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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended September 30, 2000 (Third quarter
of fiscal 2000)
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the
transition period from_____________ to ________________
Commission File No. 0-24073
IBS INTERACTIVE, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 13-3817344
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
Incorporation or Organization)
2 RIDGEDALE AVENUE
SUITE 350
CEDAR KNOLLS, NJ 07927
(Address of Principal Executive Offices)
(973) 285-2600
(Issuer's Telephone Number, Including Area Code)
-----------------------------------------
(Former Name, Former Address and Former
Fiscal Year, if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
As of November 10, 2000, 6,787,129 shares of the issuer's common stock, par
value $.01 per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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IBS INTERACTIVE, INC.
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of September 30,
2000 (unaudited)......................................... 1
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and 1999
(unaudited).............................................. 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999
(unaudited).............................................. 4
Notes to Condensed Consolidated Financial Statements..... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 9
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................... 15
SIGNATURES..................................................... 17
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
IBS INTERACTIVE, INC.
Condensed Consolidated Balance Sheet
(unaudited, in thousands)
ASSETS SEPTEMBER 30, 2000
------------------
Current Assets
Cash and cash equivalents........................ $ 1,051
Accounts receivable (net of allowance for doubtful
accounts of $607) ............................. 6,545
Prepaid expenses................................. 336
Income tax receivable............................ 86
Capitalized merger costs..................... 750
-----------
Total Current Assets...................... 8,768
-----------
Property and equipment, net........................... 2,147
Intangible assets, net................................ 14,804
Other assets.......................................... 328
-----------
TOTAL ASSETS....................... $ 26,047
===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
1
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IBS INTERACTIVE, INC.
Condensed Consolidated Balance Sheet
(unaudited, in thousands, except share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY SEPTEMBER 30, 2000
------------------
Current Liabilities
Long-term debt and capital lease obligations,
current portion.................................. $ 240
Accounts payable and accrued expenses.............. 2,609
Accrued liabilities on sale of discontinued
operations ...................................... 1,849
Deferred revenue................................... 267
---------
Total Current Liabilities..................... 4,965
---------
Long-term debt and capital lease obligations.......... 927
Deferred compensation................................. 590
Accrued liabilities on sale of discontinued
operations.......................................... 449
---------
Total Liabilities.................................. 6,913
---------
Stockholders' Equity
Preferred Stock, $.01 par value, authorized
1,000,000 shares, none issued and outstanding.... --
Common Stock, $.01 par value, authorized
11,000,000 shares, 6,787,129 shares issued
and outstanding................................. 66
Additional paid in capital......................... 38,866
Accumulated deficit................................ (19,816)
---------
Total Stockholders' Equity......................... 19,116
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $ 26,047
=========
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
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IBS INTERACTIVE, INC.
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2000 and 1999
(unaudited, in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
For the nine months ended For the three months ended
September 30, September 30,
2000 1999 2000 1999
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues...................... $ 18,059 $ 11,123 $ 6,862 $ 3,507
Cost of services.............. 12,304 7,095 4,602 2,604
----------- ----------- ----------- -----------
Gross profit.................. 5,755 4,028 2,260 903
Operating expenses:
Selling, general and
administrative........... 10,466 5,778 3,695 2,148
Amortization of intangible
assets................... 2,299 384 909 160
Compensation expense -
non-cash................. 237 260 0 72
Severance and
restructuring............ 865 0 0 0
Merger expenses............ 0 223 0 86
----------- ----------- ----------- -----------
Operating income (loss)....... (8,112) (2,617) (2,344) (1,563)
Interest expense (income), net 49 (73) (2) (6)
----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes......... (8,161) (2,544) (2,342) (1,557)
Tax benefit (provision)....... (11) 27 (0) (50)
Loss from continuing
operations.................. (8,172) (2,517) (2,342) (1,607)
Discontinued operations....... (798) (640) 0 (128)
Loss on disposal of discontinued
operations.................. (3,383) 0 0 0
----------- ----------- ----------- -----------
Net loss...................... $ (12,353) $ (3,157) $ (2,342) $ (1,735)
=========== =========== =========== ===========
Loss per share from continuing
operations:
Basic and Diluted............. $ (1.31) $ (0.61) $ (0.35) $ (0.38)
======= ======= ======== ========
Loss per share from discontinued
operations:
Basic and Diluted............. $ (0.67) $ (.15) $ (.0) $ (0.03)
======= ====== ======= ========
Loss per share from operations:
Basic and Diluted............. $ (1.98) $ (0.76) $ (0.35) $ (0.41)
======== ======== ======== ========
Weighted average common shares
outstanding:
Basic and Diluted............. 6,239,348 4,191,285 6,732,759 4,277,348
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
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IBS INTERACTIVE, INC.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2000 and 1999
(unaudited, in thousands)
Nine months ended September 30,
2000 1999
---- ----
Cash flows used in operating activities....... $ (7,851) $ (3,545)
Cash flows (used in) provided by investing
activities.................................. 2,376 (1,926)
Cash flows provided by financing activities... 3,634 53
-------- --------
NET DECREASE IN CASH and
CASH EQUIVALENTS.............................. (1,841) (5,418)
CASH and CASH EQUIVALENTS AT
BEGINNING OF PERIOD........................... 2,892 5,532
-------- --------
CASH and CASH EQUIVALENTS AT
END OF PERIOD................................. $ 1,051 $ 114
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
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NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
The condensed consolidated interim financial statements of IBS
Interactive, Inc. ("IBS," the "Company," "we," or "us") have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission with respect to Form 10-QSB. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures made herein are adequate to make the
information contained herein not misleading. These condensed consolidated
interim financial statements should be read in conjunction with the Company's
audited financial statements for the year ended December 31, 1999 and the notes
thereto included in the Company's Annual Report on Form 10-KSB and the Company's
reports on Form 8-K dated March 24, 2000 and Form 8-K/A dated May 16, 2000. In
the Company's opinion, all adjustments, consisting only of normal recurring
adjustments and severance/restructuring charges, necessary for a fair
presentation of the information shown herein have been included.
The results of operations and cash flows for the nine months ended September 30,
2000 are not necessarily indicative of the results of operations and cash flows
expected for the year ending December 31, 2000.
2. DISCONTINUED OPERATIONS
On August 8, 2000, the Company announced the sale of its consumer dial up
business to Earthlink, Inc. ("Earthlink"). Pursuant to the terms of the
agreement with Earthlink, the Company received $2.9 million of the purchase
price in the third quarter of fiscal 2000 after the Company delivered its
customer list to Earthlink. Of this amount, $2.0 million represents the minimum
purchase price, and the remainder is contingent upon the number of subscribers
ultimately transferred. The final purchase price will be based on the number of
subscribers who remain with Earthlink for a specified minimum period. A loss on
disposal of $3.4 million has been recorded for the nine month period ending
September 30, 2000, related primarily to the write off of goodwill, certain
equipment leases, and severance costs related to the sale of this business.
The determination of the actual purchase price and the loss on disposal is
expected to be finalized in the fourth quarter of this year.
3. BUSINESS COMBINATIONS
On March 1, 2000 the Company acquired all of the outstanding stock of
digital fusion, inc. ("the March 2000 Acquisition") in exchange for 975,000
shares of unregistered common stock (50,000 shares of which are reserved pending
settlement of certain matters), a $500,000 three-year subordinated note accruing
6% interest per annum and the assumption of debt totaling approximately $4.2
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million. The March 2000 Acquistion is a Tampa, Florida-based provider of
e-Business professional services. Of the assumed $4.2 million of debt, at
September 30, 2000, $3.4 million has been repaid.
The following summarized, unaudited pro forma information for the year
ended December 31, 1999 and the nine months ended September 30, 2000, assumes
that the March 2000 Acquisition had occurred on January 1, 1999:
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
Net revenues...................... $27,638,000 $19,729,000
Operating loss.................... (7,633,000) (8,485,000)
Loss from continuing operations... (8,295,000) (8,639,000)
Loss per share from continuing
operations: Basic and Diluted..... $ (1.57) $ (1.38)
The pro forma operating results reflect estimated pro forma adjustments for
the amortization of intangibles arising from the acquisition ($3,167,000 in 1999
and $281,000 in 2000) reduced interest expense from the conversion of the March
2000 Acquisition debt prior to closing ($203,000 in 1999 and $60,000 in 2000)
and the pro forma operating results of an acquisition by the March 2000
Acquisition in April 1999. 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 1999 or 2000 or of future
results of the combined operations.
The value ascribed to the consideration of stock, equity instruments, debt
and related costs ($19.2 million) less the fair market value of net assets
acquired ($3.1 million) resulted in goodwill of $16.1 million. Goodwill will be
amortized over a life of 5 years.
Due to the recent closing of the March 2000 Acquisition, the Company
utilized preliminary estimates and assumptions in determining the allocation of
purchase price to assets acquired and liabilities assumed. While management
believes such estimates and assumptions are reasonable, the final allocation of
the purchase price may differ from that reflected in the unaudited September 30,
2000 consolidated balance sheet after a more extensive review of fair values of
the assets and liabilities is completed. As noted earlier, the Company has
reserved 50,000 shares of common stock for possible issuance pending the
resolution of certain matters.
4. SEVERANCE AND RESTRUCTURING EXPENSES
During the three months ended March 31, 2000, the Company enacted a
reduction in force of 16 employees and, as a result, recognized a charge of
$567,000 related to severance, benefits and entitlements in accordance with EITF
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to exit on Activity. In addition, the Company decided to terminate its
Microsoft training business and recognized a charge of $298,000 which is
comprised of the exit costs from this business and impairment losses on the
value of related assets. As of September 30, 2000, $142,000 remained of the
total accrual of $865,000.
6
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5. INCOME TAXES
The Company has not recognized an income tax benefit for its operating loss
generated in the three-month period ended September 30, 2000 based on
uncertainties concerning its ability to generate taxable income in future
periods. The tax provision for the three month period ended September 30, 2000
is comprised of a valuation allowance established against deferred tax assets
arising from operating losses and other temporary differences, the realization
of which could not be considered more likely than not. In future periods, tax
benefits and related deferred tax assets will be recognized when management
considers realization of such amounts to be more likely than not. At September
30, 2000 income tax receivables is comprised of principally tax loss carrybacks,
the realization of which, at present, is considered to be more likely than not.
6. STOCKHOLDERS' EQUITY
On July 30, 2000, the Company entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with Infonautics, Inc.
("Infonautics") and First Avenue Ventures, Inc. ("First Avenue Ventures"). The
Reorganization Agreement provided for a business combination to be accomplished
by the formation of a holding company and the merger of subsidiaries of the
holding company with and into the Company, Infonautics and First Avenue Ventures
so that, after completion of the business combination, the Company, Infonautics
and First Avenue Ventures would be wholly-owned subsidiaries of the new holding
company named Digital Fusion, Inc. ("Digital Fusion") in the business
combination, stockholders of the Company and shareholders of Infonautics would
receive one share of common stock of Digital Fusion for each share of common
stock of the Company of Infonautics that they own. Following completion of the
business combination, stockholders of the Company would hold common stock of
Digital Fusion representing approximately 34% of the outstanding common stock of
Digital Fusion on an as converted basis, shareholders of Infonautics would hold
common stock of Digital Fusion representing approximately 61% of the outstanding
common stock of Digital Fusion on an as converted basis, and stockholders of
First Avenue Ventures would hold common stock and preferred stock of Digital
Fusion representing approximately 5% of the outstanding common stock of Digital
Fusion on an as converted basis.
During the three-month period ended September 30, 2000, the Company granted
26,600 options to employees pursuant to its 2000 Option Plan. Certain officers
and employees of the March 2000 Acquisition have been granted non-qualified
options to purchase 480,000 shares of Company common stock; of such options, 25%
vested immediately, and as such, have been treated as consideration in
determining the purchase price of the March 2000 Acquisition. The remaining
options will vest over a period of 3 years of continued employment. These
options will vest immediately upon change of control and have an exercise price
of $10.49 per share.
In the three months ended September 30, 2000, the Company issued 5,734
shares of reserved common stock in connection with the resolution of
contingencies in its 1999 acquisition of certain assets of Planet Access, Inc.
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7. RELATED PARTY TRANSACTIONS
In September 2000, the Company purchased the original equipment
manufacturing rights to a financial accounting software package developed by
PowerCerv Technologies Corporation ("PowerCerv"). The purchase price was
$350,000, which approximates fair market value, of which $140,000 was paid in
the third quarter of 2000, $105,000 will be paid on December 31, 2000 and
$105,000 will be paid on March 31, 2001. Roy Crippen, III, the Company's
President and Chief Operating Officer, is a member of the Board of Directors of
PowerCerv.
8. SUBSEQUENT EVENTS
In October 2000, the Company enacted a reduction in force of 64 employees
and, as a result, will recognize a charge of $125,000 related to
severance, benefits and entitlements in the fourth quarter.
In November 2000, the Company announced the termination of the
Reorganization Agreement with Infonautics and First Avenue Ventures. The Company
expects to take a charge of approximately $750,000 in the fourth quarter in
connection with this termination.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In addition, from time to time, we or our representatives have made or
may make other forward-looking statements orally or in writing. Such statements
may include, without being limited to, statements concerning anticipated
financial performance, future revenues or earnings, business prospects,
projected ventures, new products, anticipated market performance and similar
matters. The words "plan," "budget, "intend," "anticipate," "project,"
"estimate," "expect," "may," "might," "believe," "potential," "could," "should,"
"would" and similar statements are intended to be among the statements that are
forward-looking statements. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, we caution our readers that, because such
statements reflect the reality of risk and uncertainty that is inherent in doing
business, actual results may differ materially from those expressed or implied
by such forward-looking statements. These risks and uncertainties, many of which
are beyond our control, include, but are not limited to, those set forth in the
Company's Form 10-KSB for 1999. Readers are cautioned not to place undue
reliance on these forward-looking statements, which are made as of the date of
this report. Except as otherwise required to be disclosed in periodic reports
required to be filed by companies registered under the Exchange Act by the rules
of the SEC, the Company has no duty and undertakes no obligation to update such
statements.
OVERVIEW
We provide single source e-Business and information technology ("IT")
professional services, Web-site hosting and Internet access services to
businesses and public sector institutions in the Eastern and Midwestern United
States. Our revenues are derived principally from fees earned in connection with
the performance of professional services and Web-site hosting services and fees
from Internet access services subscribers and customers.
We commenced operations in June 1995 as an Internet Service Provider
("ISP") offering Web-site hosting services. Since April 1996, we have acquired:
Entelechy, Inc.; JDT WebwerX, LLC; DesignFX Interactive, LLC; MBS, Inc.; Halo
Network Management, LLC; Spectrum Information Systems, Inc.; Realshare, Inc.;
Spencer Analysis, Inc.; and digital fusion, inc. We began to provide e-Business
and IT professional services in April 1996 and have increasingly emphasized such
services.
On August 8, 2000, the Company announced the sale of its consumer dial up
business to Earthlink, Inc. ("Earthlink"). Pursuant to the terms of the
agreement with Earthlink, the Company received $2.9 million of the purchase
price in the third quarter of fiscal 2000 after the Company delivered its
customer list to Earthlink. Of this amount, $2.0 million represents the minimum
purchase price, and the remainder is contingent upon the number of subscribers
ultimately transferred. The final purchase price will be based on the number of
subscribers who remain with Earthlink for a specified minimum period.
We are currently evaluating strategic alternatives and options relating to
our remaining Internet access services business, which may include the possible
sale of all or a portion of our remaining Internet access services business. As
of September 30, 2000, our remaining Internet access services business consisted
9
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of 276 digital subscriber line accounts and 37 dedicated line accounts. Revenues
for this business were approximately $412,000 and $641,000 for the nine month
period ended September 30, 1999 and September 30, 2000, respectively. No
assurances can be given that if our remaining Internet access services business
is sold that the transaction(s) will not result in a loss, since the ultimate
proceeds are subject to a number of uncertainties that management is unable to
predict at this time. Such uncertainties include, but are not limited to, future
market conditions and the availability of buyer(s) willing to purchase the
business on terms acceptable to us.
On July 30, 2000, the Company entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with Infonautics, Inc.
("Infonautics") and First Avenue Ventures, Inc. ("First Avenue Ventures"). In
November 2000, the Company announced the termination of the Reorganization
Agreement with Infonautics and First Avenue Ventures. The Company expects to
take a charge of approximately $750,000 in the fourth quarter in connection with
this termination.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
REVENUES. Revenues increased by $3,355,000, or 96%, from $3,507,000 for the
three months ended September 30, 1999 ("1999"), to $6,862,000 for the three
months ended September 30, 2000 ("2000"). The increase in revenues was primarily
due to professional services revenue of $2,054,000 generated by the March 2000
Acquisition. Because the March 2000 Acquisition took place in March 2000, its
revenues were not included in our consolidated revenues for 1999. Revenues from
our largest professional services customer also increased by $1,144,000, or
174%, from $658,000 in 1999 to $1,802,000 in 2000. Our largest customer was
responsible for 26% of our revenue in 2000. Our current contract with this
customer commenced in December 1998 and terminates on December 30, 2000. We
currently expect this contract to be renewed.
COST OF SERVICES. Cost of services consists primarily of salaries and
expenses of engineering, programming and technical personnel, expenses relating
to cost of equipment and applications sold to clients and telecommunications
equipment costs for Web-site hosting, digital subscriber line and dedicated line
services and fees paid to outside consultants engaged for client projects. Cost
of services increased by $1,998,000, or 77%, from $2,604,000 for 1999 to
$4,602,000 for 2000. The increase in cost of services was primarily due to
increased direct payroll costs, increased use of consultants, increased
purchases of equipment for resale and for network services. Growth in our direct
payroll expense accounted for $1,681,000, or 84%, of the increase in total cost
of services.
GROSS PROFIT. Our gross profit was $903,000, or 26% of revenues, in 1999
and $2,260,000, or 33% of revenues, in 2000. The increase in gross profit as a
percentage of sales was primarily due an increase in the profitability of our
e-business and IT professional services projects and consulting.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses consist primarily of salaries and costs associated with marketing
literature, advertising, direct mailings, and accounting, finance and sales and
marketing personnel, administrative personnel, as well as professional fees and
other costs connected with the administration of the Company. Selling, general
and administrative expenses increased by $1,547,000, or 72%, from $2,148,000 in
10
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1999 to $3,695,000 for 2000. Such increase was primarily due to increased
personnel and related overhead costs associated with our acquisitions.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased by $749,000, from $160,000 for 1999 to $909,000 for 2000. This
increase was primarily due to the amortization related to intangible assets
arising from the March 2000 Acquisition.
NON-CASH COMPENSATION EXPENSE. Non-cash compensation expense decreased from
$72,000 in 1999 to $0 in 2000. This decrease was due to the release of shares of
common stock related to the 1998 acquisition of Entelechy, Inc. ("Entelechy").
Under terms of the original agreement, such reserved shares were to be earned
ratably over a three year period ending January 31, 2001. Since the condition of
continued employment for the release of such shares has been waived, the Company
recognized the remaining non-cash compensation charge of $214,000 in the quarter
ended March 31, 2000.
MERGER RELATED EXPENSES. The Company expects to take a charge of $750,000
in the fourth quarter of 2000 in connection with the termination of the
Reorganization Agreement in November 2000. During 1999, we incurred charges of
$109,000 for fees and costs associated with the acquisition of Spencer Analysis,
Inc. Such 1999 amounts, for transactions accounted for as a pooling of
interests, are expensed as services are rendered and costs are incurred.
INTEREST EXPENSE (INCOME), NET. Interest expense in 2000 consisted of
interest payments and accruals on indebtedness in connection with the March 2000
Acquisition, and to a lesser extent, interest payments and accruals on capital
leases. Interest expense was $6,000 and $63,000, respectively, for 1999 and
2000. Interest income increased from $12,000 in 1999 to $65,000 in 2000 due to
an increase in our cash position in 2000 relative to 1999 as a result of the
timing of our private placement financings in 1999 and 2000.
INCOME TAXES. Income taxes decreased from a provision of $50,000 in 1999 to
$0 in 2000. This was due principally to a valuation allowance established
against deferred tax assets arising from net operating losses and other
temporary differences.
LOSS FROM CONTINUING OPERATIONS. As a result of the foregoing, the Company
had a loss of $2,342,000 for the three-month period ended September 30, 2000
compared to a loss of $1,607,000 for the three-month period ended September 30,
1999.
LOSS FROM DISCONTINUED OPERATIONS. The Company did not record a loss
related to the operations of its consumer dial-up business for the three-month
period ended September 30, 2000 compared to a net loss of $128,000 for the
three-month period ended September 30, 1999.
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS. In connection with the sale of
our consumer dial up business to Earthlink in August 2000, we did not record a
loss on disposal in the third quarter of 2000. The determination of the actual
purchase price and total loss on disposal is expected to be finalized in the
fourth quarter of this year.
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NET LOSS. As a result of the foregoing, we recognized a net loss of
$2,342,000 for the three months ended September 30, 2000 compared to a net loss
of $1,735,000 for the three months ended September 30, 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
REVENUES. Revenues increased by $6,936,000, or 62%, from $11,123,000 for
the nine months ended September 30, 1999 ("1999"), to $18,059,000 for the nine
months ended September 30, 2000 ("2000"). The increase in revenues was primarily
due to Internet programming and consulting services revenue of $5,555,000
generated by the March 2000 Acquisition. Because the March 2000 Acquisition took
place during the first quarter of 2000, its revenues were not included in our
consolidated revenues for 1999. Revenues from our largest customer also
increased by $1,525,000, or 63%, from $2,440,000 in 1999 to $3,965,000 in 2000.
Our largest customer was responsible for 22% of our revenue from continuing
operations in 2000. . Our largest customer was responsible for 26% of our
revenue in 2000. Our current contract with this customer commenced in December
1998 and terminates on December 30, 2000. We currently expect this contract to
be renewed.
COST OF SERVICES. Cost of services consists primarily of salaries and
expenses of engineering, programming and technical personnel, expenses relating
to cost of equipment and applications sold to clients and equipment costs for
Web-site hosting, digital subscriber line and dedicated line services and fees
paid to outside consultants engaged for client projects. Cost of services
increased by $5,209,000, or 73%, from $7,095,000 for 1999 to $12,304,000 for
2000. The increase in cost of services was primarily due to increased direct
payroll costs and increased purchases of equipment for resale. Growth in our
direct payroll expense accounted for $3,775,000, or 72%, of the increase in
total cost of services.
GROSS PROFIT. Our gross profit was $5,755,000, or 32% of revenues, in 2000
and $4,028,000, or 36% of revenues, in 1999. The decrease in gross profit as a
percentage of sales was primarily due to a decrease in the profitability of our
network services projects and consulting, offset by an increase in the
profitability of our e-business and IT professionals services projects and
consulting.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses consist primarily of salaries and costs associated with marketing
literature, advertising, direct mailings, and accounting, finance and sales and
marketing personnel, administrative personnel, as well as professional fees and
other costs connected with the administration of the Company. Selling, general
and administrative expenses increased by $4,688,000, or 81%, from $5,778,000 in
1999 to $10,466,000 for 2000. Such increase was primarily due to increased
personnel and related overhead costs associated with our acquisitions.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased by $1,915,000, from $384,000 for 1999 to $2,299,000 for 2000. This
increase was primarily due to the amortization of intangible assets (customer
lists and goodwill) related to the ISP acquisitions made throughout 1999 and
seven months of amortization related to intangible assets arising from the March
2000 Acquisition.
12
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SEVERANCE AND RESTRUCTURING. During the first quarter of 2000, the Company
enacted a reduction in force and, as a result, recognized a charge of $567,000
related to severance, benefits and entitlements. In addition, the Company
decided to terminate its Microsoft training business and recognized a charge of
$298,000 which is comprised of the exit costs of this business. During 1999 we
did not incur any such charges.
MERGER RELATED EXPENSES. The Company expects to take a charge of $750,000
in the fourth quarter in connection with the termination of the Reorganization
Agreement in November 2000. During 1999, we incurred charges of $223,000 for
fees and costs associated with the acquisition of Spencer Analysis, Inc. Such
1999 amounts, for transactions accounted for as a pooling of interests, are
expensed as services are rendered and costs are incurred.
INTEREST EXPENSE (INCOME), NET. Interest expense in 2000 consisted of
interest payments and accruals on indebtedness in connection with the March 2000
Acquisition, and to a lesser extent interest payments and accruals on capital
leases. Interest expense was $16,000 and $233,000, respectively, for 1999 and
2000. Interest income increased from $89,000 in 1999 to $184,000 in 2000 due to
an increase in our cash position in 2000 relative to 1999 as a result of the
timing of our private placement financings.
INCOME TAXES. The Company recorded a tax provision of $11,000 in the
nine-month period ended September 30, 2000 compared to a tax benefit of $27,000
in the nine-month period ended September 30, 1999.
LOSS FROM CONTINUING OPERATIONS. As a result of the foregoing, the Company
had a loss of $8,172,000 for the nine-month period ended September 30, 2000
compared to a loss of $2,517,000 for the nine-month period ended September 30,
1999.
LOSS FROM DISCONTINUED OPERATIONS. The Company had a loss of $798,000 for
the nine-month period ended September 30, 2000 compared to a net loss of
$640,000 for the nine-month period ended September 30, 1999.
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS. In connection with the sale of
our consumer dial up business to Earthlink in August 2000, the Company recorded
a loss of $3.4 million for 2000, related primarily to the write off of goodwill,
certain equipment leases, and severance costs related to the discontinuance of
this business. The determination of the actual purchase price and the loss on
disposal is expected to be finalized in the fourth quarter of this year.
NET LOSS. As a result of the foregoing, the Company had a net loss of
$12,353,000 for the nine-month period ended September 30, 2000 compared to a net
loss of $3,157,000 for the nine-month period ended September 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities increased from $3,545,000 used in
1999 to $7,851,000 used in 2000. This change was primarily attributable to
operating results from continuing and discontinued operations that produced a
net loss in the amount of $12,353,000 for the nine months ended September 30,
2000, compared to a net loss of $3,157,000 for the corresponding nine-month
period in 1999.
Net cash used in investing activities was $1,926,000 in 1999 compared to
$2,376,000 provided by investing activities in 2000. The increase is due to $2.9
million received in connection with the sale of the Company's consumer dial up
business during the third quarter of 2000, offset by increased capital
expenditures in 2000.
Net cash provided by financing activities was $53,000 in 1999 compared to
$3,634,000 provided in 2000. This change was primarily attributable to the
proceeds raised in the Company's 2000 private placement, offset by $3,400,000 of
repayment of debt.
In May 1998, we secured equipment lines of credit from three equipment
vendors, each in the amount of $500,000. There were no borrowings outstanding
under these lines of credit at September 30, 2000.
We currently estimate our capital expenditures for the year ending December
31, 2000 will be $675,000, relating primarily to purchases of hardware and
software necessary for the conduct of our business, as well as certain
trademarks and copyrights associated with the name Digital Fusion, Inc.
In November 2000, the Company executed a term sheet relating to a $4
million credit line. The credit line is to be secured by all of the assets of
the Company. The credit line is subject to the negotiation of definitive
documentation and the satisfaction of standard closing conditions. There can be
no assurance that the Company will receive the funding in a timely manner, or at
all.
As of September 30, 2000, we had working capital of $3,803,000, which
included a cash balance of $1,051,000. We anticipate, based on our current
levels of revenues and expenses, that our current cash balances, together with
the anticipated credit line, are sufficient to fund our operations and capital
requirements for the foreseeable future. In addition, we have taken actions to
reduce our cash requirements, including selected staff reductions. Our failure
to obtain any needed additional financing would have a material adverse effect
on us. If we are unable to obtain additional financing and exhaust our current
sources of capital, we will be required to take additional actions to continue
our operations. These actions may include immediate reductions of our operating
costs and other expenditures including additional staff reductions and cost
deferments. Any of these actions may limit our opportunities to increase
revenues and may affect our ability to achieve breakeven or profitable
operations.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
I. On August 24, 2000, the Company issued an aggregate of 5,734 shares to
the stockholders of Planet Access, Inc. ("Planet Access") in connection with the
Company's acquisition of certain assets of Planet Access in May 1999. Pursuant
to the terms of the asset purchase agreement, these shares were previously held
in escrow. The issued shares were not registered under the Securities Act of
1933, as amended (the "Act"), in reliance on the exemption from registration
provided by Section 4(2) of the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits in the following table have been filed as part of this
Quarterly Report on Form 10-QSB:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
27.1 Financial Data Schedule for the nine-month period
ended September 30, 2000.
(b) Reports on Form 8-K.
On August 8, 2000, the Company filed a Current Report on Form 8-K reporting
in Item 5 thereof the execution of the Reorganization Agreement by and among the
Company, Infonautics and First Avenue Ventures. The Reorganization Agreement
provided for a business combination to be accomplished by the formation of a
holding company and the merger of subsidiaries of the holding company with and
into the Company, Infonautics and First Avenue Ventures so that, after
completion of the business combination, the company, Infonautics and First
Avenue Ventures would be wholly-owned subsidiaries of a new holding company
named Digital Fusion, Inc.
On August 8, 2000, the Company filed a Current Report on Form 8-K reporting
in Item 5 thereof the sale of the Company's consumer dial up business to
Earthlink.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IBS INTERACTIVE, INC.
Date: November 14, 2000 By: /s/ Nicholas R. Loglisci
-----------------------------
Name: Nicholas R. Loglisci
Title: Chairman and Chief
Executive Officer
(Principal Executive Officer)
Date: November 14, 2000
By: /s/ Howard B. Johnson
--------------------------------
Name: Howard B. Johnson
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule for the nine-month period ended
September 30, 2000.
