,500 of common stock guarantee.
On March 18, 2010, IMS repurchased 1,667 shares of common stock at $3.00 per share, thereby releasing $5,000 of common stock guarantee.
From May 15, 2010 through September 15, 2010, IMS repurchased 8,333 shares of common stock at $3.00 per share, thereby releasing $25,000 of common stock guarantee.
On July 7, 2010 IMS repurchased 44,000 shares of common stock at $4.50 per share using restricted cash of $198,000, thereby releasing $198,000 of the common stock guarantee.
On August 9, 2010, IMS repurchased 8,334 shares of common stock at $3.00 per share using $25,000 of Trade dollars (earned trade account receivable), thereby releasing $25,000 of the common stock guarantee.
On December 6, 2010, IMS repurchased 45,000 shares of common stock at $4.50 per share using restricted cash of $202,500, thereby releasing $202,500 of common stock guarantee.
In the fourth quarter of 2010, IMS repurchased 5,000 shares of common stock at $3.00 per share, thereby releasing $15,000 of common stock guarantee.
Stock Issued as Compensation
On March 16, 2009 IMS issued 50,000 shares of IMS stock to a consulting firm. The fair value of the stock was $24,000.
On August 19, 2009 IMS issued 24,000 shares of common stock to the outside members of the board of directors. Six members were issued 4,000 shares each as annual compensation. The fair value of the shares was $12,000.
On August 19, 2009 IMS issued 3,000 shares of common stock to an employee of the Company as a bonus. The fair value of the shares was $1,500. The shares were taken from treasury.
On November 2, 2009 IMS issued 10,000 shares of IMS stock to a consulting firm. The fair value of the stock was $5,000.
On November 2, 2009 IMS issued 8,333 shares of common stock to an employee of the Company as a bonus. The fair value of the shares was $4,167.
On November 25, 2009 IMS issued 30,000 shares of IMS stock to a consulting firm. The fair value of the stock was $15,000.
On January 14, 2010, IMS issued 20,000 shares of IMS stock to a consulting firm. The fair value of the stock was $16,000.
On February 3, 2010, IMS issued 15,000 shares of IMS stock to a consulting firm. The fair value of the stock was $12,000.
On April 19, 2010 IMS issued 8,333 shares of common stock to the then interim Chief Financial Officer of the Company as a bonus. The fair value of the shares was $5,833.
On May 19, 2010, IMS issued 40,000 shares of IMS stock to two consulting firms. The fair value of the stock was $50,000. Of these shares, 20,000 were reissued from the treasury stock of the Company.
On June 2, 2010, IMS issued 30,000 shares of IMS stock to a consulting firm. The fair value of the stock was $30,000.
On July 12, 2010, the independent directors and the corporate secretary were each issued 8,000 shares of IMS common stock as part of their directors’ compensation. The value of the stock was $43,680, and was initially recorded as prepaid expense, amortizing over a period of 12 months.
On July 13, 2010, IMS issued 25,000 shares of IMS stock to a consulting firm. The fair value of the stock was $23,250.
On July 16, 2010, IMS issued 10,000 shares of IMS stock to a consulting firm. The fair value of the stock was $8,500.
On August 9, 2010, IMS granted 25,000 shares of IMS stock to a consulting firm. The fair value of the stock was $30,000.
Other Treasury Stock Transactions
On April 3, 2009, IMS paid $3,203 in trade dollars for 6,672 shares of IMS common stock, which were placed in treasury.
In September, 2010, the Company received 79,164 shares of common stock with a value of $67,289 in settlement of a lawsuit. The shares were placed in treasury.
Share Buyback Program
In accordance with a stock buyback plan originally approved by the board of directors in 2005 and reconfirmed on October 29, 2009, in 2010 the Company purchased 44,789 shares at a cost of $41,860. In 2009, the Company purchased 30,000 shares for a total cost of $23,933. The stock was placed into treasury.
Stock Options
Options on 106,667 shares expired in 2009. As of December 31, 2010 and 2009, there were no options outstanding.
Warrants
In May, 2006, the Company issued 583,333 fully vested warrants with an option price of $3.30, which expire in May, 2011. 91,666 warrants were exercised in March 2008 with proceeds of $302,500. 125,000 warrants were exercised in 2007 with proceeds of $412,500. The remaining balance was 366,667 as of both December 31, 2010 and 2009.
No warrants were issued in the current year.
Stock Guarantee Liability
The stock guarantee liability was reduced by $658,000 and $1,301,500 during 2010 and 2009, respectively, through treasury stock buy backs as described above.
Other Comprehensive Income (Loss)
ASC 220 establishes rules for reporting and displaying of comprehensive income and its components. Comprehensive income is the sum of the net income (loss) as reported in the consolidated statements of operations and other comprehensive income transactions. Other comprehensive income transactions that currently apply to the Company result from changes in exchange rates used in translating the financial statements of its wholly owned subsidiary in Toronto, Canada.
The total of these various items was $26,699 in 2010 and $40,259 in 2009.
Proposed Sale of Stock
In 2010, the Company worked to file an S-1 Registration statement with the SEC for the purpose of raising capital through the sale of equity units. The Company has decided to indefinitely postpone raising capital via this route as it feels that timing and market conditions are not conducive to a successful offering at this time. Accordingly, approximately $116,000 in legal and other costs relating to the offering were written off in 2010.
|
NOTE 9 -
|
RELATED PARTY TRANSACTIONS
|
The Company leases its executive offices and principal operating facilities in New Berlin, Wisconsin from Glendale Investments, LLC, a Wisconsin limited liability company which is owned by officers and stockholders of the Company. The original lease began October 1, 2002 and extended through September 30, 2010. Upon expiration, the lease was renewed for a term of 3 years, through September, 2013. Under the old lease, payments were $8,000 monthly plus certain operating costs, including sales and use taxes, insurance, utilities, maintenance, and non-structural repairs. Under the new lease, the monthly payment increased to $9,740 per month plus operating costs. Total payments in 2010 and 2009 were $101,219 and $91,500, respectively.
The Company currently leases office space in Rochester, New York, from a member of the board of directors of the Company. The triple net lease commenced in February 2007, and expires December 31, 2011. Monthly rental payments are $6,644. The Company believes that the rental payments required and other terms of the lease are comparable to those available for similar space from unaffiliated, third-party lessors in the area. Total payments in 2010 and 2009 were $79,728 each year.
See Note 5 for a discussion of related party debt.
The Company sold trade dollars to employees and directors at a discount during the year ended December 31, 2010 and 2009 of $217,793 and $78,935, respectively. The value of trade dollars sold related to these transactions was $368,737, and $166,949 during the years ended December 31, 2010 and 2009, respectively.
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NOTE 10 -
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COMMITMENTS AND CONTINGENCIES
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Leases
The Company has various leases for office facilities and vehicles which are classified as operating leases, and which expire at various times through 2014. Total rent expense for all operating leases for 2010 and 2009, is summarized as follows:
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2010
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2009
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|||||||
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Related party leases
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$ | 180,947 | $ | 172,200 | ||||
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Office leases
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762,383 | 805,790 | ||||||
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Vehicle leases
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18,399 | 15,795 | ||||||
| $ | 961,729 | $ | 993,785 | |||||
Minimum future lease commitments as of December 31, 2010, are summarized as follows:
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Year ending December 31
|
Office Facilities
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Vehicles
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||||||
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2011
|
$ | 421,143 | $ | 16,284 | ||||
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2012
|
307,484 | 7,473 | ||||||
|
2013
|
259,271 | 6,672 | ||||||
|
2014
|
156,650 | 4,448 | ||||||
|
thereafter
|
279,990 | - | ||||||
| $ | 1,424,538 | $ | 34,877 | |||||
Employment Agreements
On March 10, 2007, we renewed the employment agreements with Donald F. Mardak, our president, Danny W. Weibling, then our Principal Financial Officer and John E. Strabley, and Dale L. Mardak our senior vice presidents, for three year terms. On November 20, 2008 the board of directors approved amending the contracts to freeze the compensation schedule at the 2008 salaries, in exchange for which each contract was modified to add one additional year to the original term.
Terms of each were:
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o
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Automatic renewal clause for additional one-year periods thereafter, unless terminated by either IMSL or the employee..
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|
o
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Eighteen month non compete clause
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|
o
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Confidentiality of trade secrets clause.
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|
o
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An annual auto allowance of $6,000-$18,000, depending on position.
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|
o
|
Stock options at the discretion of the CEO.
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|
o
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Change of control provisions
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On March 31, 2009, each of the above officers agreed to a 10% reduction in salary. The base salaries became $207,000, $171,000, $157,500 and $148,500, respectively. In January, 2010, the salary reduction was rescinded and the salaries were reinstated to the 2008 levels.
Additionally, all agreements contained a change of control provision. In the event of a merger, acquisition of IMSL or sale of substantially all of its assets, Donald Mardak's contract provided for compensation equal to two years' salary plus a lump sum payment of $400,000, John Strabley's and Dale Mardak's contracts provided for compensation equal to one year's salary plus a lump sum payment of $200,000. David Powell was to receive one year’s salary plus a lump sum payment of $100,000.
On February 28, 2011, the Compensation Committee of the board finalized employment agreements with Donald Mardak, Principal Executive Officer, John Strabley and Dale Mardak, Named Executive Officers, and David Powell, Principal Financial Officer, effective March 1, 2011, as follows:
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●
|
Salaries of $250,000, $192,000, $185,000, and $135,000, respectively, with increases to be determined annually by the board.
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|
●
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Bonuses ranging from $6,000 to $30,000, per individual, contingent on meeting pre-tax income goals.
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|
●
|
Stock options at the discretion of the Board of Directors
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|
●
|
Automatic renewal clause for additional one-year periods thereafter, unless terminated by either IMSL or the employee.
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|
●
|
Twelve month non-compete clause and confidentiality of trade secrets clause.
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|
●
|
Annual auto allowances of $6,000-$18,000, depending on position
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|
●
|
Health insurance benefit paid for by IMSLs.
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|
●
|
Donald Mardak, John Strabley, and Dale Mardak will receive severance payments of two years’ salary and lump sum payments of $400,000, $300,000 and $300,000 respectively in the event of involuntary termination, payable upon termination.
|
|
●
|
In the event that a new Board of Directors substantially reduces their role in the Company, Donald Mardak, John Strabley and Dale Mardak will receive lump sum payments of $600,000, $400,000 and $400,000 respectively.
|
|
●
|
All agreements contain a change of control provision. In the event of a merger, acquisition of IMSL or sale of substantially all of its assets, Donald Mardak's contract provides for compensation equal to two years' salary plus a lump sum payment of $400,000, John Strabley's and Dale Mardak's contracts provide for compensation equal to two years' salary plus a lump sum payment of $300,000. David Powell will receive one year’s salary plus a lump sum payment of $150,000.
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|
NOTE 11 -
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CONTINGENT LIABILITIES
|
In the ordinary course of business, the Company is occasionally involved in litigation, both as plaintiff and defendant. Management either litigates or settles claims after evaluating the merits of the actions and weighing the costs of settling vs. litigating.
In May 2010, the former CFO of the Company filed a lawsuit against the Company, alleging wrongful termination. In December, 2010, the Company reached a settlement agreement in this matter. The settlement agreement required a lump sum payment of $100,000 in December, 2010, and monthly installment payments of $20,000 from February through December, 2011. The Company anticipates receiving $50,000 from its insurance carrier related to the settlement.
There are no other material legal actions pending against the Company.
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NOTE 12 -
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SUBSEQUENT EVENTS
|
On February 7, 2011, in accordance with the stock buyback plan described in Note 9, the Company purchased 50,000 shares at a cost of $34,595. The shares were placed in treasury.
In accordance with the stock buyback plan described above, on February 28, 2011 the Company purchased 1,000 shares at a cost of $725. The shares were placed in treasury.
On February 28, 2011, the Company purchased the assets of a trade exchange in Peterborough, Ontario. The purchase price was $Canadian 60,000, payable $20,000 in cash, $20,000 of a note payable with a 12 month term, and $20,000 trade dollars.
F-22