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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): March 31, 1999
IBS INTERACTIVE, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 0-24073 13-3817344
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (973) 285-2600
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
STATEMENTS IN THIS REPORT ON FORM 8-K 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, (IV) TECHNOLOGICAL
DEVELOPMENTS AND INCREASED COMPETITIVE PRESSURE FROM CURRENT COMPETITORS AND
FUTURE MARKET ENTRANTS AND (V) THE FACTORS DISCUSSED IN THE COMPANY'S FORM
10-KSB FOR 1998 IN "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.
ITEM 5. OTHER EVENTS.
On March 31, 1999, IBS Interactive, Inc. (the "Company" or "IBS")
completed the acquisition of Spectrum Information Systems, Inc. ("Spectrum"),
which provided for the exchange of all of the issued and outstanding stock of
Spectrum for 145,456 shares of IBS common stock (subject to certain
adjustments). Such combination has been accounted for as a pooling-of-interests
(the "Spectrum Merger").
The Company's consolidated financial statements have been retroactively
restated as of December 31, 1997 and 1998, and for the years then ended to
reflect the consummation of the Spectrum Merger. The consolidated financial
statements included herein give retroactive effect to the Spectrum Merger, which
has been accounted for using the pooling-of-interests method and, as a result,
the financial position, results of operations and cash flows are presented as if
Spectrum had been consolidated for all periods presented. The consolidated
statements of stockholders' equity reflect the accounts of IBS as if the common
stock issued in connection with the Spectrum Merger had been issued for all
periods presented.
The consolidated balance sheets of IBS as of December 31, 1998 and 1997
have been combined with those of Spectrum for the same periods. The consolidated
statements of operations combine the results of IBS for the years ended December
31, 1998 and 1997 with those of Spectrum for the the same periods.
The consolidated financial statements, including the notes thereto, should
be read in conjunction with the historical consolidated financial statements of
IBS included in its Annual Report on Form 10-KSB for the year ended December 31,
1998 and the consolidated financial statements of Spectrum included in the
Company's Form 8-K/A dated June 2, 1999.
The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows is reflective of the consolidated financial
statements referred to above.
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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 APPEARING
ELSEWHERE HEREIN.
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 Networks, Inc., Mordor International, AllNet Technology
Services, Inc., Entelechy, Inc. ("Entelechy"), JDT WebwerX LLC, DesignFX
Interactive, LLC ("DesignFX"), MBS, Inc. ("MBS"), Halo Network Management, LLC
("Halo"), Mainsite Communications, the Renaissance Internet Services division of
PIVC, LLC, EZ Net, Inc., the ADViCOM division of Multitronics, Inc., Realshare,
Inc., Millennium Computer Applications, Inc., Planet Access, Inc. and Spectrum.
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 70%, 19% and 11%, respectively,
of the Company's revenues as compared to 64%, 19% and 17%, 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 initial public offering (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 190
full-time employees. The Company has entered into employment agreements with 35
of its employees, including its executive officers, which provide for aggregate
salaries of $5,014,000 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.
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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, 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 for all periods presented to include the
results of operations and financial position of Halo.
On January 29, 1999, the Company acquired substantially all of the assets
of Mainsite Communications 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 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.
On April 30, 1999, the Company acquired Realshare, Inc., a Cherry Hill,
New Jersey-based Web-site design and programming company.
On April 30, 1999, Millennium Computer Applications, Inc. was merged into
the Company pursuant to the laws of the States of Delaware and North Carolina,
respectively. Millennium Computer Applications, Inc. is an Internet Service
Provider based in Shallotte, North Carolina.
On May 7, 1999, the Company acquired substantially all of the consumer
dial-up and ISDN accounts from the owners of Planet Access, Inc. and related
computer equipment from Planet Access, a Stanhope, New Jersey-based Internet
Service Provider.
On March 31, 1999, the Company entered into an Exchange Agreement with
Spectrum, and all of Spectrum's shareholders. Spectrum is a full-service
provider of network and systems integration solutions based in Madison, Alabama.
Pursuant to the terms of the agreement, IBS acquired all of the issued and
outstanding shares of Spectrum in exchange for $3,200,000 (subject to certain
adjustments) of unregistered shares of IBS common stock valued by the parties at
$22.00 per share. The combination has been accounted for as a
pooling-of-interests. Accordingly, and as discussed earlier, the Company's
financial statements have been restated for all periods presented to include the
results of operations and financial position of Spectrum. Also see "Recent
Events."
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,
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1997 1998
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Revenues............................................. 100.0% 100.0%
Cost of services..................................... 57.6 68.3
Gross Profit......................................... 42.4 31.7
Selling, general and administrative expense.......... 51.2 31.8
Amortization expense................................. 0.2 1.5
Non-cash compensation expenses....................... 2.2 2.5
Merger expenses...................................... -- 1.0
Operating loss....................................... (11.2) (5.1)
Interest and other expenses.......................... (1.7) 1.1
Loss before income taxes............................. (12.9) (4.0)
Income tax provision................................. (1.5) (0.1)
Net loss............................................. (14.4) (4.1)
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased by $5,907,000, or 106%, from $5,572,000 for
the year ended December 31, 1997, to $11,479,000 for the year ended December 31,
1998. Of the increase, $2,381,000, or 40%, was generated by the operations of
DesignFX, Halo and Spectrum. The Company's evolving consulting relationship with
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Aetna accounted for $1,969,000, or 33%, of the increase in revenues. Expansion
of the Company's network and the corresponding increase in dial-up accounts
accounted for $310,000, or 5%, of the increase in revenues. The remaining
$1,247,000, or 21%, of the increase in revenues was attributable to an increase
in the number of clients of the Company, 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.
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.
Spectrum's revenues for 1998 were $1,674,000, as compared with $411,000 in
1997, an increase of $1,263,000. This increase was due to: (i) the commencement
of full-time operations in December 1997 (ii) and an increase in its client
base.
Management believes that it will be able to grow revenues derived from
network and systems integration solutions through cross-selling opportunities
created by its programming development and Internet services, 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
$4,636,000, or 145%, from $3,207,000 for 1997 to $7,843,000 for 1998. Growth in
the Company's direct payroll expense accounted for $1,626,000, or 35%, 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
11%, of the increase in cost of services. Halo, DesignFX and Spectrum accounted
for $1,602,000, or 35%, of the increase in cost of services. The remaining
$904,000, or 19%, 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.
Cost of services for Spectrum were $1,405,000 for 1998 as compared with
$390,000 in 1997, an increase of $1,015,000. This increase was due to costs
associated with new revenue growth, increases in the value of equipment sold to
customers and commencement of full-time operations in December 1997.
GROSS PROFIT. The Company's gross profit decreased from 42.4% to 31.7% 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 $803,000, or 28%, from $2,851,000 in 1997
to $3,654,000 for 1998. Such increase was primarily attributable to the
Company's expanded promotional and marketing activities, the hiring of
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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.
Selling, general and administrative expenses for Spectrum for 1998 were
$653,000 as compared to $41,000 in 1997, an increase of $612,000. This increase
was due to the hiring of additional sales and administrative personnel during
1998.
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 purchases 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 related to this agreement 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
$120,000 and $7,000 was recognized in 1997 and 1998 for the value of services
provided by Spectrum stockholders (with no cash compensation) in 1997 and the
effects of a restricted stock grant to an employee that vested through February
1998.
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. Costs to be incurred in connection
with the Spectrum acquisition will be expensed in the year ending December 31,
1999.
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 $129,000 for the year ended December 31, 1998
as compared to $81,000 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 $94,000, compared to $81,000 for 1997. This increase is due to the
effects of Spectrum financing costs of $45,000, offset by the effects of 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
$479,000 for the year ended December 31, 1998 compared to a net loss of $794,000
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
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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 $6,068,000,
compared to working capital of $25,000 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 twenty $5,000 face amount promissory 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 promissory 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.
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
$(595,000) for 1997 to $244,000 for 1998. This change was primarily attributable
to (i) improved operating results, a loss of $479,000 for 1998 compared to a
loss of $794,000 for 1997, (ii) increased depreciation and amortization expense
of $357,000, (iii) decreases in accounts receivable in the amount of $2,147,000,
offset by (iv) decreases in accounts payable of $709,000 and deferred revenue in
the amount of $734,000.
Net cash used in investing activities increased from $377,000 for 1997 to
$867,000 for 1998. The change was attributable, in part, to an increase in
capital expenditures of $449,000, principally related to the expansion and
enhancement of the Company's network operations center, as well as to
expenditures for office equipment to support additional employees hired during
1998.
Net cash provided by financing activities increased from $931,000 in 1997
to $5,992,000 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.
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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 March 1999, the Company paid in full all outstanding notes payable of
Spectrum ($84,000 outstanding at December 31, 1998).
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.
The Company's working capital at December 31, 1998 approximated $6.1
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's 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.
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 June 1, 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.
7
<PAGE>
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
All of the following business combinations have been accounted for as
purchases and the respective results of operations will be reflected in the
Company's future operations.
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.
On April 30, 1999, the Company acquired Realshare, Inc., a Cherry Hill, New
Jersey-based Web-site design and programming company.
On April 30, 1999, Millennium Computer Applications, Inc. was merged into
the Company pursuant to the laws of the States of Delaware and North Carolina,
respectively. Millennium Computer Applications, Inc. is an Internet Service
Provider based in Shallotte, North Carolina.
On May 7, 1999, the Company acquired substantially all of the consumer
dial-up and ISDN accounts from the owners of Planet Access, Inc. and related
computer equipment from Planet Access, a Stanhope, New Jersey-based Internet
Service Provider.
On March 31, 1999, the Company entered into an Exchange Agreement with
Spectrum, and all of Spectrum's shareholders. Spectrum is a full-service
provider of network and systems integration solutions based in Madison, Alabama.
Pursuant to the terms of the agreement, IBS acquired all of the issued and
outstanding shares of Spectrum in exchange for $3,200,000 (subject to certain
adjustments) of unregistered shares of IBS common stock valued by the parties at
$22.00 per share. The combination has been accounted for as a
pooling-of-interests. Accordingly, and as discussed earlier, the Company's
financial statements have been restated for all periods presented to include the
results of operations and financial position of Spectrum. Also see "Recent
Events."
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
IBS INTERACTIVE, INC.
Dated: June 4, 1999 By: /S/ Nicholas R. Loglisci, Jr.
-------------------------------------
Nicholas R. Loglisci, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
9
<PAGE>
IBS INTERACTIVE, INC.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS AND EXHIBITS
The following are the consolidated financial statements and exhibits of IBS
Interactive, Inc. and Subsidiaries, which are filed as part of this report.
PAGE
Reports of Independent Certified Public Accountants................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.......... F-4
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998........................................ F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1998.................................. F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1997 and 1998.................................. F-7
Notes to Consolidated Financial Statements............................ F-8
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 did not audit the
financial statements of Spectrum Information Systems, Inc. as of and for the
year ended December 31, 1997, which were combined with the Company's financial
statements as of December 31, 1997 and for the year then ended, which financial
statements reflect total assets of $147,000 as of December 31, 1997 and total
revenues of $411,000 for the year ended December 31, 1997. Those financial
statements were audited by another auditor whose report has been furnished to
us, and our opinion, insofar as it related to the 1997 amounts included for
Spectrum Information Systems, Inc. is based solely on the report of the other
auditor.
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 and
the report of the other auditor provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditor,
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
June 1, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Spectrum Information Systems, Inc.
We have audited the accompanying balance sheet of Spectrum Information Systems,
Inc., as of December 31, 1997, and the related statements of operations and
accumulated deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spectrum Information Systems,
Inc., as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Barfield, Murphy, Shank & Smith, P.C.
Barfield, Murphy, Shank & Smith, P.C.
Birmingham, Alabama
May 13, 1999
F-3
<PAGE>
IBS INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
December 31,
------------------------------
1997 1998
------------------------------
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 163,000 $5,532,000
Accounts receivable (net of allowance for 2,095,000 1,557,000
doubtful accounts of $106,000 in 1997 and
$23,000 in 1998)........................
Prepaid income taxes....................... - 54,000
Prepaid expenses and other current assets.. 29,000 184,000
Deferred income tax asset.................. 50,000 126,000
------------------------------
Total current assets.................... 2,337,000 7,453,000
Property and equipment, net................... 712,000 981,000
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.................................. 65,000 119,000
------------------------------
TOTAL ASSETS $ 3,215,000 $10,046,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt....... $ 624,000 $ 79,000
Accounts payable........................... 326,000 602,000
Deferred revenue........................... 503,000 45,000
Accrued salaries and related expenses...... 71,000 206,000
Accrued project costs...................... 305,000 -
Accrued professional fees.................. - 60,000
Customer deposits.......................... 80,000 59,000
Accrued interest payable................... 14,000 -
Income taxes payable....................... 25,000 -
Accrued warranty expense................... - 90,000
Other current liabilities.................. 364,000 244,000
------------------------------
Total current liabilities............... 2,312,000 1,385,000
Long-term debt, less current maturities....... 281,000 277,000
Deferred compensation......................... - 705,000
Deferred income tax liabilities............... 34,000 -
------------------------------
Total liabilities............................. 2,627,000 2,367,000
------------------------------
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
2,205,233 shares - 1997 and 3,762,036
shares - 1998............................ 22,000 37,000
Additional paid in capital................. 1,679,000 9,236,000
Unearned compensation...................... (7,000) -
Accumulated deficit........................ (1,106,000) (1,594,000)
------------------------------
Total Stockholders' Equity................. 588,000 7,679,000
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,215,000 $10,046,000
==============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
IBS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
December 31,
------------------------------
1997 1998
------------------------------
Revenues........................................ $5,572,000 $11,479,000
Cost of services................................ 3,207,000 7,843,000
------------------------------
Gross Profit.................................... 2,365,000 3,636,000
Operating expenses:
Selling, general and administrative ......... 2,851,000 3,654,000
Amortization of intangible assets............ 12,000 173,000
Non-cash compensation expenses............... 120,000 290,000
Merger related expenses...................... - 109,000
------------------------------
2,983,000 4,226,000
------------------------------
Operating loss.......................... (618,000) (590,000)
Interest expense................................ 81,000 129,000
Interest income................................. - (185,000)
Other (income) expense, net..................... 11,000 (70,000)
------------------------------
Loss before income taxes........................ (710,000) (464,000)
Income tax provision............................ (84,000) (15,000)
------------------------------
Net loss........................................ $ (794,000) $ (479,000)
==============================
Loss per share
Basic and Diluted............................ $ (.36) $ (.15)
==============================
Weighted average number of common stock and
equivalents..................................... 2,196,116 3,268,875
==============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
<CAPTION>
IBS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
Common Stock
--------------------- Additional Total
Number of Paid in Unearned Subscription Accumulated Stockholders'
Shares Amount Capital Compesation Receivable Deficit Equity
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1997,
as previously reported 1,679,975 $17,000 $1,088,00 $(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
Adjustments in connection with
pooling of interests - Spectrum 145,456 1,000 (1,000) - - - -
----------------------------------------------------------------------------------------------
Balance, January 1, 1997, as restated 2,183,241 22,000 1,083,000 (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
Spectrum stockholders'
compensation - - 160,000 - - - 160,000
Issuance and amortization of warrants
associated with 1997 Notes - - 54,000 - - - 54,000
Distribution to shareholders - - - - - (1,000) (1,000)
Capital contributions - - 310,000 - - - 310,000
Net loss - - - - - (794,000) (794,000)
----------------------------------------------------------------------------------------------
Balance - December 31, 1997 2,205,233 22,000 1,679,000 (7,000) - (1,106,000 588,000
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
Distribution to shareholders - - - - - (9,000) (9,000)
Net loss - - - - - (479,000) (479,000)
----------------------------------------------------------------------------------------------
Balance - December 31, 1998 3,762,036 $37,000 $9,236,000 $ - $ - $(1,594,000) $7,679,000
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<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................................... $ (794,000) $ (479,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization........... 306,000 663,000
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................... 200,000 110,000
Deferred income tax provision (benefit). 57,000 (115,000)
Changes in operating assets and liabilities
(net of effects of purchase acquisitions):
Accounts receivable........................ (1,486,000) 661,000
Prepaid expenses and other assets.......... (5,000) (210,000)
Accounts payable and accrued expenses...... 670,000 (39,000)
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.............................. (595,000) 244,000
-----------------------------
Cash flows from investing activities:
Capital expenditures - property and equipment (302,000) (751,000)
Asset acquisitions and related costs....... (75,000) (116,000)
-----------------------------
Net cash used in investing activities. (377,000) (867,000)
-----------------------------
Cash flows from financing activities:
Proceeds from initial public offering...... - 8,280,000
Private sales of common stock.............. 74,000 -
Capital contributions...................... 310,000 -
Capital distributions...................... (1,000) (9,000)
Offering costs............................. (25,000) (1,613,000)
Repayments of notes payable................ (121,000) (396,000)
Proceeds from notes payable................ 445,000 65,000
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 931,000 5,992,000
-----------------------------
Net increase (decrease) in cash and cash (41,000) 5,369,000
equivalents...................................
Cash and cash equivalents, at beginning of year 204,000 163,000
-----------------------------
Cash and cash equivalents, at end of year..... $ 163,000 $ 5,532,000
=============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<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 and 1999 business
combinations accounted for as poolings-of-interests (DesignFX Interactive, LLC
("DesignFX"), Halo Network Management, LLC ("Halo") and Spectrum Information
Systems, Inc. ("Spectrum") 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
F-8
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Valuation
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, Halo and Spectrum
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 or "S" corporation. Under those
regulations, the owners individually received the income tax provision or
benefit of their respective share of DesignFX's, Halo's and Spectrum'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, Halo and
Spectrum.
In future periods, the Company's consolidated income tax provision or benefit
will include the operating results of DesignFX, Halo and Spectrum. 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, Halo and Spectrum 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 69% of total net accounts
receivable and at December 31, 1998, two customers accounted for 20% and 16% 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
F-9
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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
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 $.12 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.
F-10
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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
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, December 10, 1998 and March 31, 1999, the Company
acquired DesignFX, Halo and Spectrum, 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. Spectrum, which is a
full-service provider of network and systems integration solutions, became a
wholly-owned subsidiary of the Company through the exchange of 145,456 shares of
the Company's common stock for all of the outstanding shares of Spectrum. The
ultimate number of shares to be issued to the former owners of DesignFX, Halo
and Spectrum 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, Halo and Spectrum, 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, Halo and Spectrum for
the period January 1, 1997 through December 31, 1997 are as follows:
Company DesignFX Halo Spectrum
------- -------- ----- ----------
Net revenues $2,741,000 $572,000 $1,848,000 $411,000
Net income (loss) 198,000 (825,000) (67,000) (100,000)
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-11
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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
Summarized unaudited results of operations of the Company and Spectrum through
December 31, 1998 are as follows:
Company Spectrum
---------- ----------
Net revenues $9,805,000 $1,674,000
Net loss (60,000) (419,000)
There were no material adjustments to conform the accounting policies of
DesignFX, Halo and Spectrum 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. Costs related to the Spectrum acquisition will be expensed in the year
ending December 31, 1999.
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
F-12
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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.
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 $ 5,896,000
Operating loss (1,020,000)
Net loss (1,106,000)
Loss per share:
Basic and diluted $ (.50)
============
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 Level (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 $1,123,000 $1,661,000
Office equipment, fixtures and vehicles 77,000 162,000
Leasehold improvements 1,000 86,000
------------ ------------
1,201,000 1,909,000
Less: accumulated depreciation (489,000) (928,000)
------------ ------------
$ 712,000 $ 981,000
============ ============
F-13
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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
$292,000 and $488,000, respectively, which includes depreciation of equipment
subject to capital lease agreements of $19,000 and $38,000, respectively.
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 -
Spectrum - notes payable 49,000 84,000
Other debt 107,000 -
Capital leases 123,000 72,000
------------ ------------
905,000 356,000
Less: current portion (624,000) (79,000)
============ ============
Total-long term borrowings $ 281,000 $ 277,000
============ ============
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.
F-14
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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.
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 the settlement of 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.
SPECTRUM - NOTES PAYABLE
Spectrum notes payable of $49,000 and $84,000 at December 31, 1997 and 1998,
respectively, bear interest at rates of 8.25% to 12%. The notes are payable in
installments through November 2003 and are secured in the related equipment and
vehicles.
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.
F-15
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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
.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 $ 79,000
2000 244,000
2001 15,000
2002 10,000
2003 8,000
===========
Total $356,000
===========
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.
F-16
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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.
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.
F-17
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
STOCKHOLDER COMPENSATION
During the year ended December 31, 1997, the Spectrum stockholders did not
receive cash compensation for services rendered. The Company recognized a
non-cash compensation charge of $160,000 ($80,000 classified in "Cost of
revenues" and $80,000 in "Selling, general and administrative expenses") for the
estimated value ascribed to such services. Such values were derived, in part,
from the stockholders' compensation levels for the year ended December 31, 1998.
The Company increased stockholders' equity in 1997 for the amount of this
charge.
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.
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Exercise Price Outstanding life (years) price exercisable price
------------------------------------------------------------------------------
$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
---------- ------------
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 30,484 6.14
year end
---------------------------------------------------------
Options available for grant 62,850
---------------------------------------------------------
F-18
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
Under the accounting provisions of SFAS 123, the Company's 1998 pro forma net
loss and loss per share would have been:
--------------------------------------------------------
Net loss $(544,000)
Net loss per share; basic and diluted $(.17)
--------------------------------------------------------
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 $3.47
granted
--------------------------------------------------------
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
============ ============
F-19
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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............................. $ (241,000) $ (158,000)
State taxes, net of federal benefit........ 20,000 3,000
Results attributed to DesignFX, Halo and
Spectrum owners............................ 337,000 67,000
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
============ ============
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 $ 656,000
2000 576,000
2001 439,000
2002 307,000
2003 178,000
============
Total $2,156,000
============
Total rental expense for the years ended December 31, 1997 and 1998 was
approximately $129,000 and $414,000, respectively.
F-20
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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 $2,275,000
2000 1,764,000
2001 679,000
2002 296,000
============
TOTAL $5,014,000
============
FIXED ASSETS
At December 31, 1998, the Company had entered into fixed asset purchase
commitments of approximately $1,200,000.
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 (ALSO SEE NOTE 7)
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
F-21
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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 - 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:
1997 1998
------------ ------------
Interest $9,000 $ 66,000
Income Taxes 2,000 197,000
============ ============
In 1997 and 1998, the Company acquired $95,000 and $32,000, respectively, 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 27% and 30% 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 20% and 24% 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 and Spectrum) 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.
F-22
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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 $2,259 $ - $5,572
Cost of services 208 891 565 1,543 - 3,207
------------- --------- --------- -------- ---------- ---------
Gross profit 1,542 100 7 716 - 2,365
Selling, general & administrative 404 663 850 745 189 2,851
Amortization of intangible assets - 12 - - - 12
Non-cash compensation expense 40 - - 80 - 120
------------- --------- --------- --------- ---------- --------
Operating income (loss) 1,098 (575) (843) (109) (189) (618)
Interest expense - - (28) (16) (37) (81)
Other income (expense), net - - 46 (42) (15) (11)
Income tax (provision) benefit (330) 173 - - 73 (84)
------------- --------- --------- --------- ---------- --------
Net income (loss) $ 768 $(402) $(825) $ (167) $(168) $ (794)
============= ========= ========= ========= ========== ========
Allocated assets $1,523 $ 616 $ 256 $ 507 $ 313 $3,215
============= ========= ========= ========= ========== ========
Expenditures for allocated assets $ - $ 152 $ 94 $ 54 $ 2 $ 302
============= ========= ========== ========== ========== ========
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 $3,626 $ - $11,479
Cost of services 2,504 1,629 926 2,784 - 7,843
------------- --------- ------- --------- -------- --------
Gross profit 2,463 (328) 659 842 - 3,636
Selling, general & administrative 1,456 280 454 956 508 3,654
Amortization of intangible assets 154 19 - - - 173
Non-cash compensation expense 187 - - - 103 290
Merger expenses - - - - 109 109
------------- --------- ------- --------- -------- --------
Operating income (loss) 666 (627) 205 (114) (720) (590)
Interest expense - - (18) (50) (61) (129)
Interest income - - - 1 184 185
Other income (expense), net - - 31 48 (9) 70
Income tax (provision) benefit (464) 251 - - 198 (15)
------------- --------- ------- -------- --------- --------
Net income (loss) $ 202 $ (376) $ 218 $(115) $(408) $ (479)
============= ========= ======= ========= ======== ========
Allocated assets $2,430 $ 550 $ 213 $ 460 $6,393 $10,046
============= ========= ======= ========= ======== ========
Expenditures for allocated assets $ - $ 336 $ 220 $ 24 $ 171 $ 751
============= ========= ======= ========= ======== ========
</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.
F-23
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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.
On April 30, 1999, the Company acquired Realshare, Inc., a Cherry Hill, New
Jersey-based Web-site design and programming company.
On April 30, 1999, Millennium Computer Applications, Inc. was merged into the
Company pursuant to the laws of the States of Delaware and North Carolina,
respectively. Millennium Computer Applications, Inc. is an Internet Service
Provider based in Shallotte, North Carolina.
On May 7, 1999, the Company acquired substantially all of the consumer dial-up
and ISDN accounts from the owners of Planet Access, Inc. and related computer
equipment from Planet Access, a Stanhope, New Jersey-based Internet Service
Provider.
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.
As discussed in Notes 1 and 3, on March 31, 1999, the Company completed the
acquisition of Spectrum which provided for the exchange of all of the
outstanding stock of Spectrum for 145,456 shares of IBS common stock. Such
combination has been accounted for as a pooling of interests.
F-24
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBS
INTERACTIVE, INC.'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 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> 5,532
<SECURITIES> 0
<RECEIVABLES> 1,580
<ALLOWANCES> 23
<INVENTORY> 0
<CURRENT-ASSETS> 7,453
<PP&E> 1,909
<DEPRECIATION> 928
<TOTAL-ASSETS> 10,046
<CURRENT-LIABILITIES> 1,385
<BONDS> 0
0
0
<COMMON> 37
<OTHER-SE> 7,642
<TOTAL-LIABILITY-AND-EQUITY> 10,046
<SALES> 11,479
<TOTAL-REVENUES> 11,479
<CGS> 7,843
<TOTAL-COSTS> 12,069
<OTHER-EXPENSES> (255)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129
<INCOME-PRETAX> (464)
<INCOME-TAX> (15)
<INCOME-CONTINUING> (479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (479)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBS
INTERACTIVE, INC.'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 163
<SECURITIES> 0
<RECEIVABLES> 2,201
<ALLOWANCES> 106
<INVENTORY> 0
<CURRENT-ASSETS> 2,337
<PP&E> 1,201
<DEPRECIATION> 489
<TOTAL-ASSETS> 3,215
<CURRENT-LIABILITIES> 2,312
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 566
<TOTAL-LIABILITY-AND-EQUITY> 3,215
<SALES> 5,572
<TOTAL-REVENUES> 5,572
<CGS> 3,207
<TOTAL-COSTS> 6,190
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> (710)
<INCOME-TAX> (84)
<INCOME-CONTINUING> (794)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (794)
<EPS-BASIC> (.36)
<EPS-DILUTED> (.36)
</TABLE>
