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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from _____________ to _____________
Commission File No. 0-24073
IBS INTERACTIVE, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 13-3817344
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2 RIDGEDALE AVENUE, SUITE 350
CEDAR KNOLLS, NEW JERSEY 07927
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (973) 285-2600
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on
Which Registered
COMMON STOCK, $.01 PAR VALUE PER SHARE THE BOSTON STOCK EXCHANGE, INC.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
State issuer's revenues for its most recent fiscal year. $9,805,000.
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant as of March 26, 1999 was approximately
$49,077,483.
As of March 26, 1999, 3,698,004 shares of the Registrant's common stock,
$.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. The information called for by Part
III, Items 9-12, is incorporated by reference to the definitive Proxy Statement
for the Company's 1999 Annual Meeting of Stockholders, which will be filed on or
before April 30, 1999.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, INCLUDING STATEMENTS REGARDING THE COMPANY'S (AS HEREINAFTER DEFINED)
EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.
FORWARD-LOOKING STATEMENTS INCLUDE: THE PLANS AND OBJECTIVES OF THE COMPANY FOR
FUTURE OPERATIONS AND TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. ALL FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE BASED
ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE THIS REPORT IS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, (I) A DECLINE
IN GENERAL ECONOMIC CONDITIONS OR A LOSS OF MAJOR CUSTOMERS, (II) THE
UNAVAILABILITY OR MATERIAL INCREASE IN THE PRICE OF TELECOMMUNICATIONS SERVICES
AND FACILITIES, (III) AN ADVERSE JUDGEMENT IN PENDING OR FUTURE LITIGATION AND
(IV) TECHNOLOGICAL DEVELOPMENTS AND INCREASED COMPETITIVE PRESSURE FROM CURRENT
COMPETITORS AND FUTURE MARKET ENTRANTS. SEE "ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CERTAIN FACTORS
WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE." THE COMPANY UNDERTAKES NO
OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY FUTURE REVISIONS IT MAY MAKE
TO FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS OF ISSUER
IBS Interactive, Inc. (the "Company") was originally incorporated in the
state of Delaware on February 28, 1995 under the name Internet Broadcasting
System, Inc. On March 10, 1998, the Company changed its name to IBS Interactive,
Inc.
The Company provides a broad range of computer networking, programming,
applications development and Internet services primarily to businesses and
organizations. These services are designed to permit clients to outsource a
variety of business needs such as computer networking, programming, maintenance,
Internet connectivity and technical support. The Company believes that by
combining computer consulting and Internet related services it is positioned to
capitalize on increasing demand by businesses and organizations for
comprehensive, cost-effective information technology solutions.
The systems integration services offered by the Company include network
planning, design, implementation, operations, optimization, consulting and
training. The Company's programming and applications development services
consist primarily of custom programming for Internet and Intranet applications,
including distance learning, e-commerce and Web-site development and
maintenance. Internet access services offered by the Company include dedicated
leased line, frame relay and digital subscriber line ("DSL") connections, Web
hosting, dial-up access and electronic mail services. For the year ended
December 31, 1998, systems integration, programming and applications development
and Internet services accounted for approximately 65%, 22% and 13%,
respectively, of the Company's revenues.
The Company's principal sales and marketing efforts are focused on
businesses and organizations with systems integration, applications development
and Internet connectivity needs. The Company's clients during the year ended
December 31, 1998 included Aetna/U.S. Healthcare Inc. ("Aetna"); Mobil Oil
Corporation; Black & Decker Corp.; TRW, Inc.; Foster-Wheeler; Unilever; New York
University; The Wharton School of Business; Commerce Bank; The Archdiocese of
New York (Catholic Healthcare Network); and the National Aeronautics and Space
Administration.
The Company's telecommunications network is comprised of a secure network
operations center ("NOC") in Cedar Knolls, New Jersey, leased high-speed data
lines and 39 Points-of-Presence ("POPs") serving northern New Jersey, New York,
Virginia and Alabama. The proximity of a POP to subscribers enables subscribers
in the area in which a POP is located to access the Internet through a local
telephone call. The Company currently supports 56k and ISDN technologies at each
of its POPs. The Company had approximately 9,500 dial-up subscribers as of March
26, 1999. For the year ended December 31, 1998, dial-up access services
accounted for approximately 7% of the Company's revenues.
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Because of the growth in its core consulting and Internet businesses and
the timing of acquisitions consummated by the Company in 1998, management is in
the process of developing a formal plan to fully integrate the acquired
businesses with its core operations. As such, for purposes of defining and
reporting business segments for the years ended December 31, 1997 and 1998, the
Company considers its major businesses to be: (i) System Integration,
Programming and Applications Development Consulting; (ii) Internet Services;
(iii) Web Design (principally the Design FX acquisition); and (iv) Network
Installation (principally the Halo (as hereinafter defined) acquisition). A
Corporate segment also provides administrative, marketing and treasury support
services (see note 13 to the consolidated financial statements).
GENERAL DEVELOPMENT OF BUSINESS - ACQUISITIONS
In April 1996, the Company acquired all of the outstanding capital stock
of Interactive Networks, Inc. ("Interactive") in consideration for the issuance
of 377,536 shares of the Company's common stock, $.01 par value per share (the
"Common Stock"). At the time of the combination, Interactive had approximately
400 dial-up subscribers, two POPs in New Jersey and one POP in New York City.
In May 1996, the Company acquired substantially all of the assets of
Mordor International ("Mordor"), a proprietorship, in consideration for a
$20,000 cash payment. At the time of the acquisition, Mordor had approximately
400 dial-up subscribers and network equipment valued at $15,000.
In March 1997, the Company acquired substantially all of the assets of
AllNet Technology Services, Inc. ("AllNet"), in consideration for (i) a $75,000
cash payment and (ii) the issuance of 15,883 shares of Common Stock. At the time
of the acquisition, AllNet had approximately 1,000 dial-up subscribers and five
POPs in the northern New Jersey area. AllNet's computer and network equipment
was valued at $75,000.
In January 1998, the Company acquired all of the issued and outstanding
capital stock of Entelechy, Inc. ("Entelechy") in consideration for the issuance
of an aggregate of 277,434 shares of Common Stock, of which 147,310 shares were
issued at the closing and 130,124 shares are to be issued ratably on each of the
first, second and third anniversary of the acquisition closing date, provided
that, the former Entelechy stockholders to whom such shares are issuable remain
employees of the Company on each respective anniversary. The Company incurred a
charge of approximately $180,000 relating to the issuance of such Common Stock
in 1998 and expects to incur charges of $197,000, $197,000 and $17,000 relating
to the issuance of such Common Stock in each of the years ending December 31,
1999, 2000 and 2001, respectively. The acquisition was accounted for as a
purchase. On November 4, 1998, Entelechy was formally merged into the Company.
In January 1998, the Company acquired substantially all of the assets of
JDT WebwerX LLC (consisting primarily of computer equipment and intangible
assets) in consideration for a $35,000 cash payment. The acquisition was
accounted for as a purchase.
On September 24, 1998, the Company entered into a Membership Interest
Purchase Agreement with all of the members of DesignFX Interactive, LLC
("DesignFX"), a Web-design, programming and hosting company located in Cherry
Hill, New Jersey, whereby the Company acquired all of the issued and outstanding
membership interests of DesignFX in exchange for $1,251,000 (subject to certain
adjustments) of unregistered shares of Common Stock valued by the parties at
$6.25 per share. The combination has been accounted for as a pooling of
interests. Accordingly, the Company's financial statements have been restated
for all periods presented to include the results of operations and financial
position of DesignFX. On December 9, 1998, DesignFX was formally merged into the
Company.
On December 1, 1998, the Company acquired substantially all of the assets
of MBS, Inc. ("MBS"), a Huntsville, Alabama-based Microsoft Certified Technical
Education Provider - Partner Level, for approximately $50,000, the issuance of
4,493 shares of Common Stock and the assumption of approximately $150,000 in
liabilities.
On December 10, 1998, the Company entered into a Membership Interest
Acquisition Agreement (the "Acquisition Agreement") with Halo Network
Management, LLC ("Halo"), an Eatontown, New Jersey-based network management
company that offers full-service network solutions including planning,
installation and maintenance and all of the members of Halo. Pursuant to the
terms of the Acquisition Agreement, the Company acquired all of the issued and
outstanding membership interests of Halo in exchange for $1,425,000 (subject to
certain adjustments) of unregistered shares of Common Stock valued by the
parties at $6.50 per share. The combination has been accounted for as a pooling
of interests. Accordingly, the Company's financial statements have been restated
for all periods presented to include the results of operations and financial
position of Halo.
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GENERAL DEVELOPMENT OF BUSINESS - FINANCINGS
In August 1995, the Company issued twenty $5,000 face amount promissory
notes with a term of three years in the aggregate principal amount of $100,000
(the "1995 Notes"). The 1995 Notes accrued interest at a rate of 6% and were
repaid in June 1998. In addition, each purchaser of the 1995 Notes was entitled
to receive 2,449 shares of Common Stock for every note purchased.
On October 31, 1997, the Company entered into a series of financing
agreements in the aggregate amount of $200,000 (the "1997 Financing") with eight
individual investors (collectively, the "1997 Notes"). The 1997 Notes accrued
interest at a rate of 8% and were payable in full upon the closing of the
Company's initial public offering of Common Stock. In June 1998, the Company
repaid the outstanding principal, aggregating $200,000, and accrued interest,
aggregating $10,000, on the 1997 Notes. In connection with the issuance of the
1997 Notes, investors also received warrants to purchase up to an aggregate of
48,872 shares of the Company's Common Stock at an exercise price of $3.54 per
share through October 2000. The Company capitalized the fair value ascribed to
the warrants ($54,000), which included a value reflective of the excess of the
expected initial public offering price less the exercise price, and amortized
such amount over the life of the 1997 Notes. Interest expense for the year ended
December 31, 1998, including the amortization of the value ascribed to warrants,
totaled $45,000. The effective interest rate on the 1997 Notes, which includes
the amortization of the value of the warrants, approximates 68% per annum.
On May 14, 1998, the Company's registration statement on Form SB-2, as
amended (file number 333-47741), relating to the initial offering of its Common
Stock was declared effective by the SEC (the "Offering"). Whale Securities Co.,
L.P. acted as the underwriter in connection with the Offering which was
consummated on May 20, 1998. In connection with the Offering, the Company
registered, issued and sold 1,380,000 shares of Common Stock, including 180,000
shares of Common Stock issued in connection with the exercise in full of the
underwriter's over-allotment option at an initial public offering price of $6.00
per share resulting in proceeds to the Company (net of underwriting discount,
commissions and other expenses payable by the Company) in the aggregate
approximate amount of $6,642,000. Additionally, the Company registered 120,000
shares of Common Stock underlying warrants to purchase Common Stock sold by the
Company to the underwriter for $100. The warrants are exercisable for a
four-year period commencing on May 14, 1999 at a price of $8.10 per share.
COMPANY SERVICES
SYSTEMS INTEGRATION
The Company provides a broad range of systems integration services,
including network planning, design, implementation, operations, optimization,
consulting and training.
NETWORK PLANNING. Network planning focuses on providing clients with
strategic and tactical analyses of their current network operations and future
network requirements. Network planning services provided by the Company
encompass a number of critical planning elements including: (i) defining client
business requirements; (ii) developing strategic information architectures;
(iii) performing network baseline audits; (iv) preparing capacity plans for the
physical network, logical transport and services; (v) selecting preferred
technologies; and (vi) conducting network security audits and planning.
NETWORK DESIGN. Network design includes services that assist in the design
of physical, logical and operational information infrastructures. These services
involve detailing the network specifications and implementation tactics
necessary to achieve clients' business objectives. To accomplish this task, the
Company generates a set of work papers that identify the specific technologies
to be used and the manner in which such technologies will be configured and
implemented. These work papers also provide an analysis of the manner in which
new technology will be integrated with the client's existing hardware and
software and the manner in which such integrated components will be managed on
an ongoing basis. Examples of network design services offered by the Company
include: (i) life-cycle planning, (ii) developing future technology integration
plans, (iii) defining functional requirements, (iv) developing multi-vendor
integration plans, (v) preparing technical design documentation, (vi) developing
engineering specifications and documents, (vii) preparing specifications in
connection with requests for proposals or other make/buy criteria and (viii)
providing detailed component purchasing lists.
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NETWORK IMPLEMENTATION. Network implementation includes high value-added
network services such as IP addressing and router configuration, as well as
traditional system integrator functions such as hardware and software
installation and procurement. To serve its clients' networking needs, the
Company maintains affiliations and reseller arrangements with various hardware
and software vendors, including Hewlett Packard Co., COMPAQ, Novell, Cisco
Systems and a variety of distributors. The Company customizes an implementation
plan for each client, which may include the following activities: (i) project
management; (ii) installing the cabling infrastructure to support network
services; (iii) integrating new hardware and software products and systems; (iv)
building network operations and management centers; (v) re-configuring and
upgrading network elements, systems and facilities; and (vi) implementing
installation documentation, conformance testing and compliance certification. In
addition, the Company offers Year 2000 Compliance testing services on customer
network hardware and off-the-shelf vendor software, and the Company will assist
the customer in correcting any Year 2000 Compliance issues that are identified.
NETWORK OPERATIONS. Network operations includes ongoing tasks necessary to
keep the client's network fully operational. The Company provides network
operations services to a range of clients, including those with client/server
networks running both Internet (TCP/IP) and workgroup (Novell and Microsoft)
protocols intermingled with existing (SNA) networks. The Company performs
specific operation activities in accordance with individual client requirements
only after analyzing the client's existing operating practices. Examples of
network operation activities undertaken by the Company include: (i) network
administration, including management of user accounts, service levels and client
administrative practices; (ii) network utilization analysis, involving ongoing
measurement of network activity against established network baselines; (iii)
ongoing management of documentation, including physical assets, policies and
procedures; (iv) network trouble shooting, involving fault detection, isolation,
repair and restoration; (v) alarm management, including setting alarm levels,
cross-correlation, problem diagnosis and dispatch of service resources; (vi)
network backup, including design and supervision of backup processes and
policies and exercise of disaster recovery procedures; and (vii) routine moves,
additions and changes to network elements, infrastructure and services.
NETWORK OPTIMIZATION. Network optimization involves maximizing a client's
rate of return on network investments through such means as reduction of
operating costs and increases in network utilization. Optimization is closely
related to each of the other phases of network development. Optimization
services may be long term in nature, address issues such as cost containment and
utilization and are often designed to optimize local area network
infrastructures. Network optimization services offered by the Company can also
be packaged as discrete projects, designed to present alternatives for
optimization of workgroup, departmental, building or campus network investments.
Additionally, the Company can provide assistance to clients in optimizing
"logical" networks, by addressing a protocol, service or application operating
in the larger context of the client's network. Examples of network optimization
services provided by the Company include: (i) recommendations for efficient
allocation of bandwidth; (ii) network traffic analysis, identification of
bottlenecks and recommendations for change; (iii) network process
re-engineering; and (iv) knowledge transfer to client operations personnel on
topics such as basic practices, or operations of network management tools and
stations.
CONSULTING. Consulting consists of providing businesses and organizations
with detailed reports and recommendations regarding any or all aspects of their
network operations, from a review of the entire network to an audit of a
particular protocol. Consulting services provided by the Company are closely
related to network optimization and include: (i) security audits and protocol
recommendations, (ii) disaster recovery plan audit and protocol recommendations,
(iii) network programming and applications, (iv) network cost audits and (v)
strategic plan development.
TRAINING. Training services are provided to businesses and organizations
seeking information and guidance with respect to the manner in which such
entities may effectively utilize computer networks, the Internet and other
information technology prior to the time such businesses make investments of
capital, time and/or personnel. The Company also offers customized educational
programs that are designed to provide an opportunity for an entity to
conceptualize and determine how computer networks and the Internet can best be
utilized to serve the entity's needs. Additionally, the Company assists
organizations that need technical support in establishing and maintaining
internal network operations. Training services offered by the Company include:
(i) Internet strategy development, (ii) basic Internet consulting, (iii)
one-on-one Internet training for executives and (iv) group training for
non-computer professionals.
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In addition, through its 1998 acquisition of substantially all of the
assets of MBS, the Company is now a Microsoft Certified Technical Education
Center or "CTEC." CTECs are training centers authorized by Microsoft to offer
instructor led classes, Web-based training and self-study programs to computer
professionals on its technical networking and development products. A CTEC must
use Microsoft Official Curriculum and Microsoft Certified Trainers to provide
education to its customers. The courses a CTEC teaches prepare students to pass
Microsoft Certification Tests to become Microsoft Certified System Engineers and
Microsoft Certified Solution Developers. In Huntsville, the Company is a
Microsoft CTEC "Partner" Level, which is a higher "nominated" designation than
the normal "member" level status. The Company has two Microsoft certified
classrooms and three full-time and two part-time Microsoft Certified Trainers on
staff or under contract. The Company offers more Microsoft Official Curriculum
courses then any other CTEC in its Alabama marketing area, teaching 50 to 100
students a quarter, and has a higher passing rate for Microsoft certification
tests then any other CTEC in Alabama.
PROGRAMMING AND APPLICATIONS DEVELOPMENT
Programming for Intranet and Internet applications requires knowledge of
several different programming languages. These include PERL scripting and UNIX,
Windows NT, C++, JAVA, HTML, Cold Fusion and customized database and
applications programming. The Company maintains a full range of network and
applications programming expertise to: (i) ensure that clients' networks and
applications are specifically tailored to meet their requirements, (ii) develop
and maintain clients' Web-sites, (iii) provide clients with technical
assistance, (iv) provide consulting services and (v) ensure the secure and
continuous running of the Company's Internet hosting and access networks.
Examples of programming and applications development services provided by the
Company include customized applications development, Web-site development and
maintenance and chat-room hosting and development.
CUSTOMIZED APPLICATIONS DEVELOPMENT. Customized applications development
includes services such as: E-Commerce solutions; Oracle and Microsoft Access
database development of full-featured "shopping cart" style on-line catalogs to
enhance Web-sites and Intranets; and Distance Learning applications development.
Distance Learning applications allow businesses and organizations to distribute
course material, administer training evaluations and manage employee-student
status from a single (or multiple) location via the Internet or an Intranet.
Distance Learning also allows for a globally deployed, instantaneously
up-datable, training management system. Distance Learning applications
development incorporates the latest technologies in Internet programming
development, including integration of desk-top virtual reality, streaming
audio/video segments and database applications that track employee-student
status and performance.
WEB-SITE DEVELOPMENT AND MAINTENANCE. Web-site development involves the
design and development of a client's Web-site production. Working with clients,
the Company designs, creates and maintains multi-media, interactive Web-sites
for its clients, using the latest applications and development tools, such as
Oracle and Cold Fusion.
INTERNET SERVICES
The Company provides a broad range of Internet services, including T-3,
T-1 and DSL service, dedicated leased lines, dial-up services and hosting
services.
INTERNET ACCESS. The Internet access options offered by the Company to its
subscribers include: (i) 56 Kbps, T-1 and T-3 service; (ii) integrated services
digital networks (ISDN); (iii) DSL; (iv) dedicated modems for SLIP/PPP access;
and (v) dial-up accounts. The Company's high-speed, digital communications
network provides business and consumer subscribers with direct access to the
full range of Internet applications and resources, including global electronic
mail, the Web, USENET news groups, chat-rooms and file transfer protocols.
HOSTING. Internet hosting is a multi-media Internet service that permits
clients to have a continued presence on the Web directly through the Company's
high-speed servers and a multi-homed Internet network. Hosting services provided
by the Company include virtual hosting and co-location. Virtual hosting allows a
client's Web-site (which may be hosted on either a UNIX or NT server platform)
to be connected to the Internet via the Company's NOC. Co-location permits a
client's Internet content to be hosted on a dedicated server located at the
Company's NOC, the server is either owned by the Company or leased to the
client. Co-location at the Company eliminates or substantially reduces the
capital investments a client would otherwise be required to make to purchase and
manage necessary hardware, software and network operations and eliminates
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certain of the client's security concerns associated with connection of the
client's private network(s) to a Web server.
NETWORK INFRASTRUCTURE
The Company facilitates access to the Internet by means of a regional
telecommunications network consisting of high-speed dedicated telecommunications
links (Multiple T-3 and multiple T-1 links), computer hardware and software,
seven physical and 32 virtual POPs in locations throughout New Jersey, Virginia,
Alabama, New York and the NOC, which securely houses the Company's back-end
servers and networking equipment.
The Company's POPs, external communication links and NOC are
interconnected by a robust, router-based TCP/IP network, which includes
interconnection of POPs via T-1 rate facilities. Physical local loop
connectivity is provided over fault tolerant SONET fiber facilities and
diverse-route conventional facilities. The Company maintains high-bandwidth
paths to the Internet with UUNet Worldcom, Winstar, Sprint, ICI/Digex, CRL, Cox
and Cable & Wireless. Each physical POP includes network access server
(dial-access terminal server) hardware, a router and leased-line interface
equipment. The virtual POPs are local telephone numbers (outside of the local
calling area of the physical POPs) through which calls are aggregated by a local
exchange carrier or other service provider prior to transfer to the Company via
a dedicated trunk route.
The Company operates numerous application specific server systems to
provide functionality for client applications and to support Web-site hosting
and other business services. The Company has made and expects to continue to
make significant investments in its computing hardware that includes Pentium PC
servers (running Windows NT and BSDI UNIX) and SUN UltraSparc servers. To
efficiently and effectively serve its clients and subscribers, the Company
utilizes multiple types of operating systems. The Internet services network
(dial-access consumer, e-mail, news and consumer Web) utilizes UNIX for its
scalability and security features, while business clients are served through
either UNIX or Microsoft-based technologies.
The Company is currently dependent upon Bell Atlantic, Bell South, MCI
WorldCom, Sprint, Hyperion, ICI/Digex and KMC to provide leased
telecommunication lines on a cost-effective and continuous basis, and on UUNet
Worldcom, Winstar, Sprint, ICI/Digex, CRL, Cox and Cable & Wireless to provide
Internet access. In accordance with industry custom, the Company does not
maintain interconnect agreements with these suppliers. The temporary
discontinuation or termination of service to the Company by any of these
suppliers would result in interruptions in the Company's provision of service to
its clients, which would adversely affect its business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors Which May Affect the Company's Future Performance -- Dependence
on Third-Party Suppliers and Manufacturers; Possible Service Interruptions and
Equipment Failures."
TECHNICAL SUPPORT
The Company believes that reliable 24 hours a day, seven days a week
technical support is critical to retaining existing, and attracting new, clients
and subscribers. Currently, the Company provides 24 hours a day, seven days a
week (i) live telephone assistance, (ii) e-mail-based assistance, (iii) help
sites and Internet guide files on the Company's Web-site and (iv) printed
reference material.
SALES AND MARKETING
The Company's sales and marketing strategy is driven by the Company's
ability to offer its clients comprehensive computer consulting and Internet
related services ranging from Internet access, Web-site programming and
applications development and hosting to computer networking, systems
consultation, integration and management. The Company's marketing efforts are
primarily focused on large- and medium-sized businesses and organizations, and
to a lesser extent, on small businesses and consumers. The Company utilizes both
direct selling and third-party channels for marketing its services.
The Company's marketing efforts principally involve print, radio and
direct mailing in areas within the geographic scope of the Company's network.
The Company believes that the continued expansion of its print, radio and
targeted direct mailings are important factors in its ability to continue to
expand its business and compete effectively.
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The Company also generates sales leads through referrals from clients,
responses to request for proposals, referrals from other computer consulting
businesses and Internet Service Providers, the Company's own Web-site and
associated links and industry seminars and trade shows. Efforts in all of these
areas will continue and will be increased in 1999. As a result of the continuing
extension of services offered by the Company in all areas, it is able to offer
its clients a wider range of solutions and capitalize on opportunities that it
previously outsourced.
The Company currently employs 12 full-time sales people, with six assigned
to the northern New Jersey/New York City metropolitan area, three assigned to
central and southern New Jersey and three assigned to the Southeast region of
the United States. The Company believes that the technical knowledge of its
executive officers and network engineers enhances the efforts of its sales staff
and enables the Company to develop sales proposals meeting the specific needs
and budgets of its prospective clients. In addition to increasing its sales and
marketing staff, a training effort has been undertaken to ensure that all new
sales and marketing employees, as well as current ones, are fully knowledgeable
of the complete spectrum of services the Company offers to clients.
CLIENTS
The Company's client base consists primarily of businesses and
organizations with systems integration, applications development and Internet
connectivity needs. The Company's client base also includes, as of March 26,
1999, approximately 9,500 consumer Internet dial-up accounts. The Company
intends to continue to focus it sales and marketing efforts on the needs of
businesses and organizations, while also continuing to expand its network
operations. The Company intends to expand its client base in all of its business
lines through internal growth as well as through acquisitions to lessen its
dependence on any one particular client or group of clients.
The Company is dependent on a limited number of clients for a substantial
portion of its revenues. For the year ended December 31, 1998, the Company's
largest client, Aetna, accounted for approximately 35% of the Company's
revenues. Revenues derived from the Company's consulting contracts are generally
non-recurring in nature. The Company's contract with Aetna runs through December
2000 and provides for the Company to render services pursuant to purchase
orders, each of which constitutes a separate contractual commitment by Aetna.
Non-renewal or termination of the Company's contract with Aetna or the failure
by Aetna to issue additional purchase orders to the Company under the existing
contract would have a material adverse effect on the Company. There can be no
assurance that the Company will obtain additional contracts for projects similar
in scope to those previously obtained, that the Company will be able to retain
existing clients or attract new clients or that the Company will not remain
largely dependent on a limited client base which may continue to account for a
substantial portion of the Company's revenues. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
Which May Affect the Company's Future Performance -- Dependence on Aetna;
Non-Recurring Revenues."
COMPETITION
The markets for the Company's services are highly competitive. The Company
believes that competition in the systems integration and programming and
applications development consulting market is based upon quality of service,
responsiveness to client demands, the number and availability of qualified
engineers and programmers, price, project management capability, technical
expertise, size and reputation. Additionally, the Company further believes that
competition in the Internet services market is primarily based upon quality of
service, access to local POPs, range of services, technical support and
experience.
The Company competes with numerous large companies that have substantially
greater market presence and financial, technical, marketing and other resources
than the Company, including (i) large information technology consulting and
service providers and application software firms such as Andersen Consulting,
Cambridge Technology Partners, Electronic Data Systems Corporation and American
Management Systems; (ii) international, national, regional and commercial
Internet Service Providers such as Performance Systems International, Inc.,
Earthlink, Mindspring and UUNet Worldcom; (iii) established on-line services
companies such as America Online, Inc.; (iv) computer hardware and software and
other technology companies such as IBM and Microsoft Corp.; (v) national
long-distance carriers such as AT&T Corp., MCI Worldcom and Sprint, and regional
telephone companies, including Bell Atlantic and Bell South, and cable
operators; and (vi) major accounting firms. Many of the Company's competitors
have announced plans to expand their service offerings and increase their focus
on the computer networking and Internet related services' markets. As a result,
- 7 -
<PAGE>
competition is expected to intensify for highly skilled network engineers,
programmers and technicians.
As a result of increased competition, the Company also expects to
encounter significant pricing pressure, which in turn could result in
significant reductions in the average selling price of the Company's services.
There can be no assurance that the Company will be able to offset the effects of
any such price reductions through an increase in the number of clients, higher
revenue from enhanced services, cost reductions or otherwise. In addition, the
Company believes that continuing consolidation in the Internet services market
could result in increased price and other competition in the industry. Increased
price or other competition could make it difficult for the Company to gain
additional clients and subscribers and could have a material adverse effect on
the Company. There can be no assurance that the Company will be able to compete
successfully. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors Which May Affect the Company's
Future Performance -- Competition."
EMPLOYEES
As of March 26, 1999, the Company had 128 full-time employees, including
five executive officers, eight programmers, 63 network engineers and
technicians, 20 persons devoted exclusively to providing technical support to
clients, 13 persons dedicated to sales and marketing activities and 19
administrative personnel; and five part-time employees. None of the Company's
employees are represented by a labor union, and the Company is not a party to
any collective bargaining agreement. The Company believes that its employee
relations are good. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors Which May Affect the
Company's Future Performance -- Recruitment and Retention of Qualified
Personnel."
To maximize the utilization of its resources and evaluate the skills and
knowledge of certain prospective employees, the Company routinely hires
temporary personnel to satisfy increased demand for personnel in connection with
the commencement of new projects.
ITEM 2. DESCRIPTION OF PROPERTY
The Company serves its clients through its corporate headquarters and NOC,
each located in Cedar Knolls, New Jersey, and its regional offices located in
New Jersey, Virginia and Huntsville, Alabama, as well as its network of seven
physical POPs.
At December 31, 1998, the Company did not own any real property and
conducted its operations at the following leased premises:
<TABLE>
<CAPTION>
APPROXIMATE
ANNUAL
DESCRIPTION OF SQUARE LEASED
LOCATION FACILITY FOOTAGE COST LEASE TERM
- - -------- -------------- ------- ----------- ----------
<S> <C> <C> <C> <C>
2 Ridgedale Ave., Corporate 9,830 $ 155,000 5/01/97-3/31/03
Suite 350 headquarters, sales,
Cedar Knolls, NJ technical support,
07927 customer support,
administration
Two Greentree Sales, customer 6,715 $ 110,000 12/20/98-12/31/03
Centre, support, technical
Suite 120 support
Marlton, NJ 08053
143 Highway 35, Sales, customer 2,325 $ 32,000 month to month
Suite 105 support, technical
Eatontown, NJ 07724 support
4920 C. Corporate Sales, customer 2,435 $ 27,000 month to month
Dr. Huntsville, AL support, technical
35805 support
Vantage Point, Sales, customer 1,261 $ 16,000 4/1/98-3/31/03
Suite 2A support, technical
100 Highway 36 support
West Long Branch, NJ
07764
8200 S. Memorial Sales, customer 1,800 $ 18,000 1/1/98-1/31/01
Pkwy. support, technical
Huntsville, AL 35805 support
</TABLE>
- 8 -
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
ANNUAL
DESCRIPTION OF SQUARE LEASED
LOCATION FACILITY FOOTAGE COST LEASE TERM
- - -------- -------------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Vantage Point, Sales, customer 1,261 $ 16,000 4/1/98-3/31/03
Suite 2A support, technical
100 Highway 36 support
West Long Branch, NJ
07764
8200 S. Memorial Sales, customer 1,800 $ 18,000 1/1/98-1/31/01
Pkwy. support, technical
Huntsville, AL 35805 support
</TABLE>
The Company believes that all of its leased premises are in generally good
condition, are well maintained and are adequate for its current operations.
In addition to its office space, the Company currently leases the sites at
which its physical POPs are located. The Company believes that it would be
readily able to locate other space in which to house its corporate headquarters
and NOC, regional offices and its physical POPs if any leased space currently
being utilized were to become unavailable.
ITEM 3. LEGAL PROCEEDINGS
POTENTIAL LITIGATION. A former employee has threatened to institute legal
action against the Company for breach of contract and wrongful termination on
the basis of racial and gender discrimination and is seeking salary and
attorney's fees aggregating $20,000. Additionally, certain persons have
threatened to institute legal action against the Company for unspecified damages
and expenses in connection with the Company's termination of service to an
Internet subscriber. There can be no assurance that these matters, which are
discussed more fully in the succeeding paragraphs, will be resolved in a manner
favorable to the Company.
In January 1998, the Company became aware of a threatened suit for breach
of contract and wrongful termination on the basis of race and gender
discrimination in connection with its dismissal of an employee in December 1997.
The claimant filed a complaint against the Company with the United States Equal
Employment Opportunity Commission ("EEOC"). By letter dated July 29, 1998, the
EEOC informed the claimant and Company that it would not be pursuing the
complaint.
In February 1998, the Company became aware of a threatened suit for
damages and expenses allegedly incurred by an individual and other persons
and/or companies that the individual claims to represent resulting from the
Company's termination of a subscriber's Internet access service. The claimant
also alleges that the Company's termination of service was a violation of the
claimant's civil rights. The claimant seeks an unspecified amount of expenses
and damages. There can be no assurance that this matter will be resolved in a
manner favorable to the Company. Since the original communication, the Company
has received no further correspondence relating to this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Market System
under the symbol "IBSX." The following table indicates high and low sales
quotations for the periods indicated. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
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<PAGE>
1998 HIGH LOW
---- ---- ---
Second Quarter(1) $9 $8
Third Quarter $8 3/4 $3
Fourth Quarter $9 1/2 $4 1/4
The number of holders of record of the Company's Common Stock on March 24,
1999 was 92. The Company believes that it has over 890 beneficial owners.
There were no dividends or other distributions made by the Company during
the fiscal year ended December 31, 1998. It is anticipated that cash dividends
will not be paid to the holders of the Company's Common Stock in the foreseeable
future.
On November 11, 1998, the Company entered into an agreement with EBI
Securities Corporation ("EBI") whereby EBI was retained by the Company for
mergers, acquisitions and related matters. EBI was granted a warrant (the "EBI
Warrant") to purchase 50,000 shares of Common Stock that vests over the period
of service if the requisite number of acquisitions are consummated. The exercise
price of the EBI Warrants was based, in part, on the fair market value of the
Company's Common Stock on the date of the agreement (25,000 of the EBI Warrants
will vest at an exercise price of $6.00 per share, and the remaining 25,000 EBI
Warrants will vest at an exercise price of $7.20 per share). The value ascribed
to the EBI Warrant will be capitalized. The issuance of the EBI Warrant to EBI
was exempt from registration under the Securities Act of 1933, as amended (the
"Act"), pursuant to Section 4(2) of the Act.
As part of the acquisition of MBS, on December 1, 1998, the Company issued
to William Blount and Rebecca Blount, 2,246 and 2,247 shares of Common Stock,
respectively. The issuance of the Common Stock to the Blounts was exempt from
registration under the Act, pursuant to Section 4(2) of the Act.
As part of the acquisition of Halo, on December 10, 1998 the Company
issued to the interest holders of Halo 180,866 shares of the Company's Common
Stock in exchange for all of the issued and outstanding membership interests of
Halo. The issuance of the Common Stock to the interest holders of Halo was
exempt from registration under the Act, pursuant to Section 4(2) of the Act.
On May 14, 1998, the Company's registration statement on Form SB-2, as
amended (file number 333-47741) (the "Registration Statement"), relating to the
Offering was declared effective by the SEC. Whale Securities Co., L.P. acted as
the underwriter in connection with the Offering which was consummated on May 20,
1998. In connection with the Offering, the Company registered, issued and sold
1,380,000 shares of Common Stock, including 180,000 shares of Common Stock
issued in connection with the exercise in full of the underwriter's
over-allotment option at an initial public offering price of $6.00 per share
resulting in proceeds to the Company (net of underwriting discounts, commissions
and other expenses payable by the Company) in the aggregate approximate amount
of $6,642,000. Additionally, the Company registered 120,000 shares of Common
Stock underlying warrants to purchase Common Stock sold by the Company to the
underwriter for $100. The warrants are exercisable for a four-year period
commencing on May 14, 1999 at a price of $8.10 per share.
From the effective date of the Registration Statement through December 31,
1998, the Company has applied an aggregate of $507,000 of the net proceeds of
the Offering for the full repayment of certain indebtedness; $278,000 towards
the purchase of equipment; $115,000 towards the purchase of assets of, or the
outright acquisition of, companies; and $327,000 towards sales and marketing.
The Company believes that none of the proceeds used in the fourth quarter of
1998 were paid, directly or indirectly, to (i) directors or officers of the
Company or their affiliates, (ii) persons owning ten percent or more of the
Common Stock or (iii) affiliates of the Company. To date, the Company believes
that it has used the net proceeds of the Offering in a manner consistent with
the use of proceeds described in the Registration Statement and the Prospectus
dated May 14, 1998. The remaining net proceeds of the Offering in the amount of
$5,415,000 remain unused and are invested in short-term assets.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO SUCH STATEMENTS AND NOTES
APPEARING ELSEWHERE HEREIN.
- - -------
1 Trading in the Company's Common Stock on the NASDAQ SmallCap
Market System began on May 18, 1998.
- 10 -
<PAGE>
OVERVIEW
The Company provides a broad range of computer networking, programming,
applications development and Internet services primarily to businesses and
organizations. The Company's revenues are derived principally from consulting
fees earned in connection with the performance of systems integration services,
recurring monthly Internet connectivity fees and consulting fees earned in
connection with programming and applications development services.
The Company commenced operations in June 1995 as an Internet Service
Provider offering Web-site hosting services. Since April 1996, the Company has
acquired Interactive, Mordor, AllNet, Entelechy, JDT WebwerX LLC, DesignFX, MBS
and Halo. The Company began to provide Systems Integration and Programming and
Applications Development services in April 1996 and has increasingly emphasized
such services.
The Company's consulting services generally produce higher profit margins
than the Company's Internet services. For the year ended December 31, 1998,
Systems Integration, Programming and Applications Development and Internet
Services & Training accounted for approximately 65%, 22% and 13%, respectively,
of the Company's revenues as compared to 61%, 21% and 18%, respectively, for the
year ended December 31, 1997.
The Company expects that operating expenses will increase significantly in
connection with expansion activities that the Company anticipates undertaking,
including those related to: potential acquisitions of systems integrators,
programming and applications development firms and Internet Service Providers,
further development and upgrade of the Company's network and increased marketing
activities. Utilizing proceeds from the Offering, the Company began, during the
second quarter of 1998, to increase its expenditures in connection with network
development and marketing efforts that resulted in increased operating expenses
during subsequent periods. Accordingly, the Company's future profitability will
depend on corresponding increases in revenues from operations.
The Company's projected expense levels are based on its expectations
concerning future revenues and are fixed to a large extent. Any decline in
demand for the Company's services or increases in expenses that are not offset
by corresponding increases in revenue could have a material adverse effect on
the Company. The Company also expects to incur charges of approximately
$197,000, $197,000 and $17,000 related to the acquisition of Entelechy in the
years ending December 31, 1999, 2000 and 2001; and charges of approximately
$99,000, $28,000, $28,000 and $6,000 in the years ended December 31, 1999,
2000,2001 and 2002, respectively, in connection with the 1998 award of a
restricted stock grant to an executive officer and an option grant to directors.
The value of these grants will be expensed ratably over the respective periods
that the stock is earned and the options vest.
The Company anticipates that growth in its client and subscriber base will
increase operating costs (including expenses related to network infrastructure
and client support) and will require the Company to hire additional network
engineers, programmers and technical personnel. The Company currently has 128
full-time employees. The Company has entered into employment agreements with 26
of its employees, including its executive officers, which provide for aggregate
salaries of $4,422,000 through and including year-end December 31, 2002.
ACQUISITIONS
In January 1998, the Company acquired all of the issued and outstanding
capital stock of Entelechy in consideration of the issuance of an aggregate of
277,434 shares of Common Stock, of which 147,310 shares were issued at the
closing and 130,124 shares are to be issued ratably on each of the first, second
and third anniversary of the acquisition closing date, provided that, the former
Entelechy stockholders to whom such shares are issuable remain employees of the
Company on each respective anniversary. The Company incurred a charge of
approximately $180,000 relating to the issuance of such Common Stock in 1998 and
expects to incur charges of $197,000, $197,000 and $17,000 relating to the
issuance of such Common Stock in each of the years ending December 31, 1999,
2000 and 2001, respectively. The acquisition was accounted for as a purchase. On
November 4, 1998, Entelechy was formally merged into the Company.
In January 1998, the Company acquired substantially all of the assets of
JDT WebwerX LLC (consisting primarily of computer equipment and intangible
assets) in consideration for a $35,000 cash payment. The acquisition was
accounted for as a purchase.
- 11 -
<PAGE>
On September 24, 1998, the Company entered into a Membership Interest
Purchase Agreement with all of the members of DesignFX, a Web-design,
programming and hosting company located in Cherry Hill, New Jersey, whereby the
Company acquired all of the issued and outstanding membership interests of
DesignFX in exchange for $1,251,000 (subject to certain adjustments) of
unregistered shares of Common Stock valued by the parties at $6.25 per share.
The combination has been accounted for as a pooling of interests. Accordingly,
the Company's financial statements have been restated for all periods presented
to include the results of operations and financial position of DesignFX. On
December 9, 1998, DesignFX was formally merged into the Company.
On December 1, 1998, the Company acquired substantially all of the assets
of MBS, a Huntsville, Alabama-based Microsoft Certified Technical Education
Provider - Partner Level, for approximately $50,000, the issuance of 4,493
shares of Common Stock and the assumption of approximately $150,000 in
liabilities.
On December 10, 1998, the Company entered into the Acquisition Agreement
with Halo. Pursuant to the terms of the Acquisition Agreement, the Company
acquired all of the issued and outstanding membership interests of Halo in
exchange for $1,425,000 (subject to certain adjustments) of unregistered shares
of Common Stock valued by the parties at $6.50 per share. The combination has
been accounted for as a pooling of interests. Accordingly, the Company's
financial statements have been restated to include the results of operations and
financial position of Halo.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of the Company's revenues represented by certain items reflected in the
Company's consolidated statement of operations data:
YEARS ENDED DECEMBER 31,
------------------------
1997 1998
---- ----
Revenues............................................. 100.0% 100.0%
Cost of services..................................... 54.6 65.7
Gross Profit......................................... 45.4 34.3
Selling, general and administrative expense.......... 54.4 30.6
Amortization expense................................. 0.2 1.8
Non-cash compensation expenses....................... 0.8 3.0
Merger expenses...................................... -- 1.1
Operating loss....................................... (10.0) (2.1)
Interest and other expenses.......................... (1.8) 1.6
Loss before income taxes............................. (11.8) (0.5)
Income tax provision................................. (1.6) (0.1)
Net loss............................................. (13.4) (0.6)
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased by $4,644,000, or 90%, from $5,161,000 for
the year ended December 31, 1997, to $9,805,000 for the year ended December 31,
1998. Of the increase, $1,117,000, or 24%, was generated by the operations of
DesignFX and Halo. The Company's evolving consulting relationship with Aetna
accounted for $1,969,000, or 42%, of the increase in revenues. Expansion of the
Company's network and the corresponding increase in dial-up accounts accounted
for $310,000, or 7%, of the increase in revenues. The remaining $1,241,000, or
27%, of the increase in revenues was attributable to an increase in the number
of clients of the Company and the revenue generated as a result of the Entelechy
acquisition in 1998, as well as an increase in the scope of consulting and
network integration projects undertaken during 1998 as compared with 1997.
Halo's revenues for 1998 were $1,952,000 as compared with $1,848,000 for
1997, an increase of $104,000. The increase of $104,000 is principally due to an
increase in new 1998 business volume and customer growth of approximately
$748,000 offset by the loss of three customers whose revenues in 1997 totaled
approximately $700,000. Management believes that it will be able to grow
revenues derived from the provision of systems information services through
cross-selling opportunities created by its other businesses, as well as
increased sales and marketing efforts.
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<PAGE>
DesignFX's revenues for 1998 were $1,585,000 as compared with $572,000 for
1997, an increase of $1,013,000. This increase was due mainly to an increase in
clients; an increase in the number, size and complexity of new projects; and
increased revenues from the further development of a significant Web-site
project. Management believes that it will be able to continue the growth of its
Web-site design and programming services through cross selling opportunities
created by its other businesses, as well as increased sales and marketing
efforts.
COST OF SERVICES. Cost of services consists primarily of expenses relating
to the operation of the network, including telecommunications and Internet
access costs, costs associated with monitoring network traffic and quality and
providing technical support to clients and subscribers, cost of equipment and
applications sold to clients and subscribers, salaries and expenses of
engineering, programming and technical personnel and fees paid to outside
consultants engaged for client projects. Cost of services increased by
$3,621,000, or 129%, from $2,817,000 for 1997 to $6,438,000 for 1998. Growth in
the Company's direct payroll expense accounted for $1,626,000, or 45%, of the
increase in cost of services. Additional expenses (largely depreciation)
relating to the expansion of the Company's network accounted for $504,000, or
14%, of the increase in cost of services. Halo and DesignFX accounted for
$587,000, or 16%, of the increase in cost of services. The remaining $904,000,
or 24%, of the increase in cost of services was attributable to the increase in
the number of engineers employed by the Company due to the growth in its client
base and an increase in the cost of equipment sold to such clients.
Costs of services for Halo were $1,379,000 for 1998 as compared with
$1,153,000 for 1997, an increase of $226,000. This increase was due mainly to an
increase in the value of equipment sales to clients and subcontracted labor
costs.
Cost of services for DesignFX were $926,000 for 1998 as compared with
$565,000 in 1997, an increase of $361,000. This increase was due to costs
associated with new revenue growth and increases in the cost of equipment sales
to clients.
GROSS PROFIT. The Company's gross profit decreased from 45.4% to 34.3% of
revenues. In addition to the increased rates of spending for cost of services
when measured against the increase in revenues, gross profits were also
negatively impacted by a decrease in negotiated billing rates on major long term
consulting projects.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses consist primarily of salaries and costs associated with marketing
literature, advertising, direct mailings and the Company's management,
accounting, finance and administrative functions. Selling, general and
administrative expenses increased by $191,000, or 7%, from $2,810,000 in 1997 to
$3,001,000 for 1998. Such increase was primarily attributable to the Company's
expanded promotional and marketing activities, the hiring of additional
marketing personnel, the hiring of additional administrative personnel to
support the increase in the Company's professionals and client base, and
additional administrative and professional costs associated with operating as a
public company.
Selling, general and administrative expenses for Halo for 1998 were
$303,000 as compared to $704,000 in 1997, a decrease of $401,000. This decrease
was due mainly to reduced facility costs and lower depreciation expenses.
Selling, general and administrative expenses for DesignFX for 1998 were
$454,000 as compared to $850,000 in 1997, a decrease of $396,000. This decrease
was due mainly to lower marketing and advertising expenses, decreased
professional fees and decreased depreciation expenses.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased by $161,000, from $12,000 for 1997 to $173,000 for 1998. This increase
is primarily attributable to the amortization of intangible assets (customer
lists and goodwill), related to the purchase of Entelechy and MBS.
NON-CASH COMPENSATION EXPENSE. The Company expects to incur charges in the
amount of approximately $197,000, $197,000 and $17,000 in each of the years
ending December 31, 1999, 2000 and 2001, respectively, in connection with the
issuance of 130,124 shares of Common Stock to the former Entelechy stockholders.
The acquisition of Entelechy occurred in January 1998; there was no related
non-cash compensation expense for 1997. An April 1998 restricted stock award to
an officer and 1998 option grants to outside directors resulted in compensation
charges of $24,000 and $79,000, respectively. Assuming continued employment by
these individuals, the Company expects charges of $99,000, $28,000, $28,000 and
$6,000 in the years ending December 31, 1999, 2000, 2001 and 2002 for such
awards and grants. Non-cash compensation expense of $40,000 and $7,000 was
recognized in 1997 and 1998 under terms of a restricted stock grant to an
employee that vested through February 1998.
- 13 -
<PAGE>
MERGER RELATED EXPENSES. The Company incurred charges of $109,000 for fees
and costs associated with the acquisitions of DesignFX and Halo. Such amounts,
for transactions accounted for as a pooling of interests, are expensed as
services are rendered and costs are incurred.
INTEREST EXPENSE. Interest expense consists of interest on indebtedness
and capital leases and financing charges in connection with the issuance of the
1997 Notes. Interest expense was $84,000 for the year ended December 31, 1998 as
compared to $79,000 for the year ended December 31, 1997. Excluding the
nonrecurring interest charge of $35,000 associated with the amortization of
warrants granted to the 1997 Note holders, interest expense for 1998
approximated $49,000, compared to $79,000 for 1997. This decrease is due to debt
repayments totaling $558,000 in 1998 with proceeds from the Company's Offering.
INTEREST INCOME. Interest income of $185,000 for fiscal 1998 relates to
investment income generated by the Company's increased cash position due to
proceeds from the Offering in May of 1998. The Company has invested excess
proceeds from the Offering in short term commercial paper and U.S. government
obligations.
OTHER (INCOME) EXPENSE, NET. In 1997, Halo recorded impairment losses on
disposals of fixed assets of $45,000 offset by miscellaneous income of $32,000.
In 1998, the Company recognized, as a change in estimate, the effects of
reducing $55,000 of liabilities accrued in previous years.
NET LOSS. As a result of the foregoing, the Company achieved a net loss of
$60,000 for the year ended December 31, 1998 compared to a net loss of $694,000
for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary operating cash requirements have been to fund
expenses in connection with providing consulting services to clients and
Internet access to subscribers. The Company has historically satisfied its
working capital requirements principally through the issuance of debt and equity
securities. At December 31, 1998, the Company had working capital of $6,398,000,
compared to a working capital deficit of $48,000 at December 31, 1997.
During the period from May to August 1995, the Company received net
proceeds in the amount of $100,000 in connection with the issuance and sale of
48,980 shares of Common Stock and the 1995 Notes. The 1995 Notes accrued
interest at a rate of 6% and were payable in July 1998. Interest expense for
each of the years ended December 31, 1996 and 1997 amounted to $6,000. Interest
expense for 1998 amounted to $2,000. All principal and accrued interest on the
1995 Notes were paid in full in June 1998. The proceeds of the 1995 Notes were
used for working capital and general corporate purposes.
The Company received net proceeds of $200,000 in connection with the
issuance and sale of the 1997 Notes and warrants to purchase an aggregate of
48,872 shares of Common Stock at an exercise price of $3.54 per share. The 1997
Notes accrued interest at the rate of 8% and were payable in full upon the
closing of the Offering. In June 1998, the Company repaid the outstanding
principal, aggregating $200,000, and accrued interest, aggregating $10,000, on
the 1997 Notes. The proceeds of the 1997 Notes were used for working capital and
general corporate purposes.
On May 14, 1998, the Company's registration statement on Form SB-2, as
amended (file number 333-47741), relating to the Offering was declared effective
by the SEC. Whale Securities Co., L.P. acted as the underwriter in connection
with the Offering which was consummated on May 20, 1998. In connection with the
Offering, the Company registered, issued and sold 1,380,000 shares of Common
Stock, including 180,000 shares of Common Stock issued in connection with the
exercise in full of the underwriter's over-allotment option at an initial public
offering price of $6.00 per share resulting in proceeds to the Company (net of
underwriting discount, commissions and other expenses payable by the Company) in
the aggregate approximate amount of $6,642,000. Additionally, the Company
registered 120,000 shares of Common Stock underlying warrants to purchase Common
Stock sold by the Company to the underwriter for $100. The warrants are
exercisable for a four-year period commencing on May 14, 1999 at a price of
$8.10 per share.
Further, upon consummation of the Offering, $150,000 in debt that the
Company assumed in its acquisition of Entelechy was converted into 25,000 shares
of Common Stock.
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<PAGE>
From the effective date of the Offering through December 31, 1998, the
Company incurred expenses in connection with the issuance and distribution of
securities in the Offering in the actual amount of $1,638,000. Such expenses
include underwriting discounts and commissions in the amount of $828,000,
expenses paid to or for the underwriter in the amount of $248,400 and other
expenses in the amount of $561,600. The Company believes that none of these
payments were made, directly or indirectly, to (i) directors or officers of the
Company or their affiliates, (ii) persons owning 10% or more of the Common Stock
or (iii) affiliates of the Company.
Net cash provided by (used in) operating activities increased from
$(559,000) for 1997 to $168,000 for 1998. This change was primarily attributable
to (i) improved operating results, a loss of $60,000 for 1998 compared to a loss
of $694,000 for 1997, (ii) increased depreciation and amortization expense of
$348,000, (iii) decreases in accounts receivable in the amount of $1,970,000,
offset by (iv) decreases in accounts payable of $1,117,000 and deferred revenue
in the amount of $734,000.
Net cash used in investing activities increased from $347,000 for 1997 to
$843,000 for 1998. The change was attributable, in part, to an increase in
capital expenditures of $496,000, principally related to the expansion and
enhancement of the Company's NOC, as well as to expenditures for office
equipment to support additional employees hired during 1998.
Net cash provided by financing activities increased from $855,000 in 1997
to $5,999,000 in 1998. This change is primarily attributable to the net proceeds
of $6,642,000 received in connection with the Offering offset by debt repayments
of $558,000.
From the effective date of the Offering through December 31, 1998, the
Company has applied an aggregate of $507,000 of the net proceeds of the Offering
for the full repayment of debt and $115,000 for acquisitions.
In May 1998, the Company paid in full all of its outstanding indebtedness
to Interchange State Bank, consisting of $9,000 in principal.
In October 1998 the Company repaid $200,000 of outstanding indebtedness of
DesignFX, and exercised the purchase option on an equipment lease for $186,000
with Equity National Bank and Commerce Bank.
In December 1998, the Company paid in full all of the outstanding
principal and interest of Halo in the aggregate amount of $35,000 to Tinton
Falls National Bank.
At December 31, 1998, the Company had obligations pursuant to capital
lease obligations in the aggregate amount of $72,000. These capital lease
obligations are secured by the personal guarantees of Messrs. Loglisci,
Frederick and Altieri and, in addition, certain of these capital lease
agreements are secured by the equipment that is the subject of the capital
lease.
In May 1998, the Company secured equipment lines of credit from Ascend
Credit Corp., Cisco Systems Capital Corp. and PAM Financial Corp., each in the
amount of $500,000.
In June 1998, the Company obtained a $1.5 million line of credit from
First Union National Bank. The line of credit is for a one-year period effective
July 1, 1998. As of December 31, 1998, the Company had no outstanding
indebtedness under such line of credit.
LIQUIDITY AND CAPITAL REVENUES
The Company's working capital at December 31, 1998 approximated $6.4
million. The Company believes that operating cash flow generated through
existing customers and business activities, current cash and cash equivalents,
funds available from a $1.5 million line of credit, and available credit through
equipment vendor arrangements are sufficient to fund operating cash flow needs,
capital expenditures (principally network improvements) and acquisitions. The
Company current estimate of capital expenditures for the year ending December
31, 1999 approximates $2.3 million. For the period from January 1, 1999 through
March 26, 1999, the Company has utilized cash of approximately $836,000 to fund
acquisitions.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may fluctuate significantly from period to
period as a result of the length of the Company's sales cycle, as well as from
client budgeting cycles, the introduction of new products and services by
competitors, the timing of expenditures, pricing changes in the industry,
technical difficulties, and general economic conditions. The Company's business
is generally subject to lengthy sales cycles that require the Company to make
expenditures and use significant resources prior to receipt of corresponding
revenues. Historically, the Company's revenues have been higher in the fourth
quarter as a result of client budgeting and expenditure cycles. See "-- Certain
Factors Which May Affect the Company's Future Performance -- Possible
Fluctuations in Operating Results; Lengthy Sales Cycle."
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<PAGE>
INFLATION
Inflation has not had a significant impact on the Company's results of
operations.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This situation could result in a system failure
or miscalculations causing disruptions of operations, including inability to
process transactions or engage in normal business activities.
Management has evaluated the Company's computer software and hardware
systems, and, based on currently available information, believes that it will
not have to replace or modify any of its hardware but has, and will have, to
modify its software so that its systems will function properly with respect to
dates in the year 2000 and thereafter. It is believed that the greatest risk to
the Company will be from outside firms that the Company relies on for its
operations as well as the legacy computer systems of its clients. The failure by
outside firms and/or clients' failure to address Year 2000 issues could
interfere with the Company's ability to provide its services, and therefore
impact future revenues. As of March 26, 1999, the Company has contingency plans
in place to remedy these types of problems. Estimated costs associated with such
plans are not expected to exceed $100,000, which are likely to be funded through
the use of available internal employees and resources. At this time, the Company
believes that the most likely "worst case" scenario involves potential
disruptions in areas in which the Company's operations must rely on outside
firms or clients whose systems may not function properly after January 1, 2000.
While such failures could affect important operations of the Company, either
indirectly or directly, in a significant manner, the Company cannot at present
estimate either the likelihood or the potential cost of such failures.
RECENT EVENTS
On January 29, 1999, the Company acquired substantially all of the assets
of Mainsite Communications ("Mainsite") for approximately $53,000 in cash.
Mainsite is an Internet Service Provider based in Bridgeport, New Jersey.
On February 22, 1999, the Company acquired substantially all of the assets
of the Renaissance Internet Services Division ("Renaissance") of PIVC, LLC, for
$912,377 in cash, a promissory note and Common Stock. Renaissance is an Internet
Service Provider headquartered in Huntsville, Alabama.
On March 1, 1999, the Company acquired substantially all of the assets of
EZ Net, Inc., a Yorktown, Virginia-based Internet Service Provider with
approximately 3,100 consumer dial-up and 40 corporate accounts, in exchange for
$800,000 in cash and Common Stock, subject to certain adjustments.
On March 25, 1999, the Company acquired substantially all of the assets of
the ADViCOM division of Multitronics, Inc., for approximately $193,000 in cash
and Common Stock. ADViCOM is an Internet Service Provider based to Huntsville,
Alabama.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE.
LIMITED OPERATING HISTORY. The Company commenced operations in June 1995
as an Internet Service Provider and began to offer systems integration,
programming and applications services in April 1996. Accordingly, the Company
has a limited operating history upon which an evaluation of its prospects and
performance can be made. The Company's prospects must be considered in light of
the risks, uncertainties, expenses, delays, problems and difficulties frequently
encountered in the establishment of a new business enterprise in a rapidly
evolving industry characterized by intense competition and an increasing and
substantial number of new market entrants and technologies and services. The
Company is subject to the risks associated with an evolving business and the
management of both internal and acquisition based growth.
PRIOR OPERATING LOSSES; LACK OF SUBSTANTIAL PROFITABILITY; FUTURE
OPERATING RESULTS. The Company incurred losses of $694,000 and $60,000,
respectively, for the years ended December 31, 1997 and 1998. The Company would
have incurred a pro forma net loss in the amount of $1,006,000 for the year
ended December 31, 1997, giving effect to the acquisition of Entelechy. The
Company had an accumulated deficit at December 31, 1998 of $1,065,000. Excluding
the effects of interest and merger expenses of $35,000 and $109,000,
respectively, the Company did achieve profitability for the year ended December
31, 1998. Despite generating steadily increasing levels of revenues, the
Company's operating expenses have increased and will continue to increase
significantly in connection with any expansion activities undertaken by the
Company, including those relating to acquisitions, network development and
marketing. Accordingly, the Company's future profitability will depend on
corresponding increases in revenues.
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EXPANSION AND ACQUISITIONS. The Company intends to continue to expand its
operations through internal growth. The Company plans to establish or acquire
additional POPs, upgrade and expand its network capacity, attract additional
clients and subscribers, expand its work force and its presence in selected
geographic markets. Such growth is expected to place a significant strain on its
management, administration, operational, financial and other resources. To
successfully manage growth, the Company will be required to continue to
implement and improve its administrative, operating and financial systems, train
and manage its employees, monitor operations, control costs and maintain
effective quality controls. The Company has limited experience in effectuating
rapid expansion and in managing operations that are geographically dispersed,
and there can be no assurance that the Company will be able to continue to
successfully expand its operations or manage growth. In addition, the Company
has grown through, and anticipates that it will continue to grow through,
acquisitions of Internet Service Providers, systems integrators and consultants
and programming and application developers. Acquisitions may expose the Company
to particular risks, including, without limitation, diversion of management's
attention, assumption of liabilities and amortization of goodwill and other
acquired intangible assets, some or all of which could have a material adverse
effect on the financial condition or results of operations of the Company.
Depending on the value and nature of the consideration paid by the Company for
acquisitions, such acquisitions may have a dilutive impact on the Company's
earnings per share. In making acquisitions, the Company competes for acquisition
targets with other companies, many of which are larger and have greater
financial resources than the Company. There can be no assurance that the Company
will continue to be successful in identifying acquisition opportunities,
assessing the value, strengths and weaknesses of such opportunities, evaluating
the costs of new growth opportunities at existing operations or managing the
publications it owns and improving their operating efficiency.
DEPENDENCE ON AETNA; NON-RECURRING REVENUES. For the year ended December
31, 1998, the Company's largest client, Aetna (which engaged the Company in
October 1997) accounted for approximately 35% of the Company's revenues. In
December 1998, the Company entered into a three-year agreement with Aetna to
continue to provide services. Revenues derived from the Company's consulting
contracts are generally non-recurring in nature. Non-renewal or termination of
the Company's contract with Aetna would have a material adverse effect on the
Company. There can be no assurance that the Company will obtain additional
contracts for projects similar in scope to those previously obtained from Aetna
or any other client, that the Company will be able to retain existing clients or
attract new clients or that the Company will not remain largely dependent on a
limited client base which may continue to account for a substantial portion of
the Company's revenues. In addition, the Company generally will be subject to
delays in client funding; lengthy client review processes for awarding
contracts; nonrenewal; delay, termination, reduction or modification of
contracts in the event of changes in client policies or as a result of budgetary
constraints; and increased or unexpected costs resulting in losses in the event
of "fixed-price" contracts.
SUBSCRIBER ATTRITION. The Company's operating results may be affected by
dial-up subscriber attrition rates. Subscribers may discontinue service without
penalty at any time, and there can be no assurance that subscribers will
continue to purchase services from the Company or that the Company will not be
subject to subscriber attrition. Historically, the Company has not retained data
enabling it to accurately compute subscriber attrition levels. Significant
levels of subscriber attrition in the future could have a material adverse
effect on the Company's operating results.
LIMITED NUMBER OF POPS; GEOGRAPHIC CONCENTRATION; UNCERTAINTY OF NETWORK
EXPANSION. The Company currently has 39 POPs in operation in northern New
Jersey, New York, Virginia and Alabama. Consequently, the results achieved to
date by the Company may not be indicative of the prospects or market acceptance
of a larger number of POPs in wider and more geographically dispersed areas. The
process of acquiring existing POPs or identifying suitable sites and
establishing additional POPs can be lengthy. There can be no assurance that the
Company will be successful in acquiring existing POPs or identifying suitable
sites and establishing additional POPs. Failure to obtain and install telephone
lines and network equipment on a timely and cost-effective basis could
materially delay the Company's plans with respect to the establishment of
additional POPs in target markets. The Company has relatively limited experience
in establishing POPs and has limited financial, technical and other resources.
There can be no assurance that the Company will be able, for financial or other
reasons, to successfully expand its network of POPs or that any expansion will
not be subject to unforeseen delays and costs.
EMERGING AND EVOLVING MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE; LIMITED
MARKETING, SERVICE AND SUPPORT CAPABILITIES. The markets for the Company's
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services are relatively new and evolving and are characterized by consolidating
trends. As a result, the ultimate level of demand for the Company's services is
subject to a high degree of uncertainty. Any significant decline in demand for
computer networking services or in the computer industry generally or in
particular market segments could have a material adverse effect on the Company's
business and prospects. The Company's success will be largely dependent upon its
ability to continually attract and retain additional clients and subscribers and
replace terminating clients and subscribers. Achieving significant market
acceptance will require substantial efforts and expenditures to create enhanced
awareness of the services offered by the Company. The successful implementation
of the Company's business plans will also require the Company to expand client
service and support capabilities to satisfy increasingly sophisticated client
requirements. The Company currently has limited marketing experience and limited
marketing, service, client support and other resources. To date, the Company has
relied principally on the efforts of its executive officers to market its
services. There can be no assurance that the Company will be able to
successfully expand its marketing activities, client service or support
capabilities, or that the Company's efforts will result in continued market
acceptance for the Company's services.
COMPETITION. The markets for the Company's services are highly
competitive. There are no substantial barriers to entry and the Company expects
that competition will intensify in the future. The Company believes that its
ability to compete successfully will be significantly affected by the
availability of highly skilled engineers, programmers and technicians;
continuing referrals by clients; the geographic scope of the Company's network;
and industry and general economic trends. The Company competes with numerous
large companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company, including (i) large
information technology consulting and service providers and application software
firms such as Andersen Consulting, Cambridge Technology Partners, Electronic
Data Systems Corporation and American Management Systems; (ii) international,
national, regional and commercial Internet Service Providers such as Performance
Systems International, Inc., Earthlink, Mindspring and UUNet WorldCom; (iii)
established on-line services companies such as America Online, Inc; (iv)
computer hardware and software and other technology companies such as IBM and
Microsoft Corp.; (v) national long-distance carriers such as AT&T Corp., MCI
WorldCom and Sprint, and regional telephone companies, including Bell Atlantic
and Bell South, and cable operators; and (vi) major accounting firms. Many of
these competitors have announced plans to expand their service offerings and
increase their focus on the computer networking and Internet related services'
markets. As a result, competition is expected to intensify for highly skilled
network engineers, programmers and technicians. There can be no assurance that
competitors will not develop or offer services that provide performance, price
or other advantages over those offered by the Company, that the Company will be
able to attract, hire or retain highly skilled network engineers, programmers
and technicians or that the Company will have the financial resources, technical
expertise or marketing and support capabilities to compete successfully.
RAPID TECHNOLOGICAL CHANGE. The markets for the Company's services are
characterized by rapid technological change, changes in client requirements and
preferences, frequent new product and service introductions embodying new
processes and technologies and evolving industry standards and practices that
could render the Company's existing practices and methodologies obsolete or less
attractive to existing and prospective clients. The Company's success will
depend on its ability to improve existing and develop new services and solutions
that address the increasingly sophisticated and varied needs of its current and
prospective clients, and respond to technological advances, emerging industry
standards and practices and competitive service offerings. There can be no
assurance that the Company will be successful in responding quickly,
cost-effectively and sufficiently to these developments. The Company's dial-up
access service is also subject to fundamental changes in the manner in which
Internet access services are delivered. Currently, the Internet is accessed
primarily through computers and telephone lines. To the extent that the Internet
becomes increasingly accessible by screen-based telephones, television or other
consumer electronic devices which change the way Internet access is routinely
provided, the Company may be required to acquire or develop new technology or
modify its existing technology to accommodate these developments. The pursuit of
these technological advances may require substantial time and expense, and there
can be no assurance that the Company will succeed in adapting its Internet
access service to alternate access devices and conduits.
CAPACITY CONSTRAINTS; SYSTEM FAILURE AND SECURITY RISKS. The Company's
operations depend upon the capacity, reliability and security of its network
infrastructure. The Company currently has limited network capacity and will be
required to continually expand its network infrastructure to accommodate
significant numbers of users and increasing amounts of information. Expansion of
the Company's network infrastructure will require significant financial,
operational and management resources. There can be no assurance that the Company
will be able to expand its network infrastructure to meet potential demand on a
timely basis, at a commercially reasonable cost, or at all. Failure by the
Company to expand its network infrastructure on a timely basis would have a
material adverse effect on the Company. Although the Company maintains redundant
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connections to the Internet, the Company's operations will also be dependent on
the Company's ability to protect its computer equipment against damage from
fire, power loss, telecommunications failures and similar events. The Company's
network infrastructure will be vulnerable to computer viruses, break-ins and
similar disruptions from unauthorized tampering with the Company's computer
systems. Computer viruses or problems caused by third parties could lead to
material interruptions, delays or cessation in service. Inappropriate use of the
Internet by third parties could also potentially jeopardize the security of
confidential information stored in computer systems. Security and privacy
concerns may limit the Company's ability to develop a significant subscriber
base.
DEPENDENCE ON THIRD-PARTY SUPPLIERS AND MANUFACTURERS; POSSIBLE SERVICE
INTERRUPTIONS AND EQUIPMENT FAILURES. The Company is currently dependent upon
Bell Atlantic, Bell South, MCI WorldCom, Sprint, Hyperion, ICI/Digex and KMC to
provide leased telecommunication lines on a cost-effective and continuous basis,
and on UUNet Worldcom, Winstar, Sprint, ICI/Digex, CRL, Cox and Cable & Wireless
to provide Internet access. In accordance with industry custom, the Company does
not maintain interconnect agreements with these suppliers. Increases in rates
charged by such suppliers could adversely affect the Company's operating
margins. Failure to obtain continuing access to such networks resulting in
material business interruptions would also have an adverse effect on the
Company. The Company also is dependent on third-party manufacturers of hardware
components. Except for a limited number of non-exclusive reseller agreements
with certain suppliers, the Company has not entered into agreements with any
equipment manufacturer. Failure by manufacturers to deliver quality equipment on
a timely basis or any inability to obtain alternative sources of supply, could
materially adversely affect the Company's business and limit the Company's
ability to expand its network. In addition, the Company's operations require
that its POPs and its third-party telecommunications networks operate on a
continuous basis. It is possible that the Company's POPs and third party
telecommunications networks may from time to time experience service
interruptions or equipment failures. Service interruptions and equipment
failures resulting in material delays would adversely affect client and
subscriber confidence, as well as the Company's business operations and
reputation.
RECRUITMENT AND RETENTION OF QUALIFIED PERSONNEL. The Company's business
is labor intensive. The Company's success will depend upon its ability to
identify, hire, train and retain professional engineers, programmers and
technicians who can provide the strategy, technology and creative skills
required by clients. Qualified professionals are in high demand and are likely
to remain a limited resource for the foreseeable future. The Company is
currently dependent on the services of temporary personnel to satisfy increased
client requirements. The Company competes intensely for qualified personnel with
other companies, and there can be no assurance that the Company will be able to
attract or retain other highly qualified engineers, programmers and technical
personnel in the future. Failure to attract and retain qualified professionals
in sufficient numbers would severely limit the Company's ability to complete
existing projects and expand its operations.
POSSIBLE NEED FOR ADDITIONAL FINANCING. The Company's business is capital
intensive. Based on proposed plans and assumptions relating to its operations,
the Company believes that the proceeds of its financings, together with
projected cash flow from operations will be sufficient to satisfy its
contemplated cash requirements. In the event that the Company's plans change,
its assumptions change or prove to be inaccurate or if the proceeds of this
offering or cash flow prove to be insufficient to implement its business plans,
the Company may be required to seek additional financing or curtail its
expansion activities. There can be no assurance that the Company will be able to
implement its business plan or that any assumptions relating to such plan will
prove to be accurate or that any additional financing would be available to the
Company on commercially reasonable terms, or at all. The inability to obtain
additional financing, if required, would have a material adverse effect on the
Company. The Company may determine to seek additional debt or equity financing
to fund the cost of continuing expansion. To the extent that the Company
finances an acquisition with equity securities, the issuance of such equity
securities may result in dilution to the interests of the Company's
stockholders. Additionally, if the Company incurs indebtedness or issues debt
securities in connection with any acquisition, the Company will be subject to
risks that interest rates may fluctuate and cash flow may be insufficient for
the payment of principal and interest on any such indebtedness.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS; LENGTHY SALES CYCLE. The
Company's operating results may fluctuate significantly from period to period as
a result of the length of the Company's sales cycle, as well as from client
budgeting cycles; the introduction of new products and services by competitors;
the timing of expenditures; pricing changes in the industry; technical
difficulties; and general economic conditions. The Company's business is
generally subject to lengthy sales cycles, which requires the Company to make
expenditures and use significant resources prior to receipt of corresponding
revenues. Historically, the Company's revenues have been higher in the fourth
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quarter as a result of client budgeting and expenditures cycles. There can be no
assurance that the foregoing factors will not result in significant fluctuations
in future operating results.
GOVERNMENT REGULATION; POTENTIAL LIABILITY FOR CONTENT. Recently enacted
federal, state and local legislation aimed at limiting the use of the Internet
to transmit certain content and materials could result in significant liability
to Internet Service Providers. These types of legislative actions present the
potential for increased scrutiny and attempts to impose liability upon Internet
Service Providers for information disseminated through their networks. The
adoption or strict enforcement of any such laws or regulations may limit the
growth of the Internet, which could decrease demand for the Company's services
and increase the Company's cost of doing business. Additionally, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is uncertain. As a result, it is possible
that the adoption of new legislation or regulation or the application to the
Internet of existing laws and regulations relating to property ownership, libel
and personal privacy could have a material adverse effect on the Company.
Changes in the regulatory environment relating to Internet access, including
regulatory changes which directly or indirectly affect telecommunication costs
or increase the likelihood or scope of competition from local and regional
telephone companies or others, could also have a material adverse effect on the
Company.
LIMITED INTELLECTUAL PROPERTY PROTECTION. The Company relies on a
combination of copyright and trademark laws, trade secrets and nondisclosure
agreements to protect its proprietary information. The Company currently has no
registered copyrights or patents or patent applications pending. It may be
possible for unauthorized third parties to copy aspects of, or otherwise obtain
and use, the Company's proprietary information without authorization. In
addition, there can be no assurance that any confidentiality agreements between
the Company and its employees or any agreements with its customers will provide
meaningful protection for the Company's proprietary information in the event of
any unauthorized use or disclosure of such proprietary information. The majority
of the Company's current agreements with its clients contain provisions granting
to the client intellectual property rights to certain of the Company's work
product, including customized programming that is created during the course of a
project. The Company anticipates that agreements with future clients may contain
similar provisions. Other existing agreements to which the Company is a party
are, and future agreements may be, silent as to the ownership of such rights. To
the extent that the ownership of such intellectual property rights is expressly
granted to a client or is ambiguous, the Company's ability to reuse or resell
such rights will or may be limited.
POTENTIAL LIABILITY TO CLIENTS. The Company's consulting engagements often
involve development, implementation and maintenance of applications that are
critical to the operations of its clients' businesses. The Company's failure or
inability to meet a client's expectations in the performance of its services
could harm the Company's business reputation or result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure or inability. In addition, in the course of
performing services, the Company's personnel often gain access to technologies
and content that include confidential or proprietary client information.
Although the Company has implemented policies to prevent such client information
from being disclosed to unauthorized parties or used inappropriately, any such
unauthorized disclosure or use could result in a claim for substantial damages.
The Company attempts to limit contractually its damages arising from negligent
acts, errors, mistakes or omissions in rendering services and, although the
Company maintains general liability insurance coverage in the amount of
$1,000,000 including coverage for errors and omissions, there can be no
assurance that such coverage will continue to be available on reasonable terms
or will be available in sufficient amounts to cover one or more large claims.
The successful assertion of one or more large claims against the Company that
are uninsured, exceed available insurance coverage or result in changes to the
Company's insurance policies, including premium increases or the imposition of a
large deductible or co-insurance requirements, would adversely affect the
Company.
DEPENDENCE ON KEY PERSONNEL. The success of the Company will be dependent
on the personal efforts of Nicholas R. Loglisci, Jr., its President and Chief
Executive Officer; Clark D. Frederick, its Chief Technical Officer; Frank R.
Altieri, Jr., its Chief Information Officer and other key personnel. Although
the Company has entered into employment agreements with Messrs. Loglisci,
Frederick and Altieri, the loss of the services of any of such individual, as a
result of extended leaves due to military service or otherwise, could have a
material adverse effect on the Company. The Company maintains "key-man"
insurance on the life of each of Messrs. Loglisci, Frederick and Altieri in the
amount of $2,000,000.
AUTHORIZED PREFERRED STOCK. The Company's Restated Certificate of
Incorporation authorizes the Company's Board of Directors to issue one million
shares of "blank check" preferred stock, par value $.01 per share (the
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"Preferred Stock"), and to fix the rights, preferences, privileges and
restrictions, including voting rights, of such shares of Preferred Stock,
without further stockholder approval. The rights of the holders of Common Stock
will be subject to and may be adversely affected by the rights of holders of any
Preferred Stock that may be issued in the future. The ability to issue Preferred
Stock without stockholder approval could have the effect of making it more
difficult for a third party to acquire a majority of the voting stock of the
Company thereby delaying, deferring or preventing a change in control of the
Company.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are attached hereto following page F-2.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information appearing under the captions "Proposal 1 - Election of
Directors," "Executive Officers of the Company," "Promoters and Control Persons"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement for its 1999 Annual Meeting of Stockholders (the "1999 Proxy
Statement") is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" in the
1999 Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Security Ownership of Beneficial
Owners and Management" in the 1999 Proxy Statement is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under the caption "Certain Transactions" in the 1999
Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following is a list of Exhibits filed as a part of this Report.
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
*3.1 Restated Certificate of Incorporation of the Company (filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2,
File No. 333-47741, filed on April 23, 1998 (the "Registration
Statement")).
*3.2 Restated By-Laws of the Company, as amended (filed as Exhibit 3.2
to the Company's Registration Statement).
4.1 See Exhibit numbers 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Restated By-Laws of the Company, as
amended, defining the rights of the holders of Common Stock.
*4.2 Specimen form of certificate evidencing the shares of Common Stock
of the Company (filed as Exhibit 4.1 to the Company's Registration
Statement).
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*10.1 Form of Registration Rights Agreement, dated as of May 6, 1997,
between the Company and the holders of certain shares of Common
Stock (filed as Exhibit 10.2 to the Company's Registration
Statement).
*10.2 Form of Warrant to Purchase Shares of Stock, dated as of October 31,
1997 (filed as Exhibit 10.4 to the Company's Registration
Statement).
*10.3 Form of Employment Agreement between the Company and Nicholas R.
Loglisci, Jr. (filed as Exhibit 10.5 to the Company's Registration
Statement).+
*10.4 Form of Employment Agreement between the Company and Clark D.
Frederick (filed as Exhibit 10.6 to the Company's Registration
Statement).+
*10.5 Form of Employment Agreement between the Company and Frank
Altieri, Jr. (filed as Exhibit 10.7 to the Company's Registration
Statement).+
*10.6 Form of Employment Agreement between the Company and Jeffrey
Brenner (filed as Exhibit 10.8 to the Company's Registration
Statement).+
*10.7 Stock Purchase Agreement, dated as of January 31, 1998, between
the Company and Entelechy, Inc. and the stockholders of Entelechy,
Inc. named therein (filed as Exhibit 10.12 to the Company's
Registration Statement).
*10.8 Membership Interest Purchase Agreement, dated September 24, 1998, by
and among the Company and Peter Bowman, Lawrence Rafkin, Robert
Gillespie, Steven Rotella, Steven Swartz, Jospeh Calabro, Febe
Dwyer, Barbara Glass-Seran, Clifford Seran, Stanley Lerner, Annette
Monti, Christina Monti, Jack Monti, Rogelio Valencia, Linda Valencia
and Phyllis Wood (filed as Exhibit 2.1 to the Company's Report on
Form 8-K, filed on October 9, 1998).
*10.9 Membership Interest Acquisition Agreement, dated December 10, 1998,
by and among the Company, Carl Broadbent, Keith Lowy, Stephen Lowy
and Halo Network Management, LLC (filed as Exhibit 2.1 to the
Company's Report on Form 8-K, filed on December 22, 1998).
*10.10 IBS Interactive, Inc. 1998 Stock Option Plan (filed as Exhibit
10.14 to the Company's Registration Statement).+
*10.11 Commercial Sublease, dated as of May 5, 1997, between the Company
and Information Systems & Communications, Inc., in connection with
the Company's premises in Fairfax, Virginia (filed as Exhibit 10.16
to the Company's Registration Statement).
*10.12 Second Lease Modification Agreement, dated as of March 3, 1998, by
and among the Company and EI Realty, 2 Ridgedale Avenue, Inc. and
Hanover Park for Industry, in connection with the Company's premises
in Cedar Knolls, New Jersey (filed as Exhibit 10.17 to the Company's
Registration Statement).
*10.13 Letter Agreement, dated as of October 21, 1997, between the Company
and EI Realty in connection with the Company's premises in Cedar
Knolls, New Jersey (filed as Exhibit 10.18 to the Company's
Registration Statement).
*10.14 Lease Agreement, dated as of May 1, 1997, by and between the Company
and Iron Investment Corp. and Hanover Park for Industry, in
connection with the Company's premises in Cedar Knolls, New Jersey
(filed as Exhibit 10.19 to the Company's Registration Statement).
*10.15 Network Services Contract, dated as of December 27, 1996, between
the Company and the Catholic Healthcare Network (filed as Exhibit
10.20 to the Company's Registration Statement).
*10.16 Professional Service Agreement Consulting, dated as of October 23,
1997, between Aetna Life Insurance Company and the Company (filed as
Exhibit 10.21 to the Company's Registration Statement).
*10.17 Lease Agreement, dated as of January 31, 1998, between the Company
and R&G International, in connection with the Company's premises in
Huntsville, Alabama (filed as Exhibit 10.22 to the Company's
Registration Statement).
**10.18 Loan Agreement, dated October 30, 1998, by and between the Company
and First Union National Bank.
**21.1 Subsidiaries of the Company.
**24.1 Power of Attorney (appears on signature page).
**27.1 Financial Data Schedule.
- - -------------
* Incorporated by reference.
** Filed herewith.
+ Management contract or compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K
On October 9, 1998, the Company filed a Report with the SEC on Form 8-K,
under Item 2, to report the execution of a definitive Membership Interest
Purchase Agreement, dated as of September 24, 1998, among the Company and the
interest holders of DesignFX, whereby the Company acquired all of the issued and
outstanding membership interests of DesignFX in exchange for 176,944 shares of
the Company's Common Stock. The Company has also reserved 23,216 shares of
Common Stock for issuance in connection with the DesignFX combination pending
the final calculation of defined financial data. The Company filed the financial
statements required by Items 7(a) and 7(b) of Form 8-K on December 9, 1998.
On December 22, 1998, the Company filed a Report with the SEC on Form 8-K,
under Item 2, to report the Acquisition Agreement, dated as of December 10,
1998, among the Company and the members of Halo and Halo, whereby the Company
acquired all of the issued and outstanding membership interests of Halo in
exchange for 180,866 shares of the Company's Common Stock. The Company has also
reserved 38,365 shares of Common Stock for issuance in connection with the Halo
combination pending the final calculation of defined financial data. The Company
filed the financial statements required by Items 7(a) and 7(b) of Form 8-K on
February 26, 1999.
- 22 -
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IBS INTERACTIVE, INC.
Dated: March 31, 1999 By: /s/ NICHOLAS R. LOGLISCI, JR.
-----------------------------------
Nicholas R. Loglisci, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints both Nicholas R. Loglisci, Jr. and Clark
D. Frederick his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-KSB, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities
indicated on the 31st day of March, 1999.
SIGNATURE TITLE(S)
/S/ NICHOLAS R. LOGLISCI, JR. President, Chief Executive Officer and
- - ------------------------------- Director (Principal Executive Officer)
Nicholas R. Loglisci, Jr.
/S/ CLARK D. FREDERICK Chief Technical Officer and Director
- - -------------------------------
Clark D. Frederick
/S/ FRANK R. ALTIERI, JR. Chief Information Officer and Director
- - -------------------------------
Frank R. Altieri, Jr.
/S/ JEFFREY E. BRENNER Senior Vice President, Finance and
- - ------------------------------- Administration (Principal Financial and
Jeffrey E. Brenner Accounting Officer)
/S/ SUSAN HOLLOWAY TORRICELLI Director
- - -------------------------------
Susan Holloway Torricelli
/S/ BARRETT N. WISSMAN Director
- - -------------------------------
Barrett N. Wissman
/S/ DAVID FAEDER Director
- - -------------------------------
David Faeder
/S/ PATRICIA DUFF Director
- - -------------------------------
Patricia Duff
- 23 -
<PAGE>
IBS INTERACTIVE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998....... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998..................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1998............................... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1997 and 1998............................... F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
IBS Interactive, Inc.
Cedar Knolls, New Jersey
We have audited the accompanying consolidated balance sheets of IBS
Interactive, Inc. and Subsidiaries (formerly known as Internet Broadcasting
System, Inc.) as of December 31, 1997 and 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IBS
Interactive, Inc. and Subsidiaries as of December 31, 1997 and 1998 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
March 29, 1999
F-2
<PAGE>
IBS INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
December 31,
------------------------------
1997 1998
------------------------------
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 153,000 $5,477,000
Accounts receivable (net of allowance for
doubtful accounts of $106,000 in 1997 and
$23,000 in 1998)........................ 1,974,000 1,492,000
Prepaid income taxes....................... - 54,000
Prepaid expenses and other current assets.. 28,000 175,000
Deferred income tax asset.................. 50,000 126,000
------------------------------
Total Current Assets.................... 2,205,000 7,324,000
Property and equipment, net................... 701,000 943,000
Intangible assets, net........................ 56,000 1,418,000
Deferred income tax asset..................... - 5,000
Deferred offering costs....................... 45,000 -
Advance to related party...................... - 70,000
Other assets.................................. 61,000 115,000
------------------------------
TOTAL ASSETS $ 3,068,000 $9,875,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt....... $ 575,000 $ 47,000
Accounts payable........................... 322,000 414,000
Deferred revenue........................... 503,000 45,000
Accrued salaries and related expenses...... 71,000 106,000
Accrued project costs...................... 305,000 -
Accrued professional fees.................. - 50,000
Customer deposits.......................... 80,000 59,000
Accrued interest payable................... 14,000 -
Income taxes payable....................... 25,000 -
Other current liabilities.................. 358,000 205,000
------------------------------
Total Current Liabilities............... 2,253,000 926,000
Long-term debt, less current maturities....... 281,000 225,000
Deferred compensation......................... - 705,000
Deferred income tax liabilities............... 34,000 -
------------------------------
Total liabilities............................. 2,568,000 1,856,000
------------------------------
Commitments and contingencies
Stockholders' Equity:
Preferred Stock - $.01 par value; authorized
1,000,000 shares, no shares issued and
outstanding
Common Stock - $.01 par value; authorized
11,000,000 shares, issued and outstanding
2,059,777 shares - 1997 and 3,616,580
shares - 1998........................... 21,000 36,000
Additional paid in capital................. 1,491,000 9,048,000
Unearned compensation...................... (7,000) -
Accumulated deficit........................ (1,005,000) (1,065,000)
------------------------------
Total Stockholders' Equity................. 500,000 8,019,000
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,068,000 $9,875,000
==============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
IBS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
December 31,
------------------------------
1997 1998
------------------------------
Revenues........................................ $5,161,000 $9,805,000
Cost of services................................ 2,817,000 6,438,000
------------------------------
Gross Profit.................................... 2,344,000 3,367,000
Operating Expenses:
Selling, general and administrative ......... 2,810,000 3,001,000
Amortization of intangible assets............ 12,000 173,000
Non-cash compensation expenses............... 40,000 290,000
Merger related expenses...................... - 109,000
------------------------------
2,862,000 3,573,000
------------------------------
Operating loss.......................... (518,000) (206,000)
Interest expense................................ 79,000 84,000
Interest income................................. - (185,000)
Other (income) expense, net..................... 13,000 (60,000)
------------------------------
Loss before income taxes........................ (610,000) (45,000)
Income tax provision............................ (84,000) (15,000)
------------------------------
Net loss........................................ $ (694,000) $ (60,000)
==============================
Loss per share
Basic and Diluted............................ $(.34) $(.02)
==============================
Weighted average number of common stock and
equivalents..................................... 2,050,660 3,123,419
==============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
IBS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
Common Stock
-------------------------
Number Additional Total
of Paid-in Unearned Subscription Accumulated Stockholders'
Shares Amount Capital Compensation Receivable Deficit Equity
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1,
1997, as previously
reported 1,679,975 $17,000 $1,088,000 $(47,000) $(54,000) $ (283,000) $ 721,000
Adjustments in
connection with
pooling of interests
- DesignFX 176,944 2,000 (2,000) - - (45,000) (45,000)
Adjustments in
connection with
pooling of interests
- Halo 180,866 2,000 (2,000) - - 17,000 17,000
----------------------------------------------------------------------------------------------
Balance, January 1,
1997, as restated 2,037,785 21,000 1,084,000 (47,000) (54,000) (311,000) 693,000
Shares issued in
connection with
acquisition - AllNet 15,883 - 52,000 - - - 52,000
Payment of common
stock subscription
receivable - - - - 54,000 - 54,000
Amortization of
unearned compensation - - - 40,000 - - 40,000
Shares issued in
connection with
private placement 6,109 - 20,000 - - - 20,000
Issuance and
amortization of
warrants associated
with 1997 Notes - - 54,000 - - - 54,000
Capital contributions 281,000 281,000
Net loss - - - - - (694,000) (694,000)
----------------------------------------------------------------------------------------------
Balance - December 31,
1997 2,059,777 21,000 1,491,000 (7,000) - (1,005,000) 500,000
Net proceeds from
initial public
offering 1,380,000 14,000 6,628,000 - - - 6,642,000
Issuance and
amortization of
directors' options - - 79,000 - - - 79,000
Shares issued in
connection with
acquisition -
Entelechy 147,310 1,000 670,000 - - - 671,000
Conversion of
Entelechy demand note 25,000 - 150,000 - - - 150,000
Shares issued in
connection with
acquisition - MBS 4,493 - 30,000 - - - 30,000
Amortization of
unearned compensation - - - 7,000 - - 7,000
Net loss - - - - - (60,000) (60,000)
----------------------------------------------------------------------------------------------
Balance - December 31,
1998 3,616,580 $36,000 $9,048,000 $ - $ - $(1,065,000) $8,019,000
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
IBS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
December 31,
-----------------------------
1997 1998
-----------------------------
Cash flows from operating activities:
Net loss................................... $ (694,000) $ (60,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization........... 285,000 633,000
Loss on disposals of fixed assets....... 69,000 18,000
Non-cash interest expense............... 24,000 49,000
Compensation expense - Entelechy........ - 180,000
Non-cash compensation................... 40,000 110,000
Deferred income tax provision (benefit). 57,000 (115,000)
Changes in operating assets and liabilities
(net of effects of purchase acquisitions):
Accounts receivable........................ (1,365,000) 605,000
Prepaid expenses and other assets.......... 1,000 (201,000)
Accounts payable and accrued expenses...... 660,000 (457,000)
Deferred revenue........................... 276,000 (458,000)
Income taxes............................... 25,000 (79,000)
Deposits and other......................... 63,000 (57,000)
-----------------------------
Net cash provided by (used in) operating
activities.......................... (559,000) 168,000
-----------------------------
Cash flows from investing activities:
Capital expenditures - property and equipment (272,000) (727,000)
Asset acquisitions and related costs....... (75,000) (116,000)
-----------------------------
Net cash used in investing activities. (347,000) (843,000)
-----------------------------
Cash flows from financing activities:
Proceeds from initial public offering...... - 8,280,000
Private sales of common stock.............. 74,000 -
Capital contributions...................... 282,000 -
Offering costs............................. (25,000) (1,613,000)
Repayments of notes payable................ (100,000) (358,000)
Proceeds from notes payable................ 375,000 25,000
Repayments from (advances to) related parties 79,000 (70,000)
Proceeds from (repayment of) 1997 Notes.... 200,000 (200,000)
Payments of capital lease obligations...... (30,000) (65,000)
-----------------------------
Net cash provided by financing activities 855,000 5,999,000
-----------------------------
Net increase (decrease) in cash and cash
equivalents................................. (51,000) 5,324,000
Cash and cash equivalents, at beginning of year 204,000 153,000
-----------------------------
Cash and cash equivalents, at end of year..... $ 153,000 $ 5,477,000
=============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 1- ORGANIZATION AND BACKGROUND
IBS Interactive, Inc. (the "Company") and its subsidiaries provides a broad
range of computer networking, programming, applications development, Internet
subscriber access, Internet Web-site development and network installation
services. Services are primarily rendered to businesses and organizations,
including governmental and not-for-profit entities. The Company was incorporated
under the name Internet Broadcasting System, Inc. and changed its name to IBS
Interactive, Inc. on March 10, 1998. The Company, a Delaware corporation, has
its main administrative office in Cedar Knolls, New Jersey, along with regional
offices throughout New Jersey, Alabama and Virginia.
RESTATEMENTS
Previously issued consolidated financial statements and notes thereto of the
Company have been restated, as required by Accounting Principles Board Opinion
No. 16, "Business Combinations," to reflect the 1998 business combinations
accounted for as poolings-of-interests (DesignFX Interactive, LLC ("DesignFX")
and Halo Network Management, LLC ("Halo") see Note 3).
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue is recognized as services are provided to clients and subscribers. In
the event that there are significant performance obligations yet to be fulfilled
on consulting, design and installation projects, revenue recognition is deferred
until such conditions are removed.
For the years ended December 31, 1997 and 1998, the Company recognized revenues
of $252,000 and $29,000 respectively, on projects in process. Such unbilled
amounts are included in accounts receivable, net, at December 31, 1997 and 1998,
respectively.
STOCK BASED COMPENSATION
The Company accounts for its stock option awards to employees under the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date over
the amount an employee must pay to acquire the stock. The Company provides pro
forma disclosures of net income (loss) and earnings (loss) per share as if the
fair value based method of accounting had been applied, as required by Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
The values ascribed to restricted stock awards are based on the fair value of
the Company's common stock at the date of the grant. The intangible asset
related to the value of the stock awards is amortized on a straight line basis
over the required service periods. The Company's liability related to such
awards will be converted to common stock and additional paid in capital upon the
formal issuance of the common stock.
WARRANTS
The fair values ascribed to warrants that were granted in connection with the
1997 Notes (see Note 6) have been capitalized and amortized, as interest
expense, over the expected life of the underlying debt.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Valuation
F-7
<PAGE>
allowances are established against deferred tax assets when management concludes
that the realization of such deferred tax assets cannot be considered more
likely than not.
Through their acquisition dates, the owners of DesignFX and Halo elected, under
the applicable provisions of the Internal Revenue Code and applicable state
code, to report their respective income for federal and state income tax
purposes as a limited liability corporation. Under those regulations, the owners
individually received the income tax provision or benefit of their respective
share of DesignFX's and Halo's net income or loss. Accordingly, the Company has
not recorded a provision or benefit for federal and state income taxes for the
year ended December 31, 1997 and from January 1, 1998 through the respective
acquisition dates of DesignFX and Halo.
In future periods, the Company's consolidated income tax provision or benefit
will include the operating results of DesignFX and Halo. As such, the historical
tax provision of the Company, as reflected in the accompanying consolidated 1997
and 1998 statements of operations, is not necessarily indicative of the tax
provision or benefit that would have been recorded had DesignFX and Halo been
acquired at the beginning of 1997.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and other short-term
investments with an initial maturity date of three months or less from the
purchase date to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist primarily of a concentration of unsecured trade accounts receivables. At
December 31, 1997, a single customer accounted for 74% of total net accounts
receivable and at December 31, 1998, two customers accounted for 21% and 17% of
total net accounts receivable.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on accounts receivable. The Company monitors the
allowance for potential credit losses and adjusts the allowance accordingly.
During the year ended December 31, 1998, the Company's allowance for doubtful
accounts was reduced by $83,000. The decrease was comprised of charged off
accounts totaling $39,000 and a reduction in the allowance (based on the results
of an assessment of the collectibility of outstanding balances) of $44,000.
At December 31, 1998, cash equivalents of $4,982,000 and $443,000 represent
investments in GE Capital Corporation commercial paper and short-term
obligations of the United States government, respectively.
The Company maintains substantially all of the machinery and communications
network equipment utilized in providing Internet access to customers at one
location.
SOURCES OF SUPPLIES AND VENDORS
The Company has multiple vendors, which provide data communications and Internet
access services to customers. Although management believes alternative
telecommunications and access facilities could be found in a timely manner, any
disruption or termination of these services could have a short-term adverse
effect on operating results. In addition, the Company is also dependent on
third-party manufacturers of hardware components to be used for resale. Failure
by manufacturers to deliver this equipment on a timely basis, or any inability
to obtain alternative sources, could have an adverse effect on operating
results.
Although the Company attempts to maintain multiple vendors for required
products, its modems, terminal servers and high-performance routers, which are
important components of its network, are currently acquired from limited
sources. In addition, some of the Company's suppliers have limited resources and
production capacity. If the suppliers are unable to meet the Company's needs as
it builds out its network infrastructure, then delays and increased costs in the
F-8
<PAGE>
expansion of the Company's network infrastructure could result, which could have
an adverse effect on operating results.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed primarily under the straight-line method over the assets estimated
useful lives, generally three years for computer equipment, five years for
office equipment and seven years for furniture and fixtures. Leasehold
improvements are amortized over the term of the related lease, generally three
to five years. Equipment under capital leases is amortized on a straight-line
basis over the terms of the leases, generally three years.
LONG-LIVED ASSETS
The Company follows SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-lived Assets to be Disposed of" ("SFAS 121"). In accordance
with SFAS 121, the carrying values of long-lived assets are periodically
reviewed by the Company and impairments would be recognized if the expected
future operating non-discounted cash flows derived from an asset were less than
its carrying value.
There were no impairment losses recorded in the years ended December 31, 1997
and 1998.
INTANGIBLE ASSETS
Intangible assets are comprised primarily of goodwill, customer lists and other
intangibles arising from various acquisitions and deferred compensation
arrangements. Such asset values are amortized over periods of five to ten years,
and for deferred compensation arrangements over the period that such services
are rendered.
ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
notes payable approximate the instruments' fair values due to the immediate or
short-term maturity of these financial instruments.
EARNINGS (LOSS) PER SHARE
Basic loss per share has been computed using the weighted average number of
shares of common stock outstanding for the period. The Company's diluted loss
per share includes the effect, if any, of unissued shares under options,
warrants and stock awards computed using the treasury stock method. In all
periods presented, there were no differences between basic and diluted loss per
common share because the assumed exercise of common share equivalents was
antidilutive. The assumed exercise of stock options and warrants, as well as the
issuance of common stock under compensation and acquisition agreements
(aggregating 655,049 shares at December 31, 1998), could potentially dilute
basic earnings per share.
The Company's 1998 pro forma basic loss per share (which assumes that the
proceeds from the initial public offering of common stock and repayments of
certain borrowings occurred on January 1, 1998), totaled $.01 per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Significant estimates include
the assumptions utilized in the development of the Company's allowance for
doubtful accounts, given its concentration of accounts receivable balances with
a limited number of customers. In addition, many of the Company's estimates and
F-9
<PAGE>
assumptions used in the consolidated financial statements relate to the
Company's continued ability to deliver state-of-the-art technical and subscriber
services, which are subject to competitive market and technology changes.
It is reasonably possible that changes may occur in the near term that would
affect management's estimates with respect to the values of accounts
receivable, intangibles and fixed assets.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which establishes accounting and reporting standards for derivative instruments
and hedging activities. The Company is currently reviewing the effects of SFAS
133, if any. This statement will be adopted by the Company no later than its
year ending December 31, 2000.
NOTE 3 - BUSINESS COMBINATIONS
POOLINGS-OF-INTERESTS
On September 24, 1998 and December 10, 1998, the Company acquired DesignFX and
Halo, respectively, in business combinations accounted for as
poolings-of-interests. DesignFX, which engages in the development and
maintenance of Web-sites on the Internet, became a wholly-owned subsidiary of
the Company through the exchange of 176,944 shares of the Company's common stock
(exclusive of the reserves discussed below) for all of the outstanding
membership interests of DesignFX. On December 9, 1998, DesignFX was formally
merged into the Company. Halo, which engages in full-service network solutions,
including planning, installation and maintenance services, became a wholly-owned
subsidiary of the Company through the exchange of 180,866 shares of the
Company's common stock (exclusive of the reserves discussed below) for all of
the outstanding membership interests of Halo. The ultimate number of shares to
be issued to the former owners of DesignFX and Halo is contingent upon the
resolution of specific and, to a lesser extent, general financial matters. The
Company has reserved 23,216 and 38,365 of common shares for issuance to the
owners of DesignFX and Halo, respectively, pending the outcome of such matters.
The Company expects to reach agreement on the ultimate number of shares to be
issued in the year ending December 31, 1999. The accompanying financial
statements are based on the assumption that the Company, DesignFX and Halo, were
combined as of January 1, 1997 and, accordingly, financial statements of prior
years have been restated to give effect to the combinations.
Summarized results of operations of the Company, DesignFX and Halo for the
period January 1, 1997 through December 31, 1997 are as follows:
COMPANY DESIGNFX HALO
------- -------- ----
Net revenues $2,741,000 $572,000 $1,848,000
Net income (loss) 198,000 (825,000) (67,000)
Summarized unaudited results of operations of the Company and DesignFX through
September 30, 1998 (the closest practical date to the date of the DesignFX
acquisition) are as follows:
COMPANY DESIGNFX
------- --------
Net revenues $6,091,000 $1,181,000
Net income 52,000 42,000
F-10
<PAGE>
Summarized unaudited results of operations of the Company and Halo through
December 31, 1998 (the closest practical date to the date of the Halo
acquisition) are as follows:
COMPANY HALO
------- ----
Net revenues $7,853,000 $1,952,000
Net income (loss) (326,000) 266,000
There were no material adjustments to conform the accounting policies of
DesignFX and Halo to the accounting policies used by the Company.
The Company incurred charges of $109,000 for fees and costs associated with the
acquisitions of DesignFX and Halo. Such amounts, for transactions accounted for
as a pooling of interests, are expensed as services are rendered and costs are
incurred.
PURCHASES
ALLNET TECHNOLOGY SERVICES, INC.
On March 1, 1997, the Company acquired certain assets of AllNet Technology
Services, Inc. ("AllNet"), an Internet Service Provider, in exchange for $75,000
of cash and 13,378 shares of Company common stock in a business combination
accounted for as a purchase. The fair value of the shares issued in connection
with the acquisition approximated $52,000 and was based, in part, on the fair
market value of shares sold in the Company's 1996 private placement of common
stock (see Note 7). Of the total purchase price of $127,000, $65,000 was
allocated to equipment and the balance was assigned to various intangible
assets. The results of operations of AllNet are included in the accompanying
financial statements from the acquisition date forward. With respect to this
acquisition, the results of operations from January 1, 1997 through the
acquisition date were not material and, accordingly, pro forma operating results
are not presented.
JDT WEBWERX LLC
On January 1, 1998, the Company acquired certain assets of JDT WebwerX LLC
("JDT"), a business providing programming and applications development and
Internet access, for $35,000 cash, in a business combination accounted for as a
purchase. Of the total purchase price of $35,000, $9,000 was allocated to
equipment and the balance was assigned to various intangible assets. The results
of operations of JDT are included in the accompanying financial statements for
the entire year ended December 31, 1998. With respect to this acquisition, the
results of operations for the year ended December 31, 1997 through the
acquisition date were not material and, accordingly, pro forma operating results
are not presented.
ENTELECHY, INC.
On January 31, 1998, the Company acquired substantially all the assets of
Entelechy, Inc. ("Entelechy"), in exchange for 277,434 shares of Company common
stock in a business combination accounted for as a purchase. The Company issued
147,310 shares at closing, and will issue an additional 130,124 shares (the
"Contingent Shares") over a three-year period on each of January 31, 1999, 2000
and 2001 to the former Entelechy stockholders. The issuance of such shares is
contingent upon the former Entelechy stockholders remaining in the continuous
employ of the Company. The total purchase price for Entelechy was based upon the
value of shares issued at closing and related acquisition costs. Goodwill
arising from the Entelechy acquisition totaled $828,000, and is being amortized
over a period of five years. The values ascribed to the Contingent Shares will
result in a charge to operations as such shares are earned through the Company's
years ending December 31, 2001. The related charge to operations for the year
ended December 31, 1998 totaled $180,000. Assuming the former Entelechy
stockholders remain in the continuous employ of the Company, the Company is
expected to incur a charge to operations of $197,000, $197,000 and $17,000 in
each of the years ending December 31, 1999, 2000 and 2001, respectively. The
Company's liability for the values ascribed to these shares approximates
$591,000 and is included in "Deferred Compensation" in the accompanying December
31, 1998 consolidated balance sheet. Such liability will be reduced if and when
the shares are formally issued.
F-11
<PAGE>
Entelechy had an outstanding demand note of $150,000 to a relative of one of
Entelechy's principals. The demand note did not bear interest and was converted,
subsequent to the consummation of the Company's initial public offering, into
25,000 shares of the Company's common stock.
The following summarized, unaudited pro forma information for the year ended
December 31, 1997 assumes that the acquisition of Entelechy had occurred on
January 1, 1997:
Unaudited
------------
Net revenues $ 5,484,000
Operating loss (920,000)
Net loss (1,006,000)
Loss per share:
Basic and diluted $ (.49)
============
The pro forma operating results reflect estimated pro forma adjustments for the
amortization of intangibles $(156,000) and compensation expense $(197,000)
related to the issuance of the Contingent Shares over a one-year period. Pro
forma results of operations information is not necessarily indicative of the
results of operations that would have occurred had the acquisition been
consummated at the beginning of 1997, or of future results of the combined
companies.
MBS, INC.
On December 1, 1998, the Company acquired certain assets of MBS, Inc. ("MBS"), a
Certified Technical Education Center-Partner (providing training on MicroSoft
Solutions) for cash of $50,000, the issuance of 4,493 shares of Company common
stock and an assumption of liabilities totaling $150,000. This business
combination was accounted for as a purchase. The purchase price was allocated to
the fair market values of tangible and intangible assets acquired. Goodwill
arising from the MBS acquisition totaled $181,000, and is being amortized over a
period of ten years. The results of operations of MBS are included in the
accompanying financial statements from the acquisition date forward. With
respect to this acquisition, the results of operations from January 1, 1998
through the acquisition date were not material and, accordingly, pro forma
operating results are not presented.
NOTE 4 - PROPERTY AND EQUIPMENT
Major classes of property and equipment, net, consist of the following:
December 31,
---------------------------
1997 1998
------------ ------------
Network equipment $1,101,000 $1,635,000
Office equipment, fixtures and vehicles 70,000 107,000
Leasehold improvements - 81,000
------------ ------------
1,171,000 1,823,000
Less: accumulated depreciation (470,000) (880,000)
------------ ------------
$ 701,000 $ 943,000
============ ============
At December 31, 1997 and 1998, equipment subject to capital leases, less
accumulated depreciation, amount to $98,000 and $60,000, respectively.
Depreciation expense for the years ended December 31, 1997 and 1998 amounted to
$273,000 and $459,000, respectively, which includes depreciation of equipment
subject to capital lease agreements of $19,000 and $38,000, respectively.
F-12
<PAGE>
NOTE 5 - INTANGIBLE ASSETS
Intangible assets, net, are comprised of the following:
December 31,
---------------------------
1997 1998
------------ ------------
Goodwill - Entelechy $ - $ 828,000
Goodwill - MBS - 181,000
Goodwill - JDT - 26,000
Deferred compensation - 705,000
Customer lists 67,000 67,000
Organizational costs 2,000 2,000
------------ ------------
69,000 1,809,000
Less: accumulated amortization (13,000) (391,000)
------------ ------------
$ 56,000 $1,418,000
============ ============
Amortization expense was $12,000 and $378,000 for the years ended December 31,
1997 and 1998, respectively.
NOTE 6 - BORROWINGS
At December 31, 1997 and 1998, the Company's outstanding borrowings were
comprised of the following:
1997 1998
------------ ------------
1997 Notes $ 200,000 $ -
DesignFX - development loan 175,000 200,000
DesignFX - bank loan 200,000 -
Halo - line of credit 35,000 -
Halo - vehicle loan 16,000 -
Other debt 107,000 -
Capital leases 123,000 72,000
------------ ------------
856,000 272,000
Less: current portion (575,000) (47,000)
------------ ------------
Total-long term borrowings $ 281,000 $ 225,000
============ ============
1997 NOTES
On October 31, 1997, the Company entered into a series of financing agreements
with eight individual investors (collectively, the "1997 Notes"). The 1997 Notes
accrued interest at a rate of 8% and were paid in full after the closing of the
Company's initial public offering of common stock. The outstanding principal
balance of the 1997 Notes amounted to $200,000 at December 31, 1997.
In connection with the issuance of the 1997 Notes, investors also received
warrants to an aggregate of purchase up to 48,872 shares of the Company's common
stock at an exercise price of $3.54 per share through October 2000 (see Note 7).
The Company capitalized the fair values ascribed to the warrants, which included
a value reflective of the excess of the initial public offering price less the
exercise price, as a deferred financing cost of $35,000 (included in "Other
Assets" in the accompanying December 31, 1997 balance sheet). Such costs were
amortized over the life of the 1997 Notes. Interest expense for the years ended
December 31, 1997 and 1998, including the amortization of the value ascribed to
warrants, totaled $22,000 and $45,000, respectively. The effective interest rate
on the 1997 Notes, which includes the amortization of the value of the warrants,
approximated 68% per annum.
F-13
<PAGE>
DESIGNFX - DEVELOPMENT LOAN
In March 1997, DesignFX entered into an agreement with a bank to develop and
design the software and hardware for the bank's sites on the Internet and the
worldwide web. Provisions of the agreement provided for various advances to
DesignFX in order to provide working capital for expenses incurred with the
design and development of such web sites. In September 1998, this agreement was
terminated and a new agreement was executed. Terms of the new agreement provide
for the advances to be repaid in monthly installments equal to 50% of DesignFX's
defined revenues received through the bank's web site. Based on the negotiated
terms in this obligation, management does not anticipate that any repayments of
this loan will be due during the year ending December 31, 1999. In addition, the
Company will accrue, in the form of a royalty, 10% of defined revenues. Upon
repayment in full of this advance, the accrued royalties, without interest,
shall be paid over a period of one year in twelve equal monthly installments.
Obligations under this loan totaled $175,000 and $200,000 at December 31, 1997
and 1998, respectively.
DESIGNFX - BANK LOAN
In July 1997, DesignFX borrowed $200,000 from a bank. Repayment terms provided
for interest only payments through January 1999, with interest based on 1% over
the bank's prime rate of interest (9 3/4% at December 31, 1997). Remaining
principal and unpaid interest were due in monthly installments through December
2001. The outstanding balance was paid off in November 1998.
HALO - LINE OF CREDIT
Halo had a credit line with a bank that accrued interest (9 1/2% at December 31,
1997) at a rate indexed to the bank's prime rate. The outstanding balance at
December 31, 1997 totaled $35,000. The outstanding balance was repaid by the
Company in the year ended December 31, 1998 and the credit line was terminated.
HALO - VEHICLE LOAN
In 1997, Halo entered into a borrowing agreement with a bank to finance the
purchase of a vehicle. The secured note accrued interest at a rate of 8.85% and
was payable in full in May of 2001. The outstanding balance at December 31, 1997
totaled $16,000. The outstanding balance was paid off during 1998.
OTHER DEBT
In 1995, the Company issued three-year promissory notes in the original
aggregate principal amount of $100,000 of which, notes with an aggregate
original principal amount of $95,000 remained outstanding at December 31, 1997.
These notes accrued interest at a rate of 6%. Interest expense for the years
ended December 31, 1997 and 1998 amounted to $6,000 and $2,000, respectively.
Bank borrowings assumed in connection with the acquisition of Interactive
Networks, Inc. ("INI") in 1996, accrued interest at the rate of 10%. Outstanding
borrowings assumed from INI amounted to $12,000 as of December 31, 1997. Such
borrowings were secured by the Company's assets. Interest expense for each of
the years ended December 31, 1997 and 1998 amounted to $2,000 and $1,000,
respectively.
The promissory notes and the INI bank borrowings were paid off with proceeds
from the Company's initial public offering of common stock. In addition, a
demand note of $150,000 assumed in the Entelechy acquisition was converted into
25,000 shares of Company common stock in 1998.
LINE OF CREDIT
In October 1998, the Company entered into a promissory note agreement with a
bank for a line of credit. Borrowings are limited to the lower of $1,500,000 or
defined accounts receivable, and outstanding amounts are secured by the
Company's assets. At the Company's option, the interest rate is based on the
London Interbank Offering Rate ("LIBOR") plus 2% or the bank's prime rate plus
F-14
<PAGE>
.25%. The agreement requires the Company to comply with certain operational and
financial covenants. There were no outstanding borrowings under this line of
credit at December 31, 1998 and the agreement expires on June 30, 1999.
CAPITAL LEASES
The Company leases certain equipment in the normal course of operations which
are accounted for as capital leases. Outstanding obligations at December 31,
1997 and 1998 totaled $123,000 and $72,000, respectively. Interest expense
related to such agreements was $7,000 and $18,000 for the years ended December
31, 1997 and 1998, respectively.
DEBT AND LEASE MATURITIES
At December 31, 1998, aggregate required principal payments, including the
present value of amounts owed under capital leases, are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- - ------------------------ ------
1999 $ 47,000
2000 225,000
============
Total $272,000
============
NOTE 7 - STOCKHOLDERS' EQUITY
In May 1998, the Company completed an initial public offering of its common
stock. In connection with the offering, the Company registered, issued and sold
1,380,000 shares of common stock, including 180,000 shares of common stock
issued in connection with the exercise in full of the underwriter's
over-allotment option at an initial public offering price of $6.00 per share.
The proceeds to the Company (net of underwriting discounts, commissions and
other expenses payable by the Company) totaled approximately $6,642,000.
Additionally, the Company registered 120,000 shares of common stock underlying
warrants, which were sold to the underwriter ("Underwriter Warrants"). The
warrants are exercisable for a four-year period commencing on May 14, 1999 at a
price of $8.10 per share.
The Company incurred costs in connection with the issuance and distribution of
securities in the offering in the amount of $1,638,000. Such costs include
underwriting discounts and commissions in the amount of $828,000, expenses paid
to or for the underwriting in the amount of $248,000 and other expenses in the
amount of $562,000.
STOCK SPLITS
On March 9, 1998, the Company effected a 1,029.1 for 1 stock split and on April
21, 1998, a 1.187 for 1 stock split. All share and per share data have been
restated for all periods presented to reflect the splits.
CAPITAL STOCK
At December 31, 1998, 218,872 shares of common stock were reserved for the
exercise of stock warrants, comprised of the aforementioned Underwriter's
Warrants, 48,872 reserved shares for the 1997 Note investors and 50,000 for an
investment advisory firm (see Warrants below).
On March 9, 1998 the Company's Board of Directors approved an increase in the
number of shares of authorized capital stock to 12,000,000, of which 1,000,000
shares were designated as "blank check" preferred stock and 11,000,000 shares
were designated as common stock.
F-15
<PAGE>
PRIVATE PLACEMENT
During 1997, the Company sold 6,109 shares of common stock for net proceeds of
approximately $20,000. At December 31, 1996, a subscription receivable of
$54,000 was owed to the Company. Such amount was received in January 1997.
WARRANTS
As discussed in Note 6, the 1997 Note investors also received warrants to
purchase up to 48,872 shares of the Company's common stock. The 1997 Note
investors may exercise the warrants at any time through October 2000 at an
exercise price of $3.54 per share.
In November 1998, the Company entered into an agreement with an investment
advisory firm who will directly assist the Company in future acquisition
efforts. In return for services to be rendered, the Company has issued 50,000
warrants to such firm. The warrants will vest over the period of service if the
requisite number of acquisitions are consummated. The exercise prices of the
warrants were based, in part, on the fair market value of the Company's common
stock at the date of the agreement. The values ascribed to the warrants will be
capitalized. Such acquisitions were consummated in the first quarter of 1999.
STOCK AWARDS
In February 1996, the Company entered into an employment agreement with an
individual which provided for compensation that included the issuance of 24,436
shares of common stock to be issued ratably over a two-year period. Compensation
expense associated with such shares (computed using the per share price of the
1996 private placement) was $40,000 and $7,000 for the years ended December 31,
1997 and 1998, respectively.
In April 1998, the Company agreed to issue 20,000 shares of restricted stock to
an officer. The stock award vests over a four-year period; however, if certain
events occur, the unvested portion of the award will automatically vest. The
value ascribed to the stock award ($114,000) was based, in part, on the per
share price of the Company's common stock in its initial public offering.
Compensation expense for the year ended December 31, 1998 totaled $24,000. The
Company's liability for the values ascribed to these shares approximates
$114,000 and is included in "Deferred Compensation" in the accompanying December
31, 1998 consolidated balance sheet. Such liability will be reduced if and when
the shares are formally issued.
STOCK OPTION PLAN
As of March 10, 1998, the Board of Directors adopted the 1998 Stock Option Plan.
Under the terms of this plan, the Company has reserved 330,000 shares of common
stock for future grants (see Note 15).
Under the Company's 1998 Stock Option Plan, the Company may grant incentive
stock options to certain officers, employees and directors. The options expire
five or ten years from the date of grant. Accelerated vesting occurs following a
change in control of the Company and under certain other conditions. At December
31, 1998, the Company could grant an aggregate of 62,850 shares under the plan.
During the year ended December 31, 1998, the Company issued options to outside
members of their Board of Directors, which vest over a one-year period. The
exercise prices of such options were based on the fair market values of the
Company's stock at the grant dates. The related compensation charge totaled
$79,000 in 1998.
F-16
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
outstanding life (years) price exercisable price
----------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
$6.00 215,500 9.5 $6.00 26,938 $6.00
$6.25 to $6.38 23,950 9.7 6.26 1,496 6.26
$7.25 to $7.97 16,950 9.8 7.50 706 7.50
$8.09 to $8.63 10,750 9.5 8.18 1,344 8.18
---------- ----------
267,150 9.5 6.14 30,484 6.14
---------- ----------
</TABLE>
There were no option grants in the year ended December 31, 1997. Transactions
under the 1998 Stock Option Plan are summarized as follows:
Year ended December 31,
-----------------------
1998
-----------------------
Weighted
average
exercise
Shares price
---------------------------------------------------------
Outstanding at beginning of year - -
Granted 267,150 $ 6.14
Exercised - -
Canceled - -
---------------------------------------------------------
Outstanding at end of year 267,150 6.14
---------------------------------------------------------
Options exercisable at year end 30,484 6.14
---------------------------------------------------------
Options available for grant 62,850
---------------------------------------------------------
Under the accounting provisions of SFAS 123, the Company's 1998 pro forma net
loss and loss per share would have been:
--------------------------------------------------------
Net loss $(125,000)
Net loss per share; basic and diluted $(.04)
--------------------------------------------------------
The Company estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following assumptions:
December 31, 1998
--------------------------------------------------------
Dividend yield 0%
Expected volatility 46.1%
Risk-free interest rate 5.39%
Expected life - years 10
Weighted average fair value of options granted $ 3.47
--------------------------------------------------------
F-17
<PAGE>
NOTE 8 - TAXES
Provisions (benefits) for federal and state income taxes consist of the
following:
December 31,
---------------------------
1997 1998
------------ ------------
Current
Federal.................................... $21,000 $ 102,000
State...................................... 6,000 28,000
------------ ------------
27,000 130,000
------------ ------------
Deferred
Federal.................................... 29,000 (91,000)
State...................................... 28,000 (24,000)
------------ ------------
57,000 (115,000)
============ ============
Total income tax provision $ 84,000 $ 15,000
============ ============
Deferred tax assets (liabilities) arise from the following temporary differences
and are classified as follows:
December 31,
---------------------------
1997 1998
------------ ------------
Deferred Tax Asset, Current:
Accounts receivable allowances........... $ 26,000 $ 9,000
Net operating loss carryforwards......... 2,000 -
Accrued compensation..................... - 117,000
Other assets............................. 20,000 -
Other, net............................... 2,000 -
------------ ------------
$ 50,000 $ 126,000
============ ============
Deferred Tax Asset (Liabilities), Non-Current:
Intangible assets........................ - $ 1,070,000
Valuation allowance...................... - (1,070,000)
Property and equipment................... (34,000) 16,000
Other.................................... - (11,000)
------------ ------------
$(34,000) $ 5,000
============ ============
Differences between the federal provision (benefit) computed at a statutory rate
and the Company's effective tax rate are as follows:
December 31,
---------------------------
1997 1998
------------ ------------
Statutory rate............................. $ (207,000) $ (15,000)
State taxes, net of federal benefit........ 20,000 3,000
Benefit attributed to DesignFX and Halo owners 303,000 (76,000)
Amortization of Entelechy goodwill......... - 52,000
Non-deductible expenses.................... 31,000 45,000
Decrease in deferred income tax valuation
allowance.................................. (76,000) -
Other, net................................. 13,000 6,000
============ ============
$ 84,000 $ 15,000
============ ============
F-18
<PAGE>
A current benefit of $12,000 related to Entelechy acquisition costs was
recognized in the year ended December 31, 1998. The benefit reduced the carrying
value of goodwill arising from the acquisition.
Based on historical results of the Company and its acquisitions and estimated
1999 earnings, which includes earnings on certain consulting projects and the
effects of integrated operations of the Company, management considers
realization of the deferred tax assets generated from operations to be more
likely than not.
The acquisitions of DesignFX and Halo were deemed to be taxable among the
parties and, accordingly, the Company was required to revalue the tax bases of
the intangible assets of DesignFX and Halo. This revaluation resulted in an
excess of tax bases over carrying values. Based on an assessment of the
Company's ability to generate taxable income beyond the year ending December 31,
1999, the Company, upon the acquisitions of DesignFX and Halo, has established a
valuation allowance of $1,070,000 against the entire deferred tax asset, since
realization of the asset can not be considered to be more likely than not.
Management will perform periodic assessments of its ability to generate taxable
income and reduce the valuation allowance if realization of the asset is
considered more likely than not. For federal and state income tax purposes, the
Company will amortize this intangible asset over a period of 15 years.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases facilities and equipment under operating leases and subleases
expiring through December 2003. Some of the leases have renewal options and most
contain provisions for passing through certain incremental costs. At December
31, 1998, future net minimum annual rental payments under non-cancelable leases
are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- - ------------------------- ------
1999 $ 628,000
2000 576,000
2001 439,000
2002 307,000
2003 178,000
------------
Total $2,128,000
============
Total rental expense for the years ended December 31, 1997 and 1998 was
approximately $124,000 and $384,000, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment and consulting contracts with certain
officers, employees and stockholders, which provide for minimum annual salaries
to be paid over specified terms. At December 31, 1998, future commitments for
such payments were as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- - ------------------------ ------
1999 $2,053,000
2000 1,468,000
2001 605,000
2002 296,000
------------
TOTAL $4,422,000
============
FIXED ASSETS
At December 31, 1998, the Company had entered into fixed asset purchase
commitments of approximately $1,200,000.
F-19
<PAGE>
NOTE 10 - RELATED PARTY TRANSACTIONS
FINANCING TRANSACTIONS
At December 31, 1997, certain of the Company's stockholders held promissory
notes made by the Company in the aggregate original principal amount of $95,000.
These notes accrued interest of 6%. Interest expense for each of the years ended
December 31, 1997 and 1998 amounted to $6,000 and $2,000, respectively.
Certain relatives of the Company's executive officers were 1997 Note investors.
The terms of such borrowings are the same as those afforded to other investors
(see Note 6).
DesignFX had a non-interest bearing demand note payable to an owner. The amount
outstanding at December 31, 1997 totaled $15,000, the balance of which was paid
in 1998. The imputed interest expense for the years ended December 31, 1997 and
1998 was not material.
At December 31, 1998, the Company had advanced $70,000 to an entity controlled
by an officer of DesignFX. Repayment terms have yet to be finalized.
GUARANTEES
Certain executive officers, who are also stockholders of the Company, have
provided, at no cost to the Company, personal guarantees of certain obligations
of the Company. The amount of obligations subject to these guarantees totaled
$117,000 and $72,000 at December 31, 1997 and 1998, respectively.
OTHER TRANSACTIONS
An entity whose stockholder is also a stockholder of the Company provided
management consulting services to the Company. Fees for such services amounted
to $14,000 and $0 for the years ended December 31, 1997 and 1998, respectively.
An entity, which is owned by certain owners of the Halo, provided managerial and
administrative services to Halo. In 1997, Halo was charged $120,000 for such
services (included in General and Administrative Expenses in the accompanying
December 31, 1997 consolidated statement of operations). Due to the acquisition
of Halo by the Company (described in Note 3), there was no allocation of such
expenses to Halo in 1998. At December 31, 1997 and 1998, Halo owed $128,000 and
$0 to this entity. The related interest expense totaled $7,000 and $0 for the
years ended December 31, 1997 and 1998.
Cash contributed to the Company from DesignFX and Halo owners totaled $281,000
and $0 for the years ended December 31, 1997 and 1998, respectively.
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
As disclosed in Note 3, the Company has consummated various asset acquisitions
in 1997 and 1998. In conjunction with such acquisitions, liabilities were
assumed as follows:
1997 1998
------------ ------------
Fair value of assets acquired $127,000 $1,010,000
Cash proceeds 75,000 50,000
Fair value of issued common stock 52,000 700,000
============ ============
Liabilities assumed $ -0- $ 260,000
============ ============
Cash paid for interest and income taxes are as follows:
F-20
<PAGE>
1997 1998
------------ ------------
Interest $7,000 $ 63,000
Income Taxes 2,000 197,000
============ ============
In 1997, the Company acquired $95,000 of equipment subject to capital lease
obligations. In 1998, a demand note of $150,000 was settled through the issuance
of 25,000 shares of Company common stock.
NOTE 12 - MAJOR CLIENTS OF THE COMPANY
One client accounted for 29% and 35% of the Company's revenues for the years
ended December 31, 1997 and 1998, respectively. One consulting project provided
to the same client accounted for 24% and 28% of the Company's revenues for the
years ended December 31, 1997 and 1998, respectively.
NOTE 13 - SEGMENT INFORMATION
The Systems Integration, Programming and Applications Development Consulting
segment consists primarily of custom programming for Intranet and Internet
applications, including distance learning and e-commerce. The Internet Services
segment provides dedicated leased line, frame relay and digital subscriber line
communications, dial-up access and mail service. The Web Design segment
(principally DesignFX) provides Web-site development and maintenance,
programming and hosting services. The Network Installations segment (principally
Halo) provides full service network solutions including planning, installation
and maintenance. All segments provide services to customers located in the
United States. The Corporate segment provides internal administrative, marketing
and treasury services. There are no revenues generated by the Corporate segment.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 2. The Company evaluates
segment performance based on net income or loss.
There were no intersegment sales and transfers during the years ended December
31, 1997 and 1998.
The Company's reportable segments were strategic business units that offer
different products and services. They have been managed separately because each
business requires different technological and marketing strategies or were
subject to autonomous control.
Segment information as of and for the years ended December 31, 1997 and 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
Systems
Integration,
Programming
and
Applications
Development Internet Web Network
December 31, 1997 Consulting Services Design Installation Corporate Total
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $1,750 $ 991 $ 572 $1,848 $ - $5,161
Cost of services 208 891 565 1,153 - 2,817
------------- --------- ------- --------- ------- --------
Gross profit 1,542 100 7 695 - 2,344
Selling, general &
administrative 404 663 850 704 189 2,810
Amortization of
intangible assets - 12 - - - 12
Non-cash compensation
expense 40 - - - - 40
------------- --------- ------- --------- ------- --------
Operating income (loss) 1,098 (575) (843) (9) (189) (518)
Interest expense - - (28) (14) (37) (79)
Other income (expense),
net - - 46 (44) (15) (13)
Income tax (provision)
benefit (330) 173 - - 73 (84)
------------- --------- ------- --------- ------- --------
Net income (loss) $ 768 $(402) $(825) $ (67) $(168) $ (694)
============= ========= ======= ========= ======= ========
Allocated assets $1,523 $ 616 $ 256 $ 360 $ 313 $3,068
============= ========= ======= ========= ======= ========
Expenditures for
allocated assets $ - $ 152 $ 94 $ 24 $ 2 $ 272
============= ========= ======= ========= ======= ========
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
Systems
Integration,
Programming
and
Applications
Development Internet Web Network
December 31, 1998 Consulting Services Design Installation Corporate Total
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $4,967 $1,301 $1,585 $1,952 $ - $9,805
Cost of services 2,504 1,629 926 1,379 - 6,438
------------- --------- ------- -------- --------- -------
Gross profit 2,463 (328) 659 573 - 3,367
Selling, general &
administrative 1,456 280 454 303 508 3,001
Amortization of
intangible assets 154 19 - - - 173
Non-cash compensation
expense 187 - - - 103 290
Merger expenses - - - - 109 109
------------- --------- ------- -------- --------- -------
Operating income (loss) 666 (627) 205 270 (720) (206)
Interest expense - - (18) (5) (61) (84)
Interest income - - - 1 184 185
Other income (expense), net - - 31 38 (9) 60
Income tax (provision)
benefit (464) 251 - - 198 (15)
------------- --------- ------- -------- --------- -------
Net income (loss) $ 202 $(376) $218 $304 $ (408) $ (60)
============= ========= ======= ======== ========= =======
Allocated assets $2,430 $ 550 $213 $289 $6,393 $9,875
============= ========= ======= ========= ========= =======
Expenditures for $ - $ 336 $220 $ - $ 171 $ 727
allocated assets ============= ========= ======= ========= ========= =======
</TABLE>
NOTE 14 - FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1998, the Company recognized, as changes in estimates,
the pre-tax effects of: (i) reducing liabilities accrued in previous years by
$55,000 (included in other (income) expense, net), (ii) reducing the allowance
for doubtful accounts by $44,000, and (iii) reducing a current year royalty
liability by $37,000. The Company incurred charges of $109,000 for
fees and costs associated with the acquisitions of DesignFX and Halo in the
fourth quarter of 1998. Management fee expenses allocated to Halo from a related
party totaling $90,000 through September 30, 1998 were eliminated in the fourth
quarter of 1998.
NOTE 15 - SUBSEQUENT EVENTS
ACQUISITIONS
On January 29, 1999, the Company acquired substantially all of the assets of
Mainsite Communications (Mainsite") for approximately $53,000 in cash. Mainsite
is an Internet Service Provider based in Bridgeport, New Jersey.
On February 22, 1999, the Company acquired substantially all of the assets of
the Renaissance Internet Services Division ("Renaissance") of PIVC, LLC, for
$365,000, a one-year promissory note of $228,000 and the issuance of 44,046
shares of common stock, subject to certain adjustments. Renaissance is an
Internet Service Provider headquartered in Huntsville, Alabama.
On March 1, 1999, the Company acquired substantially all of the assets of EZ
Net, Inc., a Yorktown, Virginia-based Internet Service Provider with
approximately 3,100 consumer dial-up and 40 corporate accounts, in exchange for
$300,000 in cash and the issuance of 33,289 shares of Company common stock,
subject to certain adjustments.
On March 25, 1999, the Company acquired substantially all of the assets of the
ADViCOM division of Multitronics, Inc., for approximately $118,000 in cash and
the issuance of 4,424 shares of common stock. ADViCOM is an Internet Service
Provider based in Huntsville, Alabama.
F-22
<PAGE>
All of these business combinations have been accounted for as purchases. The
ultimate values ascribed to the purchases are subject to certain adjustments
between the parties. The Company's 1999 acquisitions do not represent,
individually and in the aggregate, significant subsidiaries. Accordingly,
condensed and pro forma financial information is not presented.
OPTION PLAN
In January 1999, the Board of Directors decided to have its stockholders vote,
at the Annual Meeting of Stockholders, on the approval of a new stock option
plan, which would permit the Company to grant additional stock options to
purchase an aggregate of 300,000 shares of common stock of the Company.
F-23
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
*3.1 Restated Certificate of Incorporation of the Company (filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2,
File No. 333-47741, filed on April 23, 1998 (the "Registration
Statement")).
*3.2 Restated By-Laws of the Company, as amended (filed as Exhibit 3.2
to the Company's Registration Statement).
4.1 See Exhibit numbers 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Restated By-Laws of the Company, as
amended, defining the rights of the holders of Common Stock.
*4.2 Specimen form of certificate evidencing the shares of Common Stock
of the Company (filed as Exhibit 4.1 to the Company's Registration
Statement).
*10.1 Form of Registration Rights Agreement, dated as of May 6, 1997,
between the Company and the holders of certain shares of Common
Stock (filed as Exhibit 10.2 to the Company's Registration
Statement).
*10.2 Form of Warrant to Purchase Shares of Stock, dated as of October 31,
1997 (filed as Exhibit 10.4 to the Company's Registration
Statement).
*10.3 Form of Employment Agreement between the Company and Nicholas R.
Loglisci, Jr. (filed as Exhibit 10.5 to the Company's Registration
Statement).+
*10.4 Form of Employment Agreement between the Company and Clark D.
Frederick (filed as Exhibit 10.6 to the Company's Registration
Statement).+
*10.5 Form of Employment Agreement between the Company and Frank
Altieri, Jr. (filed as Exhibit 10.7 to the Company's Registration
Statement).+
*10.6 Form of Employment Agreement between the Company and Jeffrey
Brenner (filed as Exhibit 10.8 to the Company's Registration
Statement).+
*10.7 Stock Purchase Agreement, dated as of January 31, 1998, between
the Company and Entelechy, Inc. and the stockholders of Entelechy,
Inc. named therein (filed as Exhibit 10.12 to the Company's
Registration Statement).
*10.8 Membership Interest Purchase Agreement, dated September 24, 1998, by
and among the Company and Peter Bowman, Lawrence Rafkin, Robert
Gillespie, Steven Rotella, Steven Swartz, Jospeh Calabro, Febe
Dwyer, Barbara Glass-Seran, Clifford Seran, Stanley Lerner, Annette
Monti, Christina Monti, Jack Monti, Rogelio Valencia, Linda Valencia
and Phyllis Wood (filed as Exhibit 2.1 to the Company's Report on
Form 8-K, filed on October 9, 1998).
*10.9 Membership Interest Acquisition Agreement, dated December 10, 1998,
by and among the Company, Carl Broadbent, Keith Lowy, Stephen Lowy
and Halo Network Management, LLC (filed as Exhibit 2.1 to the
Company's Report on Form 8-K, filed on December 22, 1998).
*10.10 IBS Interactive, Inc. 1998 Stock Option Plan (filed as Exhibit
10.14 to the Company's Registration Statement).+
*10.11 Commercial Sublease, dated as of May 5, 1997, between the Company
and Information Systems & Communications, Inc., in connection with
the Company's premises in Fairfax, Virginia (filed as Exhibit 10.16
to the Company's Registration Statement).
*10.12 Second Lease Modification Agreement, dated as of March 3, 1998, by
and among the Company and EI Realty, 2 Ridgedale Avenue, Inc. and
Hanover Park for Industry, in connection with the Company's premises
in Cedar Knolls, New Jersey (filed as Exhibit 10.17 to the Company's
Registration Statement).
*10.13 Letter Agreement, dated as of October 21, 1997, between the Company
and EI Realty in connection with the Company's premises in Cedar
Knolls, New Jersey (filed as Exhibit 10.18 to the Company's
Registration Statement).
*10.14 Lease Agreement, dated as of May 1, 1997, by and between the Company
and Iron Investment Corp. and Hanover Park for Industry, in
connection with the Company's premises in Cedar Knolls, New Jersey
(filed as Exhibit 10.19 to the Company's Registration Statement).
*10.15 Network Services Contract, dated as of December 27, 1996, between
the Company and the Catholic Healthcare Network (filed as Exhibit
10.20 to the Company's Registration Statement).
<PAGE>
*10.16 Professional Service Agreement Consulting, dated as of October 23,
1997, between Aetna Life Insurance Company and the Company (filed as
Exhibit 10.21 to the Company's Registration Statement).
*10.17 Lease Agreement, dated as of January 31, 1998, between the Company
and R&G International, in connection with the Company's premises in
Huntsville, Alabama (filed as Exhibit 10.22 to the Company's
Registration Statement).
**10.18 Loan Agreement, dated October 30, 1998, by and between the Company
and First Union National Bank.
**21.1 Subsidiaries of the Company.
**24.1 Power of Attorney (appears on signature page).
**27.1 Financial Data Schedule.
- - -------------
* Incorporated by reference.
** Filed herewith.
+ Management contract or compensatory plan or arrangement.
[FIRST UNION LOGO]
LOAN AGREEMENT
First Union National Bank
765 Broad Street
Newark, New Jersey 07102
(Hereinafter referred to as the "Bank")
lBS Interactive, Inc.
2 Ridgedale Avenue
Cedar Knolls, New Jersey 07927
(Individually and collectively "Borrower")
This Loan Agreement ("Agreement") is entered into October 30, 1998, by and
between Bank and Borrower, a Corporation (For profit) organized under the laws
of Delaware.
Borrower has applied to Bank for a loan or loans (individually and collectively,
the "Loan") evidenced by one or more promissory notes (whether one or more, the
"Note") as follows:
Line of Credit - in the principal amount of $1,500,000.00 which is evidenced by
the Promissory Note dated October 30, 1998 ("Line of Credit Note"), under which
Borrower may borrow, repay, and reborrow, from time to time, so long as the
total indebtedness outstanding at any one time does not exceed the principal
amount. The Loan proceeds are to be used by Borrower solely to support operating
capital needs. Bank's obligation to advance or readvance under the Line of
Credit Note shall terminate if Borrower is in Default under the Line of Credit
Note.
This Agreement applies to the Loan and all Loan Documents. The terms "Loan
Documents" and "Obligations," as used in this Agreement, are defined in the
Note. The term "Borrower" shall include its Subsidiaries and Affiliates. As used
in this Agreement as to Borrower, "Subsidiary" shall mean any corporation of
which more than 50% of the issued and outstanding voting stock is owned directly
or indirectly by Borrower. As to Borrower, "Affiliate" shall have the meaning as
defined in 11 U.S.C. ss. 101, except that the term "debtor" therein shall be
substituted by the term "Borrower" herein.
Relying upon the covenants, agreements, representations and warranties contained
in this Agreement, Bank is willing to extend credit to Borrower upon the terms
and subject to the conditions set forth herein, and Bank and Borrower agree as
follows:
REPRESENTATIONS. Borrower represents that from the date of this Agreement and
until final payment in full of the Obligations: Accurate Information. All
information now and hereafter furnished to Bank is and will be true, correct and
complete. Any such information relating to Borrower's financial condition will
accurately reflect Borrower's financial condition as of the date(s) thereof,
(including all contingent liabilities of every type), and Borrower further
represents that its financial condition has not changed materially or adversely
since the date(s) of such documents. Authorization; Non-Contravention. The
execution, delivery and performance by Borrower and any guarantor, as
applicable, of this Agreement and other Loan Documents to which it is a party
are within its power, have been duly authorized by all necessary action taken by
the duly authorized officers of Borrower and any guarantors and, if necessary,
by making appropriate filings with any governmental agency or Unit and are the
legal, binding, valid and enforceable obligations of Borrower and any
guarantors; and do not (i) contravene, or constitute (with or without the giving
of notice or lapse of time or both) a violation of any provision of applicable
law, a violation of the organizational documents of Borrower or any guarantor,
or a default under any agreement, judgment, injunction, order, decree or other
instrument binding upon or affecting Borrower or any guarantor, (ii) result in
the creation or imposition of any lien (other than the lien(s) created by the
Loan Documents) on any of Borrower's or guarantor's assets, or (iii) give cause
for the acceleration of any obligations of Borrower or any guarantor to any
other creditor. Asset Ownership. Borrower has good and marketable title to all
of the properties and assets reflected on the balance sheets and financial
statements supplied Bank by Borrower, and all such properties and assets are
free and clear of mortgages, security deeds, pledges, liens, charges, and all
other encumbrances, except as otherwise disclosed to Bank by Borrower in writing
("Permitted Liens"). To Borrower's knowledge, no default has occurred under any
<PAGE>
Permitted Liens and no claims or interests adverse to Borrower's present rights
in its properties and assets have arisen. Discharge of Liens and Taxes. Borrower
has duly filed, paid and/or discharged all taxes or other claims which may
become a lien on any of its property or assets, except to the extent that such
items are being appropriately contested in good faith and an adequate reserve
for the payment thereof is being maintained. Sufficiency of Capital. Borrower is
not, and after consummation of this Agreement and after giving effect to all
indebtedness incurred and liens created by Borrower in connection with the Loan,
will not be, insolvent within the meaning of 11 U.S.C. ss. 101(32). Compliance
with Laws. Borrower is in compliance in all respects with all federal, state and
local laws, rules and regulations applicable to its properties, operations,
business, and finances, including, without limitation, any federal or state laws
relating to liquor (including 18 U.S.C. ss. 3617, ET SEQ.) or narcotics
(including 21 U.S.C. ss. 801, ET SEQ.) and/or any commercial crimes; all
applicable federal, state and local laws and regulations intended to protect the
environment; and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if applicable. Organization and Authority. Each corporate or limited
liability company Borrower and any guarantor, as applicable, is duly created,
validly existing and in good standing under the laws of the state of its
organization, and has all powers, governmental licenses, authorizations,
consents and approvals required to operate its business as now conducted. Each
corporate or limited liability company Borrower and any guarantor, if any, is
duly qualified, licensed and in good standing in each jurisdiction where
qualification or licensing is required by the nature of its business or the
character and location of its property, business or customers, and in which the
failure to so qualify or be licensed, as the case may be, in the aggregate,
could have a material adverse effect on the business, financial position,
results of operations, properties or prospects of Borrower or any such
guarantor. No Litigation. There are no pending or threatened suits, claims or
demands against Borrower or any guarantor that have not been disclosed to Bank
by Borrower in writing except as identified in the Borrower's 10-Q statement
dated March 31, 1998. Regulation U. None of the proceeds of the Loan made
pursuant to this Agreement shall be used directly or indirectly for the purpose
of purchasing or carrying any margin stock in violation of any of the provisions
of Regulation U of the Board of Governors of the Federal Reserve System
("Regulation U"), or for the purpose of reducing or retiring any indebtedness
which was originally incurred to purchase or carry margin stock or for any other
purchase which might render the Loan a "Purpose Credit" within the meaning of
Regulation U. ERISA. Each employee pension benefit plan, as defined in ERISA,
maintained by Borrower meets, as of the date hereof, the minimum funding
standards of ERISA and all applicable regulations thereto and requirements
thereof, and of the Internal Revenue Code of 1954, as amended. No "Prohibited
Transaction" or "Reportable Event" (as both terms are defined by ERISA) has
occurred with respect to any such plan.
AFFIRMATIVE COVENANTS. Borrower agrees that from the date of this Agreement and
until final payment in full of the Obligations, unless Bank shall otherwise
consent in writing, Borrower will: Business Continuity. Conduct its business in
substantially the same manner and locations as such business is now and has
previously been conducted. Maintain Properties. Maintain, preserve and keep its
property in good repair, working order and condition, making all needed
replacements, additions and improvements thereto, to the extent allowed by this
Agreement. Access to Books & Records. Allow Bank, or its agents, during normal
business hours, access to the books, records and such other documents of
Borrower as Bank shall reasonably require, and allow Bank to make copies thereof
at Bank's expense. Insurance. Maintain adequate insurance coverage with respect
to its properties and business against loss or damage of the kinds and in the
amounts customarily insured against by companies of established reputation
engaged in the same or similar businesses including, without limitation,
commercial general liability insurance, workers compensation insurance, and
business interruption insurance; all acquired in such amounts and from such
companies as Bank may reasonably require. Notice of Default and Other Notices.
(a) Notice of Default. Furnish to Bank immediately upon becoming aware of the
existence of any condition or event which constitutes a Default (as defined in
the Loan Documents) or any event which, upon the giving of notice or lapse of
time or both, may become a Default, written notice specifying the nature and
period of existence thereof and the action which Borrower is taking or proposes
to take with respect thereto. (b) Other Notices. Promptly notify Bank in writing
of (i) any material adverse change in its financial condition or its business;
(ii) any default under any material agreement, contract or other instrument to
which it is a party or by which any of its properties are bound, or any
acceleration of the maturity of any indebtedness owing by Borrower; (iii) any
material adverse claim against or affecting Borrower or any part of its
properties; (iv) the commencement of, and any material determination in, any
litigation with any third party or any proceeding before any governmental agency
or unit affecting Borrower; and (v) at least 30 days prior thereto, any change
<PAGE>
First Union National Bank
IBS Interactive, Inc.
Page 3
in Borrower's name or address as shown above, and/or any change in Borrower's
structure. Compliance with Other Agreements. Comply with all terms and
conditions contained in this Agreement, and any other Loan Documents, and swap
agreements, if applicable, as defined in the Note. Payment of Debts. Pay and
discharge when due, and before subject to penalty or further charge, and
otherwise satisfy before maturity or delinquency, all obligations, debts, taxes,
and liabilities of whatever nature or amount, except those which Borrower in
good faith disputes. Reports and Proxies. Deliver to Bank, promptly, a copy of
all financial statements, reports, notices, and proxy statements, sent by
Borrower to stockholders, and all regular or periodic reports required to be
filed by Borrower with any governmental agency or authority. Other Financial
Information. Deliver promptly such other information regarding the operation,
business affairs, and financial condition of Borrower which Bank may reasonably
request. Non-Default Certificate From Borrower. Deliver to Bank, with the
Financial Statements required herein, a certificate signed by Borrower, if
Borrower is an individual, or by a principal financial officer of Borrower
warranting that no "Default" as specified in the Loan Documents nor any event
which, upon the giving of notice or lapse of time or both, would constitute such
a Default, has occurred. Estoppel Certificate. Furnish, within 15 days after
request by Bank, a written statement duly acknowledged of the amount due under
the Loan and whether offsets or defenses exist against the Obligations.
NEGATIVE COVENANTS. Borrower agrees that from the date of this Agreement and
until final payment in full of the Obligations, unless Bank shall otherwise
consent in writing, Borrower will not: Default on Other Contracts or
Obligations. Default on any material contract with or obligation when due to a
third party or default in the performance of any obligation to a third party
incurred for money borrowed in an amount in excess of $100,000.00. Judgment
Entered. Permit the entry of any monetary judgment or the assessment against,
the filing of any tax lien against, or the issuance of any writ of garnishment
or attachment against any property of or debts due Borrower in an amount in
excess of $100,000.00 and that is not discharged or execution is not stayed
within Thirty (30) days of entry. GOVERNMENT INTERVENTION. Permit the assertion
or making of any seizure, vesting or intervention by or under authority of any
government by which the management of Borrower or any guarantor is displaced of
its authority in the conduct of its respective business or such business is
curtailed or materially impaired. PREPAYMENT OF OTHER DEBT. Retire any long-term
debt entered into prior to the date of this Agreement at a date in advance of
its legal obligation to do so except for debt to be retired from the proceeds of
the Initial Public Offering, as identified in the Borrower's 10-Q dated March
31, 1998. RETIRE OR REPURCHASE CAPITAL STOCK. Retire or otherwise acquire any of
its capital stock. CHANGE OF MANAGEMENT. Make or suffer a change in senior
management, except such changes as are reasonably acceptable to Bank.
GUARANTEES. Guarantee or otherwise become responsible for obligations of any
other person or persons in an aggregate amount in excess of $250,000.00 per
fiscal year, other than the endorsement of checks and drafts for collection in
the ordinary course of business. ENCUMBRANCES. Create, assume, or permit to
exist any mortgage, security deed, deed of trust, pledge, lien, charge or other
encumbrance on any of its assets, whether now owned or hereafter acquired, other
than: (i) security interests required by the Loan Documents; (ii) liens for
taxes contested in good faith: (iii) liens accruing by law for employee
benefits; or (iv) Permitted Liens.
FINANCIAL COVENANTS. Borrower agrees to the following provisions from the date
hereof until final payment in full of the Obligations, unless Bank shall
otherwise consent in writing: CURRENT RATIO. Borrower shall, at all times,
maintain a Current Ratio of not less than 1.50 to 1.00. "Current Ratio" shall
mean the ratio of current assets divided by current liabilities. Tangible Net
Worth. Borrower shall, at all times, maintain Tangible Net Worth of at least
$5,500,000.00. "Tangible Net Worth" shall mean the total assets minus total
liabilities. For purposes of this computation, the aggregate amount of any
intangible assets of Borrower including, without limitation, goodwill,
franchises, licenses, patents, trademarks, trade names, copyrights, service
marks, and brand names, shall be subtracted from total assets, and total
liabilities shall include fully subordinated debt. DEPOSIT RELATIONSHIP.
Borrower shall maintain its primary depository account with Bank. Dividends.
Borrower shall not, during any fiscal year, declare or pay dividends in an
amount in excess of 40% of its net income. Said amount may be paid only after
providing for the prior satisfaction of all accrued taxes and debt service. In
no event shall Borrower declare or pay a dividend if there shall exist a Default
or a condition which, upon the giving of notice or lapse of time or both, would
become a Default under the Loan Documents. DEBT TO CASH FLOW RATIO. Borrower
shall, at all times maintain, a ratio of Debt to Cash Flow of not more than 2.00
to 1.00. "Debt to Cash Flow" shall mean the sum of all Funded Debt divided by
the sum of earnings before interest, taxes, depreciation and amortization.
"Funded Debt" shall mean, as applied to any person, the sum of all indebtedness
for borrowed money (including all indebtedness under the Loan and including,
without limitation, capital lease obligations, subordinated debt, and
unreimbursed drawings under letters of credit) or evidenced by a note, bond,
debenture or similar instrument of that person. Limitation on Mergers and
<PAGE>
First Union National Bank
IBS Interactive, Inc.
Page 4
Acquisitions. Borrower shall not make any acquisitions except asset purchases
not to exceed a purchase price of $2,500,000.00 in the aggregate without Bank's
prior written consent, which will not be unreasonably withheld. Borrower shall
not pay more than 30% of the purchase price for any such acquisition in cash
unless the acquisition purchase price is less than $500,000.00. Without the
prior written consent of Bank, Borrower shall not permit any of the following:
(i) a material alteration in the kind or type of Borrower's business or that of
Borrower's Subsidiaries or Affiliates, if any; (ii) the sale of substantially
all of the business or assets of Borrower, any of Borrower's Subsidiaries or
Affiliates or any guarantor or a material portion (10%) of such business or
assets, if such a sale is outside the ordinary course of business of Borrower,
or any of Borrower's Subsidiaries of Affiliates or any guarantor or more than
50% of the outstanding stock or voting power of or in any such entity in a
single transaction or a series of transactions; (iii) any merger or
consolidation of any Borrower, or any of Borrower's Subsidiaries or Affiliates
or guarantor. NO TWO QUARTERLY LOSSES. Borrower shall not incur losses for two
(2) consecutive quarters within a rolling four quarter period. LOANS AND
Advances. Borrower shall not, during any fiscal year, make loans or advances,
excepting ordinary course of business travel and expense advances, to any person
or entity, which total more than $500,000.00 in the aggregate.
ANNUAL FINANCIAL STATEMENTS. Borrower shall deliver to Bank, within 90 days
after the close of each fiscal year, audited financial statements reflecting its
operations during such fiscal year, including, without limitation, a balance
sheet, profit and loss statement and statement of cash flows, with supporting
schedules; all on a consolidated and consolidating basis and in reasonable
detail, prepared in conformity with generally accepted accounting principles,
applied on a basis consistent with that of the preceding year. All such
statements shall be examined by an independent certified public accountant
acceptable to Bank. The opinion of such independent certified public accountant
shall not be acceptable to Bank if qualified due to any limitations in scope
imposed by Borrower or its Subsidiaries, if any. Any other qualification of the
opinion by the accountant shall render the acceptability of the financial
statements subject to Bank's approval. Borrower's accountant shall provide Bank
with a written acknowledgment of Bank's reliance upon the statements in
accordance with N.J.S. ss. 2A:53A-25.
PERIODIC FINANCIAL STATEMENTS. Borrower shall deliver to Bank unaudited
management-prepared quarterly financial statements, including, without
limitation, a balance sheet, profit and loss statement and statement of cash
flows, with supporting schedules, as soon as available and in any event within
30 days after the close of each such period; all in reasonable detail and
prepared in conformity with generally accepted accounting principles, applied on
a basis consistent with that of the preceding year. Such statements shall be
certified as to their correctness by a principal financial officer of Borrower.
Borrower shall deliver to Bank quarterly an accounts receivable aging and
borrowing base certificate within 30 days of quarter end. Borrower shall deliver
to Bank semi-annually, a covenant compliance certificate with delivery of
financial statements.
FINANCIAL AND OTHER INFORMATION. Borrower shall deliver to Bank such information
as Bank may reasonably request from time to time, including without limitation,
financial statements and information pertaining to Borrower's financial
condition. Such information shall be true, complete, and accurate.
BORROWING BASE. As to the Line of Credit Note in the principal amount of
$1,500,000.00, the following provisions shall apply:
Borrowing Limitation. The maximum principal amount that Borrower may borrow
shall be the lesser of the principal amount stated in the Line of Credit Note or
the maximum principal amount allowed under this addendum (the "Maximum Principal
Amount").
The Maximum Principal Amount shall be an amount equal to 70% of the net amount
of Eligible Accounts, less the amount of any Reserve required by Bank.
"Eligible Account" refers to an account receivable not more than 90 days from
the date of the original invoice that arises in the ordinary course of
Borrower's business and meets the following eligibility requirements: (a) the
sale of goods or services reflected in such account is final and such goods and
services have been delivered or provided and accepted by the account debtor and
payment for such is owing; (b) the invoices comprising an account are not
subject to any claims, returns or disputes of any kind; (c) the account debtor
is not insolvent; (d) the account debtor has its principal place of business in
<PAGE>
First Union National Bank
IBS Interactive, Inc.
Page 5
the United States; (e) the account debtor is not an affiliate of Borrower and is
not a supplier to Borrower and the account is not otherwise exposed to risk of
set-off; (f) not more than thirty percent of the original invoices owing
Borrower by the account debtor are more than ninety days from the date of the
original invoice; (g) any account receivable less than $100.00.
"Reserves" may be required at any time and from time to time by Bank without
prior notice to Borrower in amounts deemed by Bank to be adequate to reserve
against outstanding letter of credit, outstanding bankers acceptances,
Borrower's obligations to Bank or its affiliates or any guaranties or other
contingent debt of Borrower.
Required Reports. Borrower shall certify to Bank 30 days after quarter end, the
amount of Eligible Accounts as of the first day of each month, on forms required
by Bank together with all detail and supporting documents requested by Bank.
Bank may at any time and from time to time, during Bank's normal business hours,
enter upon any business premises of Borrower and audit Borrower's accounts.
Bank's determination of the amount of Eligible Accounts shall at all times be
indisputable and deemed correct. The Borrower, at all times, shall cooperate
with Bank without limitation by providing Bank information and access to
Borrower's premises and business records and shall be courteous to Bank's
agents.
Continuing Representations. Borrower warrants and represents as a continuing
warranty, that so long as principal is outstanding under the Line of Credit
Note, the outstanding principal balance shall not exceed the lesser of the
Maximum Principal Amount or the principal amount stated in the Line of Credit
Note (the "Borrowing Limit"). Borrower agrees to pay any advances in excess of
the Borrowing Limit immediately upon receipt by Borrower of written notice that
the Borrowing Limit has been exceeded.
CONDITIONS PRECEDENT. The obligations of Bank to make the Loan and any
advances pursuant to this Agreement are subject to the following conditions
precedent: Additional Documents. Receipt by Bank of such additional
supporting documents as Bank or its counsel may reasonably request.
IN WITNESS WHEREOF, Borrower and Bank, on the day and year first written above,
have caused this Agreement to be executed under seal.
IBS Interactive, Inc.
CORPORATE By: /s/ Nicholas R. Loglisci, Jr.
SEAL --------------------------------------------
Nicholas R. Loglisci, Jr., President
By: /s/ Jeff Brenner
--------------------------------------------
Jeff Brenner, Chief Financial Officer
First Union National Bank
CORPORATE By:/s/ Eugene Smith
SEAL --------------------------------------------
Eugene Smith, Vice President
<PAGE>
PROMISSORY NOTE
$1,500,000.00 October 30, 1998
IBS Interactive, Inc.
2 Ridgedale Avenue
Cedar Knolls, New Jersey 07927
(Individually and collectively "Borrower")
First Union National Bank
765 Broad Street
Newark, New Jersey 07102
(Hereinafter referred to as the "Bank")
Borrower promises to pay to the order of Bank, in lawful money of the United
States of America, at its office indicated above or wherever else Bank may
specify, the sum of One Million Five Hundred Thousand and no/100 Dollars
($1,500,000.00) or such sum as may be advanced and outstanding from time to time
with interest on the unpaid principal balance at the rate and on the terms
provided in this Promissory Note (including all renewals, extensions or
modifications hereof, this Note").
SECURITY. Borrower has granted Bank a security interest in the collateral
described in the Loan Documents, including, but not limited to, personal
property collateral described in that certain Security Agreement of even date
herewith.
INTEREST RATE DEFINITIONS.
LIBOR. 3-months LIBOR plus 2.0% and 6-months LIBOR plus 2.0% (each, a
"LIBOR-Based Rate"). "LIBOR" is the rate for U.S. dollar deposits of that many
months maturity as reported on Telerate page 3750 as of 11:00 a.m., London time,
on the second London business day before the relevant Interest Period begins (or
if not so reported, then as determined by Bank from another recognized source of
interbank quotation).
PRIME RATE. The rate of Bank's Prime Rate plus .25% as that rate may change from
time to time with changes to occur on the date Bank's Prime Rate changes
("Prime-Based Rate"). "Bank's Prime Rate" shall be that rate announced by Bank
from time to time as its prime rate and is one of several interest rate bases
used by Bank. Bank lends at rates bath above and below Bank's Prime Rate, and
Borrower acknowledges that Bank's Prime Rate is not represented or intended to
be the lowest or most favorable rate of interest offered by Bank.
INTEREST RATE SELECTION AND ADJUSTMENT.
INTEREST RATE OPTIONS. At the election of Borrower, the unpaid principal balance
of each Advance (defined herein) shall bear interest from the date such Advance
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is made available to the Borrower at a LIBOR-Based Rate or Prime-Based Rate
selected by Borrower in accordance herewith (each, an "Interest Rate"). Borrower
shall select the Interest Rate and for each Interest Rate, except the
Prime-Based Rate, the period of time such Interest Rate will continuously apply
(each, an "Interest Period") pursuant to the subparagraph entitled "Notice and
Manner of Borrowing and Rate Conversion" below; provided, the first Interest
Period shall commence on the date of such Advance and end on the first date
thereafter that interest in respect of such Advance is due. There shall be no
more than one Interest Rate for an Advance in effect at any time.
When the Prime-Based Rate is selected for an Advance, it shall be adjusted daily
as applicable to reflect Bank's Prime Rate and the Prime-Based Rate shall
continue to apply until another Interest Rate option for that Advance is
selected pursuant to the subparagraph entitled "Notice and Manner of Borrowing
and Rate Conversion." When a LIBOR-Based Rate Rate is selected for an Advance,
such rate shall be fixed for the Interest Period and shall apply for that
Advance for successive Interest Periods at the then prevailing successive rate
until another Interest Rate option for that Advance is selected pursuant to the
subparagraph entitled "Notice and Manner of Borrowing and Rate Conversion."
Until the Borrower selects an initial Interest Rate as provided herein, the
Advance shall bear Interest at the Prime-Based Rate.
INTEREST PERIODS. In connection with each LIBOR-Based Rate Advance, Borrower, by
giving notice at the times described in the subparagraph entitled "Notice end
Manner of Borrowing and Rate Conversion" below, shall select an Interest Period
to be applicable thereto, which Interest Period shall be a period corresponding
to one of the Interest Rate options. No Interest Period selection is required
for a Prime-Based Rate Advance.
INDEMNIFICATION. Borrower indemnifies Bank against Bank's loss or expense in
employing deposits as a consequence of (a) Borrower's failure to make any
payment when due on a loan or Advance bearing interest at a LIBOR-Based Rate,
(b) any payment, prepayment or conversion of any loan on a date other than the
last day of the Interest Period, if applicable ("Indemnified Loss or Expense").
The amount of such Indemnified Loss or Expense shall be determined by Bank based
upon the assumption that Bank funded 100% of that portion of the loan in the
London interbank market.
DEFAULT RATE. In addition to all other rights contained in this Note, if a
Default (defined herein) occurs and as long as a Default continues, (a) Borrower
shall no longer have the option to request a LIBOR-Based Rate and (b) all
outstanding Obligations shall bear interest at the Prime-Based Rate plus 3%
("Default Rate"). The Default Rate shall also apply from acceleration until the
Obligations or any judgment thereon is paid in full.
NOTICE AND MANNER OF BORROWING AND RATE CONVERSION. Borrower shall give Bank
irrevocable telephonic notice (confirmed in writing) of each proposed Advance or
rate conversion not later than 11:00 a.m. local time at the office of Bank first
shown above (a) on the same business day as each proposed Advance or rate
conversion to a Prime-Based Rate and (b) at least 2 business days before each
proposed Advance or rate conversion to a LIBOR-Based Rate. Each such notice
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shall specify (i) the date of such Advance or rate conversion, which shall be a
business day and, in the case of a conversion from a LIBOR-Based Rate Advance,
the last day of an Interest Period, (ii) the amount of each Advance or the
amount to be converted, (iii) the Interest Rate selected by Borrower, and (iv)
except for the Prime-Based Rate, the duration of any Interest Period applicable
thereto, which period must correspond to one of the Interest Rate options.
Notices received after 11 :00 a.m. local time at the office of Bank first shown
above shall be deemed received on the next business day.
INTEREST AND FEE(S) COMPUTATION. (Actual/360). Interest and fees, if any, shall
be computed on the basis of a 350-day year for the actual number of days in the
applicable period ("Actual/360 Computation"). The Actual/360 Computation
determines the annual effective yield by taking the stated (nominal) rate for a
year's period and then dividing said rate by 360 to determine the daily periodic
rate to be applied for each day in the applicable period. Application of the
Actual/360 Computation produces an annualized effective rate exceeding that of
the nominal rate.
REPAYMENT TERMS. This Note shall be due and payable in consecutive monthly
payments of accrued interest only commencing on September 1, 1998, and on the
same day of each month thereafter until fully paid. In any event, all principal
and accrued interest shall be due and payable on June 30, 1999.
AUTOMATIC DEBIT OF CHECKING ACCOUNT FOR LOAN PAYMENT. Borrower authorizes Bank
to debit its demand deposit account number 2020000309598 or any other account
with Bank (routing number 021200025) designated in writing by Borrower,
beginning August 1, 1998 for any payments due under this Note. Borrower further
certifies that Borrower holds legitimate ownership of this account and
preauthorizes this periodic debit as part of its right under said Ownership.
APPLICATION OF PAYMENTS. Monies received by Bank from any source for application
toward payment of the Obligations shall be applied to accrued interest and then
to principal. If a Default occurs, monies may be applied to the Obligations in
any manner or order deemed appropriate by Bank.
If any payment received by Bank under this Note or other Loan Documents is
rescinded, avoided or for any reason returned by Bank because of any adverse
claim or threatened action, the returned payment shall remain payable as an
obligation of all persons liable under this Note or other Loan Documents as
though such payment had not been made.
LOAN DOCUMENTS AND OBLIGATIONS. The term "Loan Documents" used in this Note and
other Loan Documents refers to all documents executed in connection with the
loan evidenced by this Note and any prior notes which evidence all or any
portion of the loan evidenced by this Note, and may include, without limitation,
a commitment letter that survives closing, a loan agreement, this Note, guaranty
agreements, security agreements, security instruments, financing statements,
mortgage instruments, any renewals or modifications, whenever any of the
foregoing are executed, but does not include swap agreements (as defined in 11
U.S.C. ss. 101). OBLIGATIONs. The term "Obligations" used in this Note refers to
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any and all Indebtedness and other obligations under this Note, all other
obligations under any other Loan Document(s), and all obligations under any swap
agreements as defined in 11 U.S.C. ss. 101 between Borrower and Bank whenever
executed. CERTAIN OTHer TERMS. All terms that are used but not otherwise defined
in any of the Loan Documents shall have the definitions provided in the Uniform
Commercial Code.
LATE CHARGE. If any payments are not timely made, Borrower shall also pay to
Bank a late charge equal to 5% of each payment past due for 10 or more days.
Acceptance by Bank of any late payment without an accompanying late charge shall
not be deemed a waiver of Bank's right to collect such late charge or to collect
a late charge for any subsequent late payment received.
If this Note is secured by owner-occupied residential real property located
outside the state in which the office of Bank first shown above is located, the
late charge laws of the state where the real property is located shall apply to
this Note and the late charge shall be the highest amount allowable under such
laws. If no amount is stated thereunder, the late charge shall be 5% of each
payment past due for 10 or more days.
ATTORNEYS' FEES AND OTHER COLLECTION COSTS. Borrower shall pay all of Bank's
reasonable expenses incurred to enforce or collect any of the Obligations,
including, without limitation, reasonable arbitration, paralegals', attorneys'
and experts fees and expenses, whether incurred without the commencement of a
Suit, in any trial, arbitration, or administrative proceeding, or in any
appellate or bankruptcy proceeding.
USURY. If at any time the effective interest rate under this Note would, but for
this paragraph, exceed the maximum lawful rate, the effective interest rate
under this Note shall be the maximum lawful rate, and any amount received by
Bank in excess of such rate shall be applied to principal and then to fees and
expenses, or, if no such amounts are owing, returned to Borrower.
DEFAULT. If any of the following occurs, a default ("Default") under this Note
shall exist: NONPAYMENT; NONPERFORMANCE. The failure of timely payment or
performance of the Obligations or Default under this Note or any other Loan
Documents. FALSE WARRANTY. A warranty or representation made or deemed made in
the Loan Documents or furnished Bank in connection with the loan evidenced by
this Note proves materially false, or if of a continuing nature, becomes
materially false. CROSS DEFAULT. At Bank's option, any default in payment or
performance of any obligation under any other loans, contracts or agreements of
Borrower, any Subsidiary or Affiliate of Borrower, any general partner of or the
holder(s) of the majority ownership interests of Borrower with Bank or its
affiliates ("Affiliate" shall have the meaning as defined in 11 U.S.C. ss. 101,
except that the term "debtor"' therein shall be substituted by the term
"Borrower" herein; "Subsidiary" shall mean any business in which Borrower holds,
directly or indirectly, a controlling interest). CESSATION; BANKRUPTCY. The
death of, appointment of guardian for, dissolution of, termination of existence
of, loss of good standing status by, appointment of a receiver for, assignment
for the benefit of creditors of, or commencement of any bankruptcy or insolvency
proceeding by or against the Borrower, its Subsidiaries or Affiliates, if any,
or any general partner of or the holder(s) of the majority ownership Interests
of Borrower, or any party to the Loan Documents.
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<PAGE>
REMEDIES UPON DEFAULT. If a Default occurs under this Note or any Loan
Documents, Bank may at any time thereafter, take the following actions: BANK
LIEN. Foreclose its security interest or lien against Borrower's accounts
without notice. ACCELERATION UPON DEFAULT. Accelerate the maturity of this
Note and all other Obligations, and all of the Obligations shall be
immediately due and payable. CUMULATIVE. Exercise any rights and remedies
as provided under the Note and other Loan Documents, or as provided by law or
equity.
FINANCIAL AND OTHER INFORMATION. Borrower shall deliver to Bank such information
as Bank may reasonably request from time to time, including without limitation,
financial statements and information pertaining to Borrower's financial
condition. Such information shall be true, complete, and accurate.
YEAR 2000 COMPATIBILITY. Borrower shall take all action necessary to ensure that
Borrower's computer based systems are able to operate and effectively process
data including dates on and after January 1, 2000. At the request of Bank,
Borrower shall provide Bank assurance acceptable to Bank of Borrower's Year 2000
compatibility.
LINE OF CREDIT ADVANCES. Borrower may borrow, repay and reborrow, and Bank may
advance and readvance under this Note respectively from time to time until the
maturity hereof (each an "Advance" and together the "`Advances"), so long as the
total indebtedness outstanding at any one time does not exceed the principal
amount stated on the face of this Note. Bank's obligation to make Advances under
this Note shall terminate if Borrower is in Default or a representation in any
of the Loan Documents is false or has become false. As of the date of each
proposed Advance, Borrower shall be deemed to represent that each representation
made in the Loan Documents is true as of such date. 30-DAY PAYOUT. During the
term of the Note, Borrower agrees to pay down the outstanding balance to a
maximum of $100.00 for 30 consecutive days annually.
If Borrower subscribes to Bank's cash management services and such services are
applicable to this line of credit. the terms of such service shall control the
manner in which funds are transferred between the applicable demand deposit
account and the line of credit for credit or debit to the line of credit.
LOAN AGREEMENT. This Note is subject to the provisions of that certain Loan
Agreement between Bank and Borrower dated October 30, 1998, as modified from
time to time.
WAIVERS AND AMENDMENTS. No waivers, amendments or modifications of this Note and
other Loan Documents shall be valid unless in writing and signed by an officer
of Bank. No waiver by Bank of any Default shall operate as a waiver of any other
Default or the same Default on a future occasion. Neither the failure nor any
delay on the part of Bank in exercising any right, power, or remedy under this
Note and other Loan Documents shall operate as a waiver thereof, nor shall a
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or remedy.
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<PAGE>
Each Borrower or any person liable under this Note waives presentment. protest,
notice of dishonor, demand for payment, notice of intention to accelerate
maturity, notice of acceleration of maturity, notice of sale and all other
notices of any kind. Further, each agrees that Bank may extend, modify or renew
this Note or make a novation of the loan evidenced by this Note for any period
and grant any releases, compromises or indulgences with respect to any
collateral securing this Note. or with respect to any other Borrower or any
other person liable under this Note or other Loan Documents, all without notice
to or consent of each Borrower or each person who may be liable under this Note
or other Loan Documents and without affecting the liability of Borrower or any
person who may be liable under this Note or other Loan Documents.
MISCELLANEOUS PROVISIONS. ASSIGNMENT. This Note and other Loan Documents shall
inure to the benefit of and be binding upon the parties and their respective
heirs, legal representatives, successors and assigns. Bank's interests in and
rights under this Note and other Loan Documents are freely assignable, in whole
or in part, by Bank. In addition, nothing in this Note or any of the Loan
Documents shall prohibit Bank from pledging or assigning this Note or any of the
Loan Documents or any interest therein to any Federal Reserve Bank. Borrower
shall not assign its rights and interest hereunder without the prior written
consent of Bank, and any attempt by Borrower to assign without Bank's prior
written consent is null and void. Any assignment shall not release Borrower from
the Obligations. APPLICABLE LAW; CONFLICT BETWEEN DOCUMENTS. This Note and other
Loan Documents shall be governed by and construed under the laws of the state
named in Bank's address shown above without regard to that state's conflict of
laws principles. If the terms of this Note should conflict with the terms of the
loan agreement or any commitment letter that survives closing, the terms of this
Note shall control. BORROWER'S ACCOUNTS. Except as prohibited by law, Borrower
grants Bank a security interest in all of Borrower's accounts with Bank and any
of its affiliates. JURISDICTION. Borrower irrevocably agrees to non-exclusive
personal jurisdiction in the state named in Bank's address shown above.
SEVERABILITY. If any provision of this Note or of the other Loan Documents shall
be prohibited or invalid under applicable law, such provision shall be
ineffective but only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Note or other such document. NOTICES. Any notices to Borrower shall be
sufficiently given, if in writing and mailed or delivered to the Borrower's
address shown above or such other address as provided hereunder, and to Bank, if
in writing and mailed or delivered to Bank's office address shown above or such
other address as Bank may specify in writing from time to time. In the event
that Borrower changes Borrower's address at any time prior to the date the
Obligations are paid in full, Borrower agrees to promptly give written notice of
said change of address by registered or certified mail, return receipt
requested, all charges prepaid. PLURAL; CAPTIONS. All references in the Loan
Documents to Borrower, guarantor, person, document or other nouns of reference
mean both the singular and plural form, as the case may be, and the term
"person" shall mean any individual, person or entity. The captions contained in
the Loan Documents are inserted for convenience only and shall not affect the
meaning or interpretation of the Loan Documents. BINDING CONTRACT. Borrower by
execution of and Bank by acceptance of this Note agree that each party is bound
to all terms and provisions of this Note. Advances. Bank in its sole discretion
may make other Advances under this Note pursuant hereto. POSTING OF PAYMENTS.
All payments received during normal banking hours after 2:00 p.m. local time at
the office of Bank first shown above shall be deemed received at the opening of
the next banking day. Joint and Several Obligations. Each Borrower is jointly
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<PAGE>
and severally obligated under this Note. FEES AND TAXES. Borrower shall promptly
pay all documentary, intangible recordation and/or similar taxes on this
transaction whether assessed at closing or arising from time to time.
ARBITRATION. Upon demand of any party hereto, whether made before or after
institution of any judicial proceeding, any claim or controversy arising out of
or relating to the Loan Documents between parties hereto (a "Dispute") shall be
resolved by binding arbitration conducted under and governed by the Commercial
Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association (the "AAA") and the Federal Arbitration Act. Disputes
may include, without limitation, tort claims, counterclaims, a dispute as to
whether a matter is subject to arbitration, claims brought as class actions, or
claims arising from documents executed in the future. A judgment upon the award
may be entered in any court having jurisdiction. Notwithstanding the foregoing,
this arbitration provision does not apply to disputes under or related to swap
agreements. SPECIAL RULES. All arbitration hearings shall be conducted in the
city named in the address of Bank first stated above. A hearing shall begin
within 90 days of demand for arbitration and all hearings shall conclude within
120 days of demand for arbitration. These time limitations may not be extended
unless a party shows cause for extension and then for no more than a total of 60
days. The expedited procedures set forth in Rule 51 ET SEQ. of the Arbitration
Rules shall be applicable to claims of less than $1,000,000.00. Arbitrators
shall be licensed attorneys selected from the Commercial Financial Dispute
Arbitration Panel of the AAA. The parties do not waive applicable Federal or
state substantive law except as provided herein. PRESERVATION AND LIMITATION OF
REMEDIES. Notwithstanding the preceding binding arbitration provisions, the
parties agree to preserve, without diminution, certain remedies that any party
may exercise before or after an arbitration proceeding is brought. The parties
shall have the right to proceed in any court of proper jurisdiction or by
self-help to exercise or prosecute the following remedies, as applicable: (i)
all rights to foreclose against any real or personal property or other security
by exercising a power of sale or under applicable law by judicial foreclosure
including a proceeding to confirm the sale; (ii) all rights of self-help
including peaceful occupation of real property and collection of rents, set-off,
and peaceful possession of personal property; (iii) obtaining provisional or
ancillary remedies including injunctive relief, sequestration, garnishment,
attachment, appointment of receiver and filing an involuntary bankruptcy
proceeding; and (iv) when applicable, a judgment by confession of judgment. Any
claim or controversy with regard to any party's entitlement to such remedies is
a Dispute. WAIVER OF EXEMPLARY DAMAGES. The parties agree that they shall not
have a remedy of punitive or exemplary damages against other parties in any
Dispute and hereby waive any right or claim to punitive or exemplary damages
they have now or which may arise in the future in connection with any Dispute
whether the Dispute is resolved by arbitration or judicially. WAIVER OF JURY
TRIAL. THE PARTIES ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE
IRREVOCABLY WAIVED ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH REGARD TO A
DISPUTE.
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IN WITNESS WHEREOF, Borrower, on the day and year first above written, has
caused this Note to be executed under seal.
IBS Interactive, Inc.
Taxpayer Identification Number: 13-3817344
CORPORATE By:/S/ NICHOLAS R. LOGLISCI, JR.
SEAL Nicholas R. Loglisci, Jr., President
By:/S/ JEFF BRENNER
Jeff Brenner, Chief Financial Officer
8
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SECURITY AGREEMENT
October 30, 1998
IBS Interactive, Inc.
2 Ridgedale Avenue
Cedar Knolls, New Jersey 07927
(Individually and collectively "Debtor")
First Union National Bank
765 Broad Street
Newark, New Jersey 07102
(Hereinafter referred to as the "Bank")
For value received and to secure the payment and performance of the Promissory
Note executed by the Debtor dated October 30, 1998, in the original principal
amount of $1,500,000.00, payable to Bank, and any extensions, renewals,
modifications or novations thereof (the "Note"), this Security Agreement and the
other Loan Documents, and any other obligations of Debtor to Bank however
created, arising or evidenced, whether direct or indirect, absolute or
contingent, now existing or hereafter arising or acquired, including swap
agreements (as defined in 11 U.S.C. ss. 101), future advances, and all costs and
expenses incurred by Bank to obtain, preserve, perfect and enforce the security
interest granted herein and to maintain, preserve and collect the property
subject to the security interest (collectively, "Obligations"), Debtor hereby
grants to Bank a continuing security interest in and lien upon the following
described property, now owned or hereafter acquired, any additions, accessions,
or substitutions thereof and thereto (including but not limited to investment
property and security entitlements), and all cash and non-cash proceeds and
products thereof (collectively, "Collateral"):
All accounts, together with all chattel paper and instruments, and all credit
insurance, guaranties, letters of credit, and other security for any of the
foregoing.
All instruments, documents, chattel paper, goods, moneys, securities, drafts,
and other property of Debtor now in possession of and at any time and from time
to time hereafter delivered to Bank, its agents or affiliates, whether for
safekeeping, pledge, custody, transmission, collection, or otherwise, and all of
Debtor's deposits, balances, sums, proceeds, and credits with, and any of its
claims against Bank and affiliates of Bank, at any time existing, together with
the increases and profits received therefrom and the proceeds thereof, including
insurance payable because of loss or damage thereto.
All general intangibles (including, without limitation, all contract rights, tax
refunds and tax refund claims, choses in action, causes of action, corporate or
other business records, inventions, designs, patents, patent applications,
trademarks, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, claims under guaranties, security interests or other
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security held or granted to secure payment of contracts by account debtors, all
rights to indemnification and all other intangible property of every kind and
nature).
Debtor hereby represents and agrees that:
OWNERSHIP. Debtor owns the Collateral or Debtor will purchase and acquire rights
in the Collateral within ten days of the date advances are made under the Loan
Documents. If Collateral is being acquired with the proceeds of an advance under
the Loan Documents, Debtor authorizes Bank to disburse proceeds directly to the
seller of the Collateral. The Collateral is free and clear of all liens,
security interests, and claims except those previously reported in writing to
Bank, and Debtor will keep the Collateral free and clear from all liens,
security interests and claims, other than those granted to Bank.
NAME AND OFFICES. There has been no change in the name of Debtor, or the name
under which Debtor conducts business, within the 5 years preceding the date of
execution of this Security Agreement and Debtor has not moved its executive
offices or residence within the 5 years preceding the date of execution of this
Security Agreement except as previously reported in writing to Bank. The
taxpayer identification number of Debtor as provided herein is correct.
TITLE/TAXES. Debtor has good and marketable title to Collateral and will warrant
and defend same against all claims. Debtor will not transfer, sell, or lease
Collateral (except in the ordinary course of business). Debtor agrees to pay
promptly all taxes and assessments upon or for the use of Collateral and on this
Security Agreement. At its option, Bank may discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on Collateral.
Debtor agrees to reimburse Bank, on demand, for any such payment made by Bank.
Any amounts so paid shall be added to the Obligations.
WAIVERS. Debtor waives presentment, demand, protest, notice of dishonor, notice
of default, demand for payment, notice of intention to accelerate, and notice of
acceleration of maturity. Debtor further agrees not to assert against Bank as a
defense (legal or equitable), as a set-off, as a counterclaim, or otherwise, any
claims Debtor may have against any seller or lessor that provided personal
property or services relating to any part of the Collateral. Debtor waives all
exemptions and homestead rights with regard to the Collateral. Debtor waives any
and all rights to notice or to hearing prior to Bank's taking immediate
possession or control of any Collateral, and to any bond or security which might
be required by applicable law prior to the exercise of any of Bank's remedies
against any Collateral.
EXTENSIONS, RELEASES. Debtor agrees that Bank may extend, renew or modify any of
the Obligations and grant any releases, compromises or indulgences with respect
to any security for the Obligations, or with respect to any party liable for the
Obligations, all without notice to or consent of Debtor and without affecting
the liability of Debtor or the enforceability of this Security Agreement.
NOTIFICATIONS OF CHANGE. Debtor will notify Bank in writing at least 30 days
prior to any change in: (i) Debtor's chief place of business and/or residence;
(ii) Debtor's name or identity; or (iii) Debtor's corporate/organizational
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structure. Debtor will keep Collateral at the location(s) previously provided to
Bank until such time as Bank provides written advance consent to a change of
location. Debtor will bear the cost of preparing and filing any documents
necessary to protect Bank's liens.
COLLATERAL CONDITION AND LAWFUL USE. Debtor represents that Collateral is in
good repair and condition and that Debtor shall use reasonable care to prevent
Collateral from being damaged or depreciating. Debtor shall immediately notify
Bank of any material loss or damage to Collateral. Debtor shall not permit any
item of equipment to become a fixture to real estate or an accession to other
personal property. Debtor represents it is in compliance in all respects with
all federal, state and local laws, rules and regulations applicable to its
properties, Collateral, operations, business, and finances, including, without
limitation, any federal or state laws relating to liquor (including 18 U.S.C.
ss. 3617, ET SEq.) or narcotics (including 21 U.S.C. ss. 801, et SEQ.) and all
applicable federal, state and local laws, and regulations intended to protect
the environment.
RISK OF LOSS AND INSURANCE. Debtor shall bear all risk of loss with respect to
the Collateral. The injury to or loss of Collateral, either partial or total,
shall not release Debtor from payment or other performance hereof. Debtor agrees
to obtain and keep in force casualty and hazard insurance on Collateral naming
Bank as loss payee. Such insurance is to be in form and amounts satisfactory to
Bank. All such policies shall provide to Bank a minimum of 30 days written
notice of cancellation. Debtor shall furnish to Bank such policies, or other
evidence of such policies satisfactory to Bank. Bank is authorized, but not
obligated, to purchase any or all insurance or "Single Interest Insurance"
protecting such interest as Bank deems appropriate against such risks and for
such coverage and for such amounts, including either the loan amount or value of
the Collateral, all at its discretion, and at Debtor's expense. In such event,
Debtor agrees to reimburse Bank for the cost of such insurance and Bank may add
such cost to the Obligations. Debtor shall bear the risk of loss to the extent
of any deficiency in the effective insurance coverage with respect to loss or
damage to any of the Collateral. Debtor hereby assigns to Bank the proceeds of
all such insurance and directs any insurer to make payments directly to Bank.
Debtor hereby appoints Bank its attorney-in-fact, which appointment shall be
irrevocable and coupled with an interest for so long as the Obligations are
unpaid, to file proof of loss and/or any other forms required to collect from
any insurer any amount due from any damage or destruction of Collateral, to
agree to and bind Debtor as to the amount of said recovery, to designate
payee(s) of such recovery, to grant releases to insurer, to grant subrogation
rights to any insurer, and to endorse any settlement check or draft. Debtor
agrees not to exercise any of the foregoing powers granted to Bank without the
Bank's prior written consent.
ADDITIONAL COLLATERAL. If at any time Collateral is unsatisfactory to Bank, then
on demand of Bank, Debtor shall immediately furnish such additional Collateral
satisfactory to Bank to be held by Bank as if originally pledged hereunder and
shall execute such additional security agreements and financing statements as
requested by Bank.
FINANCING STATEMENTS. No financing statement (other than any filed by Bank or
disclosed above) covering any of Collateral or proceeds thereof is on file in
any public filing office. This Security Agreement, or a copy thereof, or any
financing statement executed hereunder may be recorded. On request of Bank,
3
<PAGE>
Debtor will execute one or more financing statements in form satisfactory to
Bank and will pay all costs and expenses of filing the same or of filing this
Security Agreement in all public filing offices, where filing is deemed by Bank
to be desirable. Bank is authorized to file financing statements relating to
Collateral without Debtor's signature where authorized by law. Debtor appoints
Bank as its attorney-in-fact to execute such documents necessary to accomplish
perfection of Bank's security interest. The appointment is coupled with an
interest and shall be irrevocable as long as any Obligations remain outstanding.
Debtor further agrees to take such other actions as might be requested for the
perfection, continuation and assignment, in whole or in part, of the security
interests granted herein. If certificates are issued or outstanding as to any of
the Collateral, Debtor will cause the security interests of Bank to be properly
protected, including perfection of notation thereon.
LANDLORD/MORTGAGEE WAIVERS. Debtor shall cause each mortgagee of real property
owned by Debtor and each landlord of real property leased by Debtor to execute
and deliver instruments satisfactory in form and substance to Bank by which such
mortgagee or landlord waives its rights, if any, in the Collateral.
STOCK, DIVIDENDS. If, with respect to any security pledged hereunder, a stock
dividend is declared, any stock split made or right to subscribe is issued, all
the certificates for the shares representing such stock dividend, stock split or
right to subscribe will be immediately delivered, duly endorsed, to the Bank as
additional collateral, and any cash or non-cash proceeds and products thereof,
including investment property and security entitlements will be immediately
delivered to Bank. If Debtor has granted to Bank a security interest in
securities, Debtor acknowledges that such grant includes all investment property
and security entitlements, now existing or hereafter arising, relating to such
securities. In addition, Debtor agrees to execute such notices and instructions
to securities intermediaries as Bank may reasonably request.
CONTRACTS, CHATTEL PAPER, ACCOUNTS, GENERAL INTANGIBLES. Debtor warrants that
Collateral consisting of contract rights, chattel paper, accounts, or general
intangibles is (i) genuine and enforceable in accordance with its terms except
as limited by law; (ii) not subject to any defense, set-off, claim or
counterclaim of a material nature against Debtor except as to which Debtor has
notified Bank in writing; and (iii) not subject to any other circumstances that
would impair the validity, enforceability, value, or amount of such Collateral
except as to which Debtor has notified Bank in writing. Debtor shall not amend,
modify or supplement any lease, contract or agreement contained in Collateral or
waive any provision therein, without prior written consent of Bank.
ACCOUNT INFORMATION. From time to time, at the Bank's request, Debtor shall
provide Bank with schedules describing all accounts and contracts, including
customers' addresses, credited or acquired by Debtor and at the Bank's request
shall execute and deliver written assignments of contracts and other documents
evidencing such accounts and contracts to Bank. Together with each schedule,
Debtor shall, if requested by Bank, furnish Bank with copies of Debtor's sales
journals, invoices, customer purchase orders or the equivalent, and original
shipping or delivery receipts for all goods sold, and Debtor warrants the
genuineness thereof.
ACCOUNT AND CONTRACT DEBTORS. After a Default occurs, Bank shall have the right
to notify the account and contract debtors obligated on any or all of the
Collateral to make payment hereof directly to Bank and Bank may take control of
4
<PAGE>
all proceeds of any such Collateral, which rights Bank may exercise at any time.
The cost of such collection and enforcement, including attorneys' fees and
expenses, shall be borne solely by Debtor whether the same is incurred by Bank
or Debtor. After a Default occurs, upon demand of Bank, Debtor will, upon
receipt of all checks, drafts, cash and other remittances in payment on
Collateral, deposit the same in a special bank account maintained with Bank,
over which Bank also has the power of withdrawal.
If a Default occurs, no discount, credit, or allowance shall be granted by
Debtor to any account or contract debtor and no return of merchandise shall be
accepted by Debtor without Bank's consent. Bank may, after Default, settle or
adjust disputes and claims directly with account contract debtors for amounts
and upon terms that Bank considers advisable, and in such cases, Bank will
credit the Obligations with the net amounts received by Bank, after deducting
all of the expenses incurred by Bank. Debtor agrees to indemnify and defend Bank
and hold it harmless with respect to any claim or proceeding arising out of any
matter related to collection of Collateral.
GOVERNMENT CONTRACTS. If any Collateral covered hereby arises from obligations
due to Debtor from any governmental unit or organization, Debtor shall
immediately notify Bank in writing and execute all documents and take all
actions demanded by Bank to ensure recognition by such governmental unit or
organization of the rights of Bank in the Collateral.
INVENTORY. So long as no Default has occurred, Debtor shall have the right in
the regular course of business, to process and sell Debtor's inventory, unless
Bank shall hereafter otherwise direct in writing. Upon demand of Bank, Debtor
will, upon receipt of all checks, drafts, cash and other remittances, in payment
of Collateral sold, deposit the same in a special bank account maintained with
Bank, over which Bank also has the power of withdrawal. Debtor shall comply with
all federal, state, and local laws, regulations, rulings, and orders applicable
to Debtor or its assets or business, in all respects. Without limiting the
generality of the previous sentence, Debtor shall comply with all requirements
of the federal Fair Labor Standards Act in the conduct of its business and the
production of inventory. Debtor shall notify Bank immediately of any violation
by Debtor of the Fair Labor Standards Act, and a failure of Debtor to so notify
Bank shall constitute a continuing representation that all inventory then
existing has been produced in compliance with the Fair Labor Standards Act.
INSTRUMENTS, CHATTEL PAPER. Any Collateral that is instruments, chattel paper
and negotiable documents will be properly assigned to, deposited with and held
by Bank, unless Bank shall hereafter otherwise direct or consent in writing.
Bank may, without notice, before or after maturity of the Obligations, exercise
any or all rights of collection, conversion, or exchange and other similar
rights, privileges and options pertaining to Collateral, but shall have no duty
to do so.
COLLATERAL DUTIES. Bank shall have no custodial or ministerial duties to perform
with respect to Collateral pledged except as set forth herein; and by way of
explanation and not by way of limitation, Bank shall incur no liability for any
of the following: (i) loss or depreciation of Collateral (unless caused by its
willful misconduct), (ii) its failure to present any paper for payment or
5
<PAGE>
protest, to protest or give notice of nonpayment, or any other notice with
respect to any paper or Collateral, or (iii) its failure to present or surrender
for redemption, conversion or exchange any bond, stock, paper or other security
whether in connection with any merger, consolidation, recapitalization, or
reorganization, arising out of the refunding of the original security, or for
any other reason, or its failure to notify any party hereto that Collateral
should be so presented or surrendered.
TRANSFER OF COLLATERAL. The Bank may assign its rights in the Collateral or any
part thereof to any assignee who shall thereupon become vested with all the
powers and rights herein given to the Bank with respect to the property so
transferred and delivered, and the Bank shall thereafter be forever relieved and
fully discharged from any liability with respect to such property so
transferred, but with respect to any property not so transferred the Bank shall
retain all rights and powers hereby given.
SUBSTITUTE COLLATERAL. With prior written consent of Bank, other Collateral may
be substituted for the original Collateral herein in which event all rights,
duties, obligations, remedies and security interests provided for, created or
granted shall apply fully to such substitute Collateral.
INSPECTION, BOOKS AND RECORDS. Debtor will at all times keep accurate and
complete records covering each item of Collateral, including the proceeds
therefrom. Bank, or any of its agents, shall have the right, at intervals to be
determined by Bank and without hindrance or delay, to inspect, audit, and
examine the Collateral and to make extracts from the books, records, journals,
orders, receipts, correspondence and other data relating to Collateral, Debtor's
business or any other transaction between the parties hereto. Debtor will at its
expense furnish Bank copies thereof upon request.
CROSS COLLATERALLZATION LIMITATION. As to any other existing or future consumer
purpose loan made by Bank to Debtor, within the meaning of the Federal Consumer
Credit Protection Act, Bank expressly waives any security interest granted
herein in Collateral that Debtor uses as a principal dwelling and household
goods.
ATTORNEYS' FEES AND OTHER COSTS OF COLLECTION. Debtor shall pay all of Bank's
reasonable expenses incurred in enforcing this Agreement and in preserving and
liquidating Collateral, including but not limited to, reasonable arbitration,
paralegals', attorneys' and experts' fees and expenses, whether incurred without
the commencement of a suit, in any trial, arbitration, or administrative
proceeding, or in any appellate or bankruptcy proceeding.
DEFAULT. If any of the following occurs, a default ("Default") under this
Security Agreement shall exist: (i) The failure of timely payment or performance
of any of the Obligations or a default under any Loan Document; (ii) Any breach
of any representation or agreement contained or referred to in this Security
Agreement or other Loan Document; (iii) Any loss, theft, substantial damage, or
destruction of Collateral not fully covered by insurance, or as to which
insurance proceeds are not remitted to Bank within 30 days of the loss; any sale
6
<PAGE>
(except the sale of inventory in the ordinary course of business), lease, or
encumbrance of any of Collateral without prior written consent of Bank; or the
making of any levy, seizure, or attachment on or of Collateral which is not
removed within 10 days; or (iv) the death of, appointment of guardian for,
dissolution of, termination of existence of, loss of good standing status by,
appointment of a receiver for, assignment for the benefit of creditors of, or
commencement of any bankruptcy or insolvency proceeding by or against Debtor,
its Subsidiaries or Affiliates ("Affiliate" shall have the meaning as defined in
11 U.S.C. ss. 101; and "Subsidiary" shall mean any corporation of which more
than 50% of the issued and outstanding voting stock is owned directly or
indirectly by Debtor), if any, or any general partner of or the holder(s) of the
majority ownership interests in Debtor or any party to the Loan Documents.
REMEDIES ON DEFAULT (INCLUDING POWER OF SALE). If a Default occurs, all of the
Obligations shall be immediately due and payable, without notice and Bank shall
have all the rights and remedies of a secured party under the Uniform Commercial
Code. Without limitation thereto, Bank shall have the following rights and
remedies: (i) to take immediate possession of Collateral, without notice or
resort to legal process, and for such purpose, to enter upon any premises on
which Collateral or any part thereof may be situated and to remove the same
therefrom, or, at its option, to render the Collateral unusable or dispose of
said Collateral on Debtor's premises; (ii) to require Debtor to assemble the
Collateral and make it available to Bank at a place to be designated by Bank;
(iii) to exercise its right of set-off or bank lien as to any monies of Debtor
deposited in demand, checking, time, savings, certificate of deposit or other
accounts of any nature maintained by Debtor with Bank or Affiliates of Bank,
without advance notice, regardless of whether such accounts are general or
special; (iv) to dispose of Collateral, as a unit or in parcels, separately or
with any real property interests also securing the Obligations, in any county or
place to be selected by Bank, at either private or public sale (at which public
sale bank may be the purchaser) with or without having the Collateral physically
present at said sale. Any notice of sale, disposition or other action by Bank
required by law and sent to Debtor at Debtor's address shown above, or at such
other address of Debtor as may from time to time be shown on the records of
Bank, at least 5 days prior to such action, shall constitute reasonable notice
to Debtor. Notice shall be deemed given or sent when mailed postage prepaid to
Debtor's address as provided herein. Bank shall be entitled to apply the
proceeds of any sale or other disposition of the Collateral, and the payments
received by Bank with respect to any of the Collateral, to the Obligations in
such order and manner as Bank may determine. Collateral that is subject to rapid
declines in value and is customarily sold in recognized markets may be disposed
of by Bank in a recognized market for such collateral without providing notice
of sale.
REMEDIES ARE CUMULATIVE. No failure on the part of Bank to exercise, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by Bank or any right,
power or remedy hereunder preclude any other or further exercise thereof or the
exercise of any right, power or remedy. The remedies herein provided are
cumulative and are not exclusive of any remedies provided by law, in equity, or
in other Loan Documents.
MISCELLANEOUS. (i) AMENDMENTS AND WAIVERS. No waiver, amendment or modification
of any provision of this Security Agreement shall be valid unless in writing and
signed by an officer of Bank. No waiver by Bank of any Default shall operate as
a waiver of any other Default or of the same Default on a future occasion.
Neither the failure of, nor any delay by, Bank in exercising any right, power or
7
<PAGE>
privilege granted pursuant to this Security Agreement shall operate as a waiver
thereof, nor shall a single or partial exercise thereof preclude any other or
further exercise of any other right, power or privilege. (ii) ASSIGNMENT. All
rights of Bank hereunder are freely assignable, in whole or in part, and shall
inure to the benefit of and be enforceable by Bank, its successors, assigns and
affiliates. Debtor shall not assign its rights and interest hereunder without
the prior written consent of Bank, and any attempt by Debtor to assign without
Bank's prior written consent is null and void. Any assignment shall not release
Debtor from the Obligations. This Security Agreement shall be binding upon
Debtor, and the heirs, personal representatives, successors, and assigns of
Debtor. (iii) APPLICABLE LAW; CONFLICT BETWEEN DOCUMENTS. This Security
Agreement shall be governed by and construed under the law of the state named in
Bank's address shown above without regard to that state's conflict of laws
principles. If any terms of this Security Agreement conflict with the terms of
any commitment letter or loan proposal, the terms of this Security Agreement
shall control. (iv) JURISDICTION. Debtor irrevocably agrees to non-exclusive
personal jurisdiction in the state named in Bank's address shown above. (v)
SEVERABILITY. If any provision of this Security Agreement shall be prohibited by
or invalid under applicable law, such provision shall be ineffective but only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Security Agreement. (vi)
NOTICES. Any notices to Debtor shall be sufficiently given, if in writing and
mailed or delivered to the address of Debtor shown above or such other address
as provided hereunder; and to Bank, if in writing and mailed or delivered to
Bank's office address shown above or such other address as Bank may specify in
writing from time to time. In the event that the Debtor changes Debtor's mailing
address at any time prior to the date the Obligations are paid in full, Debtor
agrees to promptly give written notice of said change of address by registered
or certified mail, return receipt requested, all charges prepaid. (vii)
CAPTIONS. The captions contained herein are inserted for convenience only and
shall not affect the meaning or interpretation of this Security Agreement or any
provision hereof. The use of the plural shall also mean the singular, and vice
versa. (viii) LOAN DOCUMENTS. The term "Loan Documents" refers to all documents,
whether now or hereafter existing, executed in connection with the Obligations
and may include, without limitation and whether executed by Borrower, Debtor or
others, commitment letters, loan agreements, guaranty agreements, other security
agreements, letters of credit, instruments, financing statements, mortgages,
deeds of trust, deeds to secure debt, and any amendments or supplements
(excluding swap agreements as defined in 11 U.S.C. ss. 101). (ix) JOINT AND
SEVERAL LIABILITY. If more than one person has signed this Security Agreement,
such parties are jointly and severally obligated hereunder. (x) BINDING
CONTRACT. Debtor by execution and Bank by acceptance of this Security Agreement,
agree that each party is bound by all terms and provisions of this Security
Agreement.
8
<PAGE>
IN WITNESS WHEREOF, Debtor, on the day and year first written above, has caused
this Security Agreement to be executed under seal.
IBS Interactive, Inc.
CORPORATE By:/S/ NICHOLAS R. LOGLISCI, JR.,
SEAL Nicholas R.Loglisci, Jr., President
By: /S/ JEFF BRENNER
Jeff Brenner, Chief Financial Officer
9
<PAGE>
EXHIBIT 21.1
IBS INTERACTIVE, INC.
LIST OF SUBSIDIARIES
The following is a list of all of the subsidiaries of IBS Interactive,
Inc. and the jurisdictions of incorporation of such subsidiaries. All of the
listed subsidiaries do business under the names presented below:
1. CCL Telecommunication, Inc.
Delaware
(state of incorporation)
2. IBS Holdings Corp.
Delaware
(state of incorporation)
3. Halo Network Management, LLC
New Jersey
(state of formation)
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBS
INTERACTIVE, INC.'S FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,477
<SECURITIES> 0
<RECEIVABLES> 1,515
<ALLOWANCES> 23
<INVENTORY> 0
<CURRENT-ASSETS> 7,224
<PP&E> 1,823
<DEPRECIATION> 880
<TOTAL-ASSETS> 9,875
<CURRENT-LIABILITIES> 926
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> 7,983
<TOTAL-LIABILITY-AND-EQUITY> 9,875
<SALES> 9,805
<TOTAL-REVENUES> 9,805
<CGS> 6,430
<TOTAL-COSTS> 10,011
<OTHER-EXPENSES> 60
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> (45)
<INCOME-TAX> (15)
<INCOME-CONTINUING> (60)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
