================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _____________ to _____________
Commission File No. 0-24073
IBS INTERACTIVE, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 13-3817344
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
2 RIDGEDALE AVENUE, SUITE 350
CEDAR KNOLLS, NEW JERSEY 07927
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (973) 285-2600
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
COMMON STOCK, $.01 PAR VALUE PER SHARE THE BOSTON STOCK EXCHANGE, INC.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
State issuer's revenues for its most recent fiscal year: $18,774,000.
The aggregate market value of voting and non-voting common equity held
by non-affiliates of the Registrant as of March 24, 2000 was $45,216,396
As of March 24, 2000, 6,065,849 shares of the Registrant's common
stock, $.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. The information called for by Part
III, Items 9-12, is incorporated by reference to the definitive Proxy Statement
for our 2000 Annual Meeting of Stockholders, which will be filed on or before
April 28, 2000.
================================================================================
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, INCLUDING STATEMENTS REGARDING OUR (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 OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ALL
FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO
THE COMPANY AS OF THE DATE THIS REPORT IS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC"), AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, (I) A DECLINE IN GENERAL ECONOMIC CONDITIONS OR
A LOSS OF MAJOR CUSTOMERS, (II) THE UNAVAILABILITY OR MATERIAL INCREASE IN THE
PRICE OF TELECOMMUNICATIONS SERVICES AND FACILITIES, (III) AN ADVERSE JUDGEMENT
IN PENDING OR FUTURE LITIGATION AND (IV) TECHNOLOGICAL DEVELOPMENTS AND
INCREASED COMPETITIVE PRESSURE FROM CURRENT COMPETITORS AND FUTURE MARKET
ENTRANTS. SEE "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- CERTAIN FACTORS WHICH MAY AFFECT THE
COMPANY'S FUTURE PERFORMANCE." WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY
THE RESULTS OF ANY FUTURE REVISIONS IT MAY MAKE TO FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS OF ISSUER
We (as used herein, "we," "us," "our" and the "Company" refer to IBS
Interactive, Inc.) are a leading provider of one-stop e-Business and Information
Technology (IT) professional services and Web-site Hosting (our "Professional
Services and Web-Site Hosting" business segment) to mid-size businesses and
public sector institutions in the Eastern U.S. We also provide Internet access
services (our "Internet Access Services" business segment) to consumer and
business customers in certain markets of the Eastern U.S.
We represent an emerging breed of e-Business and IT professional
services firm: one that provides total solutions by transforming technology into
value for clients through integrated, multi-disciplinary service offerings.
We utilize advanced technologies to provide our clients with programming and
applications development, network services, IT consulting and training, Web-site
hosting and Internet access services.
We provide the following services individually or as part of a
one-stop package custom designed for a client's needs:
PROFESSIONAL SERVICES & WEB-SITE HOSTING
PROGRAMMING AND APPLICATIONS DEVELOPMENT
-- Customized application development, including: Web portals,
e-commerce, distance learning, real audio and video, online
databases, interactive communications and purchasing systems
-- Content management
-- Intranet and extranet systems
-- Web-site development and maintenance
NETWORK SERVICES
-- Network planning, design and implementation
-- Network support and optimization
-- Security audits and protocol recommendation
-- Network and applications programming
-- Cabling and wiring
-1-
<PAGE>
IT CONSULTING AND TRAINING
-- Desktop and network server support
-- Software upgrades and support
-- Disaster recovery plans and protocol recommendation
-- Network cost audits
-- IT planning and staffing
-- Merger & acquisition technology integration services
-- Microsoft Certified Technical Education Center (CTEC)
WEB-SITE HOSTING
-- Shared hosting and co-location services
INTERNET ACCESS SERVICES
-- Digital Subscriber Line (DSL)
-- Dedicated access (T-1 and T-3 service)
-- Dial-up access
-- Integrated Services Digital Network (ISDN)
We market our e-Business and IT professional services and Web-site
hosting to mid-sized businesses (including mid-sized departments of larger
enterprises) and public sector institutions, who we believe are increasingly in
need of and demanding one-stop solutions for these services due to the
difficulty and expense of managing and integrating multiple vendors. Our
comprehensive suit of services enables our clients to capitalize on the wide
variety of critical business and data communication opportunities made possible
by the Internet and Internet-related technologies.
Our clients during the year ended December 31, 1999 included, among
others: Aetna US Healthcare, The Archdiocese of New York, Black & Decker,
Commerce Bank, Dendrite International, Deutsche Bank, Foster Wheeler Corp., ING
Barings, Loews Theatres, McKinsey, Mobil Oil Corporation, TIAA/CREF, University
of Southern Mississippi, and the Wharton School of Business at the University
of Pennsylvania.
For the year ended December 31, 1999, Professional Services and
Web-Site Hosting accounted for approximately 78% and Internet Access Services
accounted for approximately 22%, respectively, of our revenues.
We were incorporated in February 1995 as Internet Broadcasting Systems,
Inc. and changed our name to IBS Interactive, Inc., when we went public in May
1998. We trade on the NASDAQ SmallCap Market under the symbol IBSX.
GENERAL DEVELOPMENT OF BUSINESS - ACQUISITIONS
In January 1998, we acquired all of the issued and outstanding capital
stock of Entelechy, Inc. ("Entelechy"), a distance learning and web programming
firm based in Huntsville, Alabama, in consideration for 277,434 shares of common
stock, of which 147,310 shares were issued at the closing and 130,124 shares
were to be earned and issued ratably on each of the first, second and third
anniversaries of the acquisition closing date, provided that, the former
Entelechy stockholders to whom such shares are issuable remain our employees on
each respective anniversary. We incurred a charge of approximately $197,000
relating to the issuance of such common stock in 1999 and expect to incur
charges of $197,000 and $17,000 relating to the issuance of such common stock in
each of the years ending December 31, 2000 and 2001, respectively. The
acquisition was accounted for as a purchase. On November 4, 1998, Entelechy was
formally merged into the Company.
In January 1998, we acquired substantially all of the assets
(consisting primarily of computer equipment and intangible assets) of JDT
WebwerX LLC ("JDT WebwerX"), a web programming company based in Southern New
Jersey, for $35,000 in cash. The acquisition was accounted for as a purchase.
-2-
<PAGE>
On September 24, 1998, we entered into a Membership Interest Purchase
Agreement with all of the members of DesignFX Interactive, LLC ("DesignFX"), a
Web-design, programming and hosting company located in Cherry Hill, New Jersey,
whereby we acquired all of the issued and outstanding membership interests of
DesignFX in exchange for 200,160 shares of common stock (subject to certain
adjustments) valued by the parties at $6.25 per share. The combination has been
accounted for as a pooling of interests. Accordingly, our 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, we acquired substantially all of the assets of
MBS, Inc. ("MBS"), for approximately $50,000 in cash, 4,493 shares of common
stock, subject to certain adjustments, and the assumption of certain
liabilities. MBS is a Huntsville, Alabama-based Microsoft Certified Technical
Education Provider - Partner Level.
On December 10, 1998, we entered into a Membership Interest Acquisition
Agreement (the "Acquisition Agreement") with Halo Network Management, LLC
("Halo"), an Eatontown, New Jersey-based network management company that offers
full-service network solutions including planning, installation and maintenance.
Pursuant to the terms of the Acquisition Agreement, we acquired all of the
issued and outstanding membership interests of Halo in exchange for 219,231
shares of common stock (subject to certain adjustments) valued by the parties at
$6.50 per share. The combination has been accounted for as a pooling of
interests. Accordingly, our 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, Inc. ("Mainsite"), for approximately $53,000
in cash and the assumption of certain liabilities. Mainsite is an internet
service provider ("ISP") based in Bridgeport, New Jersey.
On February 22, 1999, we acquired substantially all of the assets of
the Renaissance Internet Services division ("Renaissance") of PIVC, LLC, for
approximately $365,000 in cash, a one-year promissory note of $228,000 and
44,046 shares of common stock, subject to certain adjustments, and the
assumption of certain liabilities. Renaissance is an ISP based in Huntsville,
Alabama. Renaissance was sold in October 1999 as part of the sale of our Alabama
Internet Access Services assets (See, "General Development of Business -
Strategic Alternatives").
On March 1, 1999, we acquired substantially all of the assets of EZ
Net, Inc. ("EZ Net"), in exchange for $300,000 in cash, 33,289 shares of common
stock, subject to certain adjustments, and the assumption of certain
liabilities. EZ Net is an ISP based in Yorktown, Virginia.
On March 25, 1999, we acquired substantially all of the assets of the
ADViCOM division ("ADViCOM") of Multitronics, Inc., for approximately $118,000
in cash, 4,424 shares of common stock, subject to certain adjustments, and the
assumption of certain liabilities. ADViCOM is an ISP based in Huntsville,
Alabama. ADViCOM was sold in October 1999 as part of the sale of our Alabama
Internet Access Services assets (See, "General Development of Business -
Strategic Alternatives").
On March 31, 1999, we acquired Spectrum Information Systems, Inc.
("Spectrum"), for approximately 145,456 shares of common stock, subject to
certain adjustments, in exchange for all of the issued and outstanding capital
stock of Spectrum. The common stock was valued by the parties at $22.00 per
share. Spectrum is a Huntsville, Alabama-based provider of network services. The
combination has been accounted for as a pooling of interests. Accordingly, our
financial statements have been restated for all periods presented to include the
results of operations and financial position of Spectrum.
On April 30, 1999, we acquired all of the issued and outstanding
capital stock of Realshare, Inc. ("Realshare"), for approximately 6,000 shares
of common stock, subject to certain adjustments. Realshare is a Cherry Hill, New
Jersey-based Web-site design and programming company.
On April 30, 1999, we acquired all of the issued and outstanding
capital stock of Millennium Computer Applications, Inc., ("Millenium") in a
merger transaction, for approximately $200,000 in cash and 19,673 shares of
-3-
<PAGE>
common stock, subject to certain adjustments. Millennium is an ISP based in
Shallotte, North Carolina.
On May 7, 1999, we acquired substantially all of the consumer dial-up
and ISDN accounts and related computer equipment of Planet Access, Inc. ("Planet
Access"), for approximately $380,000 in cash, 19,114 shares of common stock,
subject to certain adjustments, and the assumption of certain liabilities.
Planet Access is a Stanhope, New Jersey-based ISP.
On June 30, 1999 we acquired Spencer Analysis, Inc. ("Spencer"), for
approximately 260,005 shares of common stock, subject to certain adjustments.
The common stock was valued at $23.08 per share. Spencer is a New York City-
based computer consulting firm. The combination has been accounted for as a
pooling of interests. Accordingly, our financial statements have been restated
for all periods presented to include the results of operations and financial
position of Spencer.
On July 30, 1999, we acquired all of the issued and outstanding capital
stock of Jaguar Systems, Inc. ("Jaguar"), in a merger transaction, for
approximately $131,000 in cash payable in 12 substantially equal monthly
installments and 44,965 shares of common stock, subject to adjustments. Jaguar
is a Salem, New Jersey-based ISP.
On August 26, 1999, we acquired substantially all of the assets of
Florence Business Net ("Florence"), for approximately $68,750 in cash, 3,145
shares of common stock, subject to certain adjustments, and the assumption of
certain liabilities relating to the purchased assets. Florence is a Florence,
South Carolina-based ISP.
GENERAL DEVELOPMENT OF BUSINESS - STRATEGIC ALTERNATIVES
On October 18, 1999, we sold our Internet Access Services business in
Huntsville, Alabama to HiWAAY, an ISP in the area. We incurred a loss of
$350,000 in connection with this sale that is reflected in our results of
operations for the year ended December 31, 1999.
We are currently evaluating strategic alternatives and options relating
to our Internet Access Services business, which may include the possible sale of
all or a remaining portion of our remaining Internet Access Services business.
At March 24, 2000, our Internet Access Services business consists of over 16,000
dial-up subscribers, 250 digital subscriber line accounts, and 47 dedicated line
accounts. Total allocated assets, revenues, and operating losses of our Internet
Access Services segment as of and for the years ended December 31, 1998 and 1999
are as follows:
1998 1999
---- ----
Total Assets..................... $84,000 $4,301,00
Revenues......................... $1,301,000 $4,068,000
Operating Losses................. ($269,000) ($943,000)
No assurances can be given that if our remaining Internet Access
Services assets are 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 with a high degree of certainty at this time.
Such uncertainties include, but are not limited to: future market conditions and
the availability of buyer(s) willing to purchase the assets on terms acceptable
to us.
GENERAL DEVELOPMENT OF BUSINESS - FINANCING EFFORTS
In August 1995, we issued twenty $5,000 face amount promissory notes
with a term of three years in the aggregate principal amount of $100,000 (the
"1995 Notes"). The 1995 Notes accrued interest at a rate of 6% and were repaid
in June 1998. In addition, each purchaser of the 1995 Notes received 2,449
shares of common stock for every note purchased.
-4-
<PAGE>
On October 31, 1997, we entered into a series of financing agreements
in the aggregate amount of $200,000 (the "1997 Financing") with eight individual
investors (collectively, the "1997 Notes"). The 1997 Notes accrued interest at a
rate of 8% and were payable in full upon the closing of our initial public
offering of common stock. In June 1998, the Company repaid the outstanding
principal, aggregating $200,000, and accrued interest, aggregating $10,000, on
the 1997 Notes. In connection with the issuance of the 1997 Notes, investors
also received warrants to purchase up to an aggregate of 48,872 shares of our
common stock at an exercise price of $3.54 per share through October 2000. We
capitalized the fair value ascribed to the warrants ($54,000), which included a
value reflective of the excess of the expected initial public offering price
less the exercise price, and amortized such amount over the life of the 1997
Notes. Interest expense for the year ended December 31, 1998, including the
amortization of the value ascribed to warrants, totaled $45,000. The effective
interest rate on the 1997 Notes, which includes the amortization of the value of
the warrants, approximated 68% per annum.
On May 14, 1998, our registration statement on Form SB-2, as amended
(file number 333-47741), relating to the initial offering of our common stock
was declared effective by the SEC (the "IPO"). In connection with the IPO, we
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 IPO price of $6.00 per share,
resulting in proceeds to us (net of underwriting discount, commissions and other
expenses payable by the Company) in the aggregate approximate amount of
$6,642,000. Additionally, we 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.
In September and October 1999, we sold approximately $600,000 of
convertible debentures (the "1999 Debentures"). The 1999 Debentures accrued
interest at the rate of 12% per annum and were due in full in October 2001. The
1999 Debentures were convertible at our option into common stock at a price
equal to the price per share we received in a subsequent equity offering of
greater than $3,000,000. In addition, upon conversion, holders of 1999
Debentures were entitled to receive 13,680 warrants to purchase common stock at
$12.50 per share upon conversion. The 1999 Debentures were converted in December
1999. We recognized a non-cash charge of $43,000 on the warrants' fair market
value upon conversion of the 1999 Debentures in December 1999. The effective
interest rate on the 1999 Debentures over the two months that they were
outstanding, including the amortization of the value ascribed to the warrants,
approximated 115% per annum.
On October 29, 1999, we entered into a consulting agreement with EBI
Securities, Inc. ("EBI"), in which we agreed to issue to EBI: (a) warrants to
purchase 50,000 shares of common stock at an exercise price of $10.25 per share
and (b) warrants to purchase 50,000 shares of common stock at an exercise price
of $11.25 per share upon the closing of certain mergers or acquisitions to be
identified (collectively, the "EBI Warrants"). We will realize a non-cash charge
to operations for the fair value of these warrants when the EBI Warrants are
earned and issued. The period(s) over which such charge will be recognized will
be determined based upon the nature of the merger or acquisition involved, if
any (that is whether the merger is accounted for as a purchase or a pooling of
interests).
On December 7, 1999, we raised net proceeds of $4,697,500 in a private
placement (which includes the $600,000 received for the 1999 Debentures) (the
"October Private Placement") of 96 units (the "October Unit(s)") each consisting
of: (i) 5,000 shares of common stock, par value $.01, of the, and (ii) a
five-year warrant to purchase 1,250 shares of common stock at an exercise price
per share of $12.50. The purchase price of each October Unit was $50,000. In the
event that we shall, for a period of one (1) year after the closing date, sell
any equity securities or equity derivative securities for a consideration per
share of $10.00 or less (a "Lower Subsequent Price"), then a number of shares of
common stock shall be issued to such investor in the October Units, at no
additional cost to such investor, equal to: (x) the number of Shares contained
in the October Units purchased by such investor multiplied by a fraction, the
numerator of which shall be $10.00 and the denominator of which shall be the
Lower Subsequent Price, less (y) the number of Shares contained in the October
Units purchased by such investor. In connection with the October Private
Placement, the 1999
-5-
<PAGE>
Debentures were converted into an aggregate of $600,000 of October Units,
consisting of 60,000 shares, and warrants to purchase 15,000 shares of common
stock at an exercise price of $12.50 per share. In addition, holders of the 1999
Debentures also received warrants to purchase up to an additional 13,680 shares
of common stock at an exercise price of $12.50 per share.
On December 8, 1999, we raised net proceeds of $940,000 in a private
placement (the "December Private Placement") of 20 units (the "December
Unit(s)") each consisting of: (i) 5,000 shares of common stock, par value $.01,
of the Company, and (ii) a five-year warrant to purchase 1,250 shares of common
stock at an exercise price per share of $12.50. The purchase price of each
December Unit was $50,000. In the event that we shall, for a period of one (1)
year after the closing date, sell any equity securities or equity derivative
securities for a consideration per share of $10.00 or less (a "Lower Subsequent
Price"), then a number of shares of common stock shall be issued to such
investor in the December Units, at no additional cost to such investor, equal
to: (x) the number of Shares contained in the December Units purchased by such
investor multiplied by a fraction, the numerator of which shall be $10.00 and
the denominator of which shall be the Lower Subsequent Price, less (y) the
number of Shares contained in the December Units purchased by such investor.
(See "Management's Discussion & Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources," for subsequent activities).
COMPANY SERVICES
We offer our clients a full array of custom-designed, scalable and
reliable e-Business and IT professional services, Web-site hosting and Internet
access services. These include:
-- Programming and applications development
-- Network services
-- IT consulting and training
-- Web-site hosting
-- Internet access
PROFESSIONAL SERVICES AND WEB-SITE HOSTING
PROGRAMMING AND APPLICATIONS DEVELOPMENT
PROGRAMMING. Programming for Intranet and Internet applications
requires knowledge of many different programming languages, including PERL,
UNIX, ASP, MTS, C++, JAVA, HTML, Cold Fusion and customized database and
applications programming. We maintain a full range of network and applications
programming expertise to: (i) ensure that clients' networks and applications are
specifically tailored to meet their requirements, (ii) develop and maintain
clients' Web sites, (iii) provide clients with technical assistance, and (iv)
provide consulting services.
CUSTOMIZED APPLICATIONS DEVELOPMENT AND DISTANCE LEARNING. Customized
applications development includes services such as: E-Commerce "shopping cart"
style on-line catalogs, multi-media audio and video, purchasing systems,
intranet and extranet systems, and Distance Learning applications development.
Distance Learning applications allow businesses and organizations to distribute
course material, administer training evaluations and manage employee-student
status from a single (or multiple) location via the Internet or an Intranet.
WEB-SITE DEVELOPMENT AND MAINTENANCE. Web-site development involves the
design and development of a client's Web-site. Working with clients and outside
graphic designers and programmers, we design, create and maintain multi-media,
interactive Web-sites for our clients, using the latest applications and
development tools, such as Cold Fusion, ASP, MTL and HTML.
NETWORK SERVICES
We provide a comprehensive range of network services, including network
planning, design, implementation, operations, optimization, consulting and
training.
NETWORK PLANNING. Network planning focuses on providing clients with
strategic and tactical analyses of their current network operations and future
-6-
<PAGE>
network requirements. We provide network planning services which encompass a
number of critical planning elements including: (i) defining client business
requirements; (ii) developing strategic information architectures; (iii)
performing network baseline audits; (iv) preparing capacity plans for the
physical network, logical transport and services; (v) selecting preferred
technologies; and (vi) conducting network security audits and planning.
NETWORK DESIGN. Network design includes services that assist in the
design of physical, logical and operational information infrastructures. These
services involve detailing the network specifications and implementation tactics
necessary to achieve clients' business objectives. To accomplish this task, we
generate a set of work papers that identify the specific technologies to be used
and the manner in which such technologies will be configured and implemented.
These work papers also provide an analysis of the manner in which new technology
will be integrated with the client's existing hardware and software and the
manner in which such integrated components will be managed on an ongoing basis.
Examples of the network design services we offer include: (i) life-cycle
planning, (ii) developing future technology integration plans, (iii) defining
functional requirements, (iv) developing multi-vendor integration plans, (v)
preparing technical design documentation, (vi) developing engineering
specifications and documents, (vii) preparing specifications in connection with
requests for proposals or other make/buy criteria and (viii) providing detailed
component purchasing lists.
NETWORK IMPLEMENTATION. Network implementation includes high
value-added network services such as IP addressing and router configuration, as
well as traditional system integrator functions such as hardware and software
installation and procurement. To serve our clients' networking needs, we
maintain affiliations and reseller arrangements with leading hardware and
software vendors, including Hewlett Packard Co., COMPAQ, Novell, Cisco Systems
and a variety of distributors. We customize implementation plans for each
client, which may include the following activities: (i) project management; (ii)
installing the cabling infrastructure to support network services; (iii)
integrating new hardware and software products and systems; (iv) building
network operations and management centers; (v) re-configuring and upgrading
network elements, systems and facilities; and (vi) implementing installation
documentation, conformance testing and compliance certification.
NETWORK OPERATIONS. Network operations includes ongoing tasks necessary
to keep the client's network fully operational. We provide network operations
services to a range of clients, including those with client/server networks
running both Internet (TCP/IP) and workgroup (Novell and Microsoft) protocols
intermingled with existing networks. We perform specific operation activities in
accordance with individual client requirements only after analyzing the client's
existing operating practices. Examples of the network operation activities we
offer include: (i) network administration, including management of user
accounts, service levels and client administrative practices; (ii) network
utilization analysis, involving ongoing measurement of network activity against
established network baselines; (iii) ongoing management of documentation,
including physical assets, policies and procedures; (iv) network trouble
shooting, involving fault detection, isolation, repair and restoration; (v)
alarm management, including setting alarm levels, cross-correlation, problem
diagnosis and dispatch of service resources; (vi) network backup, including
design and supervision of backup processes and policies and exercise of disaster
recovery procedures; and (vii) routine moves, additions and changes to network
elements, infrastructure and services.
NETWORK OPTIMIZATION. Network optimization involves maximizing a
client's rate of return on network investments through such means as reduction
of operating costs and increases in network utilization. Optimization is closely
related to each of the other phases of network development. Optimization
services may be long term in nature, address issues such as cost containment and
utilization and are often designed to optimize local area network
infrastructures. The network optimization services we offer can also be packaged
as discrete projects, designed to present alternatives for optimization of
workgroup, departmental, building or campus network investments. Additionally,
we can provide assistance to clients in optimizing "logical" networks, by
addressing a protocol, service or application operating in the larger context of
the client's network. Examples of the network optimization services we offer
include: (i) recommendations for efficient allocation of bandwidth; (ii) network
traffic analysis, identification of bottlenecks and recommendations for change;
(iii) network process re-engineering; and (iv) knowledge transfer to client
operations personnel on topics such as basic practices, or operations of network
management tools and stations.
-7-
<PAGE>
INFORMATION TECHNOLOGY (IT) CONSULTING AND TRAINING
CONSULTING. Consulting services are provided to businesses and
organizations seeking information, guidance and staffing in order to effectively
analyze and utilize computer networks, the Internet and other information
technology prior to the time such businesses make investments of capital, time
and/or personnel. The consulting services we provide are closely related to
network optimization and include: (i) desktop and other network server support;
(ii) software upgrades and support, (iii) merger and acquisitions technology
integration services, (iv) security audits and protocol recommendations, (ii)
disaster recovery plan audit and protocol recommendations, (v) network cost
audits and (vi) strategic plan development.
TRAINING. Training services we offer include (i) one- on-one Internet
training for executives and (ii) group training for non-computer professionals.
We are a Microsoft Certified Technical Education Center or "CTEC."
CTECs are training centers authorized by Microsoft to offer instructor-led
classes, Web-based training and self-study programs to computer professionals on
our technical networking and development products. A CTEC must use Microsoft
Official Curriculum and Microsoft Certified Trainers to provide education to our
customers. The courses a CTEC teaches prepare students to pass Microsoft
Certification Tests to become Microsoft Certified System Engineers and Microsoft
Certified Solution Developers. In our Huntsville, Alabama office, the Company
has achieved Microsoft Partner Level status.
WEB-SITE HOSTING
Internet hosting is a multi-media Internet service that permits
clients to have a continued presence on the Web directly through our high-speed
servers and multi-homed Internet network. The hosting services we provide
include virtual hosting and co-location. Virtual hosting allows a client's
Web-site (which may be hosted on either a UNIX or NT server platform) to be
connected to the Internet via our Network Operations Center ("NOC"). Co-location
permits a client's Internet content to be hosted on a dedicated server located
at our NOC, and we either own the server or it is leased to the client.
Co-location eliminates or substantially reduces the capital investments a client
would otherwise be required to make to purchase and manage necessary hardware,
software and network operations and eliminates certain of the client's security
concerns associated with connection of the client's private network(s) to a Web
server.
INTERNET ACCESS SERVICES
We provide a broad range of Internet access, including T-1, T-3 and
digital subscriber line ("DSL") service, dedicated leased lines, dial-up
services and hosting services.
The Internet access options we offer to our clients include: (i) 56
Kbps, T-1 and T-3 service; (ii) integrated services digital networks (ISDN);
(iii) DSL; (iv) dedicated modems for SLIP/PPP access; and (v) dial-up accounts.
Our high-speed, digital communications network provides business and consumer
subscribers with direct access to the full range of Internet applications and
resources.
As discussed earlier, we are evaluating strategic alternatives with
respect to the Internet Access Services segment of our business.
SALES AND MARKETING
Our sales and marketing strategy is driven by our ability to offer our
clients comprehensive e-Business and IT professional services, Web-site Hosting
and Internet Access Services. Our marketing efforts are primarily focused on
mid-sized businesses and organizations, and to a lesser extent, on small
businesses and consumers. We utilize both direct selling and third-party
channels for marketing our services.
Our marketing efforts principally involve print, radio and direct
mailing in areas within the geographic scope of our markets. We believe that the
continued expansion of our print, radio and targeted direct mailings are
important factors in our ability to continue to expand our business and compete
effectively.
-8-
<PAGE>
We also generate sales leads through referrals from clients, responses
to requests for proposals, referrals from other e-Business and IT professional
service businesses and ISPs, our own Web-site and associated links and industry
seminars and trade shows. Efforts in all of these areas will continue and will
be increased in 2000. As a result of the continuing extension of services that
we offer, we are able to offer our clients a wider range of solutions and
capitalize on opportunities that we previously outsourced.
We currently employ 27 full-time sales people. We believe that the
technical knowledge of our executive officers, programmers and network engineers
enhances the efforts of our sales staff and allows us to develop sales
proposals meeting the specific needs and budgets of our prospective clients. In
conjunction with recent increases in our sales and marketing staff, a training
effort has been undertaken to ensure that all new sales and marketing employees,
as well as current ones, are fully knowledgeable of the complete spectrum of
services we offer.
CLIENTS
Our client base consists primarily of businesses and organizations with
e-Business and IT professional services, Web-site hosting, and Internet access
needs. We intend to expand our client base in all of our business segments
through internal growth as well as through acquisitions to lessen our dependence
on any one particular client or group of clients.
We are dependent on a limited number of clients for a substantial
portion of our revenues. For the years ended December 31, 1998 and 1999, our
largest client, Aetna, accounted for approximately 23% and 15%, respectively, of
our revenues. Revenues derived from our consulting contracts are generally
non-recurring in nature. Our contract with Aetna provides that we render
services pursuant to purchase orders, each of which constitutes a separate
contractual commitment by Aetna. Non-renewal or termination of our contract with
Aetna or the failure by Aetna to issue additional purchase orders to us under
the existing contract would have a material adverse effect on us. There can be
no assurance that we will obtain additional contracts for projects similar in
scope to those previously obtained, that we will be able to retain existing
clients or attract new clients or that we will not remain largely dependent on a
limited client base which may continue to account for a substantial portion of
our revenues. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors Which May Affect the Company's
Future Performance -- Dependence on Aetna; Non-Recurring Revenue."
COMPETITION
The markets for our services are highly competitive. With limited
barriers to entry we believe the competitive landscape will continue to grow
both from new entrants to the market as well as from existing players, such as
ISPs, expanding the breadth of their services.
We believe that competition in the Web-site hosting and Internet access
market is primarily based upon quality of service, range of services, technical
support and experience.
We believe that competition in the e-Business and IT professional
services market is based upon the following factors:
-- Flexibility and willingness to adapt to client needs
-- Responsiveness to client demands
-- Number and availability of qualified engineers and programmers
-- Project management capability
-- Breadth of service offerings
-- Technical expertise
-- Size and reputation
-- Brand recognition and geographic presence
-- Price
Traditional professional services firms (e.g., management consultants),
traditional IT service providers and advertising firms, have created divisions
within their organizations that focus on the e-Business needs of their clients.
Many of these service providers, however, do not provide the breadth of services
-9-
<PAGE>
needed to offer comprehensive, integrated e-Business solutions and services.
Management consulting firms focus on overall business strategies and the
remodeling of business processes for use in an Internet environment. The more
traditional IT service providers are focused on systems integration and the
development and implementation of enterprise software applications. Advertising
agencies and pure Web design shops have focused on the marketing and creative
development of services, but typically lack deep technical capabilities and the
ability to provide complete, integrated solutions.
We compete with numerous large companies that have substantially
greater market presence and financial, technical, marketing and other resources
than we have, including (i) large information technology consulting and service
providers and application software firms; (ii) international, national, regional
and commercial ISPs; (iii) established on-line services companies; (iv) computer
hardware and software and other technology companies; (v) national long-distance
carriers, regional telephone companies, and cable operators; and (vi) major
accounting firms. Many of our competitors have announced plans to expand their
service offerings and increase their focus on the e-Business and IT professional
services market. As a result, competition is expected to intensify for highly
skilled network engineers, programmers and technicians.
As a result of increased competition, we also expects to encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of our services. There can be no
assurance that we will be able to offset the effects of any such price
reductions through an increase in the number of clients, higher revenue from
enhanced services, cost reductions or otherwise. In addition, we believe that
continuing consolidation in the e-Business and IT professional services market
could result in increased price and other competition in the industry. Increased
price or other competition could make it difficult for us to gain additional
clients and subscribers and could have a material adverse effect on us. There
can be no assurance that we will be able to compete successfully. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Which May Affect the Company's Future Performance
- - -- Competition."
EMPLOYEES
As of March 24, 2000, we had 320 full-time employees, including 7
executive officers, 224 programmers, network engineers and technicians, 27
persons devoted exclusively to providing technical support to clients, 27
persons dedicated to sales and marketing activities and 35 administrative
personnel, and 5 part-time employees. None of our employees are represented by a
labor union, and we are not a party to any collective bargaining agreements. We
believe that our employee relations are good. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
Which May Affect the Company's Future Performance -- Retaining Key Personnel."
To maximize the utilization of our resources and evaluate the skills
and knowledge of certain prospective employees, we routinely hire temporary
personnel to satisfy increased demand for personnel in connection with the
commencement of new projects.
ITEM 2. DESCRIPTION OF PROPERTY
We serve our clients through our corporate headquarters and Network
Operations Center ("NOC"), each located in Cedar Knolls, New Jersey, and our
regional offices located in New Jersey, New York, North Carolina, Virginia and
Alabama, as well as our network of seven physical POPs.
At December 31, 1999, we did not own any real property and conducted
our operations at the following leased premises:
-10-
<TABLE>
<CAPTION>
Approximate
Approximate Annual
Square Leased
Location Description of Facility Footage Cost Lease Term
- - -------- ----------------------- ------- ----------- -----------
<S> <C> <C> <C> <C>
2 Ridgedale Ave. Corporate headquarters, 9,830 $155,000 5/01/97-3/31/03
Suite 350 sales, technical support,
Cedar Knolls, NJ 07927 NOC customer support,
administration
Two Greentree Centre Sales, customer support, 6,715 $110,000 12/20/98-12/31/03
Suite 120 programming
Marlton, NJ 08053
446 Highway 35 Sales, customer support, 6000 $98,000 9/1/99-8/31/04
Eatontown, NJ 07724 programming and network
services
4920 C. Corporate Dr. Sales, customer support, 2,435 $27,000 month to month
Huntsville, AL 35805 training facility
116 John Street Sales, customer support, 2,518 $53,000 12/1/99-11/30/02
Suite 620 programming and network
New York, NY 10038 services
5030 Bradford Dr. Sales, customer support, 11,784 $182,000 01/1/00-11/31/04
Huntsville, AL 35805 programming and network
services
114 Castle Drive Storage Space 2,000 $33,000 11/1/99-10/31/00
Madison, AL 35758
1810 Second Loop Rd Sales, customer support, 1,000 $9,600 10/1/99-09/30/01
Suite 10 Internet access services
Florence, SC 29501
4924 Main Street Sales, customer support, 2,000 $24,000 3/1/99-2/28/02
Shallotte, NC 28459 Internet access services
739 Thimble Shoals Sales, customer support, 1,355 $14,000 5/1/99-4/30/02
Suite 405 Internet access services
Newport News, VA 23606
</TABLE>
We believe that all of our leased premises are in generally good
condition, are well maintained and are adequate for our current operations.
In addition to our office space, we currently lease the sites at which
our physical POPs are located. We believe that we would be readily able to
locate other space in which to house our corporate headquarters and NOC,
regional offices and our physical POPs if any leased space currently being
utilized were to become unavailable.
ITEM 3. LEGAL PROCEEDINGS
There is no pending legal proceeding to which we are a party which we
believe is likely to have a material adverse effect on our financial condition
or results of operations.
-11-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ SmallCap Market System under
the symbol "IBSX." The following table indicates high and low sales quotations
for the periods indicated. Such quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
1998 HIGH LOW
---- ---- ---
First Quarter --- ---
Second Quarter(1) $9.00 $8.00
Third Quarter $8.75 $3.25
Fourth Quarter $9.00 $4.00
1999 HIGH LOW
---- ---- ---
First Quarter $21.25 $8.13
Second Quarter $24.50 $19.13
Third Quarter $25.38 $19.25
Fourth Quarter $21.38 $9.50
- - ---------------------
(1) Trading in our common stock on the NASDAQ SmallCap Market System began on
May 18, 1998
The number of holders of record of our common stock on March 24, 2000
was 111.
There were no dividends or other distributions made by the Company
during the fiscal year ended December 31, 1999 with respect to our common stock.
It is anticipated that cash dividends will not be paid to the holders of our
common stock in the foreseeable future.
Pursuant to the terms of the acquisition agreement dated as of January
31, 1998, related to our acquisition of Entelechy, Inc., on May 4, 1999 we
issued 68,404 shares of our common stock to the former owners of Entelechy. This
release of common stock was exempt from registration under the Securities Act
pursuant to Section 4(2).
Pursuant to the terms of the Membership Interest Purchase Agreement
dated as of September 24, 1998 related to our acquisition of DesignFX, in June
1999, we issued 3,200 shares of our common stock to a former owner of DesignFX.
This issuance of common stock was exempt from registration under the Securities
Act pursuant to Section 4(2).
Pursuant to the terms of the Membership Interest Acquisition Agreement
dated as of December 10, 1998 related to our acquisition of Halo, in December
1999 we issued 21,923 shares of our common stock to the former owners of Halo.
This issuance of common stock was exempt from registration under the Securities
Act pursuant to Section 4(2).
In September 1999, in connection with the exercise of options to
purchase shares of common stock, we issued 10,000 shares of common stock to one
of our directors for an aggregate of $60,000. The issuance was exempt from
registration under the Act, pursuant to Section 4(2) of the Act.
In March, July and October 1999, we issued an aggregate of 48,872
shares of our common stock to holders of certain warrants upon the exercise of
such warrants for an aggregate of $173,000. The issuances were exempt from
registration under the Act, pursuant to Section 3(b) and Regulation D
promulgated thereunder.
In September and October 1999, we sold approximately $600,000 of the
1999 Debentures. The 1999 Debentures accrued interest at the rate of 12% per
annum and were due in full in October 2001. The 1999 Debentures were convertible
at our option into common stock at a price equal to the price per share we
received in a subsequent equity offering of greater than $3,000,000. In
addition, upon conversion, holders of 1999 Debentures were entitled to receive
13,680 warrants to purchase common stock at $12.50 per share upon conversion.
The 1999 Debentures were converted in December 1999. We recognized a non-cash
charge of $43,000 on the warrants' fair market value upon conversion of the 1999
Debentures in December 1999. The issuance of the 1999 Debentures and of the
common stock upon conversion of the 1999 Debentures was exempt from registration
under the Act, pursuant to Section 3(b) and Regulation D promulgated thereunder.
On October 29, 1999, we entered into a consulting agreement with EBI
Securities, Inc. ("EBI"), in which we agreed to issue to EBI: (a) warrants to
purchase 50,000 shares of common stock at an exercise price of $10.25 per share
and (b) warrants to purchase 50,000 shares of common stock at an exercise price
of $11.25 per share upon the closing of certain mergers or acquisitions to be
identified (collectively, the "EBI Warrants). We will realize a non-cash charge
to operations for the fair value of these warrants when the EBI Warrants are
earned and issued. The period(s) over which such charges will be recognized will
be determined based upon the nature of the merger or acquisition involved, if
any (that is whether the merger is accounted for as a purchase or a pooling of
-12-
<PAGE>
interests). The issuance of the EBI Warrants to EBI was exempt from registration
under the Securities Act of 1933, as amended (the "Act"), pursuant to Section
4(2) of the Act.
In connection with our October Private Placement, we issued 480,000
shares of common stock and warrants to purchase 120,000 shares of our common
stock at an exercise price of $12.50 per share. The issuance was exempt from
registration under the Securities Act pursuant to Section 3(b) and Regulation D
promulgated thereunder.
In connection with our December Private Placement, we issued 100,000
shares of common stock and warrants to purchase 25,000 shares of our common
stock at an exercise price of $12.50 per share. The issuance was exempt from
registration under the Securities Act pursuant to Section 3(b) and Regulation D
promulgated thereunder.
In connection with our December Private Placement, we issued to LaSalle
Street Securities Corp. ("LaSalle") a five-year warrant to purchase 8,000 shares
of our common stock at $12.50 per share as partial payment for LaSalle's
services as a placement agent. The issuance was exempt from registration under
the Securities Act pursuant to Section 3(b) and Regulation D promulgated
thereunder.
In connection with the conversion of the 1999 Debentures, we issued
five-year warrants to purchase 13,680 shares of our common stock at an exercise
price of $12.50 per share. The issuance of the warrants was exempt from
registration under the Act, pursuant to Section 3(b) and Regulation D
promulgated thereunder.
On May 14, 1998, our registration statement on Form SB-2, as amended
(file number 333-47741) (the "Registration Statement"), relating to our IPO was
declared effective by the SEC. In connection with the IPO, we 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 us (net of underwriting discounts, commissions and
other expenses payable by us) in the aggregate approximate amount of $6,642,000.
Additionally, we registered 120,000 shares of common stock underlying warrants
to purchase common stock sold by us to the underwriter for $100. The warrants
are exercisable for a four-year period commencing on May 14, 1999 at a price of
$8.10 per share.
From the effective date of the Registration Statement through December
31, 1999, we have applied an aggregate of $854,000 of the net proceeds of the
IPO for the full repayment of certain indebtedness; $665,000 towards the
purchase of equipment; $1,689,000 towards the purchase of assets of, or the
outright acquisition of, companies; $1,260,000 towards sales and marketing; and
$2,174,000 towards general administrative expenses. We believe that none of the
proceeds used were paid, directly or indirectly, to (i) directors or officers of
the Company or their affiliates, (ii) persons owning ten percent or more of the
common stock or (iii) affiliates of the Company. We believe that we have used
the net proceeds of the Offering in a manner consistent with the use of proceeds
described in the Registration Statement and the Prospectus dated May 14, 1998.
All net proceeds of the IPO in the amount of $6,642,000 have been used.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO SUCH STATEMENTS APPEARING
ELSEWHERE HEREIN.
OVERVIEW
We provide a broad range of e-Business and IT professional services,
including computer networking, programming and applications development and
consulting services and Web-site hosting services (our "Professional Services
and Web-Site Hosting" business segment) primarily to mid-size businesses and
public sector institutions and Internet access services (our "Internet Access
Services" business segment) to consumer and business customers. 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.
-13-
<PAGE>
We commenced operations in June 1995 as an ISP offering Web-site
hosting services. Since April 1996, we have acquired Interactive, Mordor,
AllNet, Entelechy, JDT WebwerX LLC, DesignFX, MBS, Halo, Mainsite, Renaissance,
EZ-Net, ADViCOM, Spectrum, Millenium, Realshare, Planet Access, Spencer, Jaguar
and Florence. We began to provide e-Business and IT professional services in
April 1996 and have increasingly emphasized such services.
We are currently evaluating strategic alternatives and options relating
to our Internet Access Services business, which may include the possible sale of
all or a portion of our remaining Internet Access Services business. At March
24, 2000, our Internet Access Services business consists of over 16,000 dial-up
subscribers, 250 digital subscriber line accounts, and 47 dedicated line
accounts. In the fourth quarter of 1999, we consummated the sale of our Internet
Access Services assets in Alabama. The sale of these assets resulted in a loss
of $350,000 which is reflected in our results of operations for the year ended
December 31,1999. Total assets, revenues, and operating losses of the Internet
Access Services segment as of and for the years ended December 31, 1998 and 1999
are as follows:
-------------------------- ---------------- ----------------
1998 1999
---- ----
-------------------------- ------------- ----------------
Total Assets.............. $84,000 $4,301,000
-------------------------- ------------ ----------------
Revenues................... $1,301,000 $4,068,000
-------------------------- ------------- ----------------
Operating Losses........... ($269,000) ($943,000)
-------------------------- ------------- ----------------
- - --------------------------------------------------------------------------------
No assurances can be given that if our remaining Internet Access
Services assets are 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 with a high degree of certainty at this time.
Such uncertainties include, but are not limited to: future market conditions and
the availability of buyer(s) willing to purchase the assets on terms acceptable
to us.
Our Professional Services and Web-Site Hosting business segment
generally produces higher profit margins than our Internet Access Services
business segment. For the year ended December 31, 1999, Professional Services
and Web-Site Hosting accounted for approximately 78% of our revenues and
Internet Access Services accounted for approximately 22% of our revenues as
compared to 91% and 9%, respectively, for the year ended December 31, 1998.
We expect that operating expenses will increase significantly in 2000
in connection with expansion activities that we anticipate undertaking,
including those related to: increased marketing and sales activities, potential
acquisitions of e-Business professional services firms and amortization of
intangibles related to acquisitions. Accordingly, our future profitability will
depend on corresponding increases in revenues from operations. Our projected
expense levels are based on our expectations concerning future revenues. Any
decline in demand for our services or increases in expenses that are not offset
by corresponding increases in revenue could have a material adverse effect on
us.
We expect to incur charges of approximately $197,000 and $17,000
related to the acquisition of Entelechy in the years ending December 31, 2000
and 2001; and charges of approximately $94,000, $94,000 and $28,000 in the years
ended December 31, 2000, 2001 and 2002, respectively, in connection with
restricted stock grants to an executive officer. The value of the restricted
stock grants will be expensed ratably over the respective periods that the stock
is earned.
We anticipate that growth in our business will increase operating costs
and will require the Company to hire additional network engineers, programmers
and technical personnel. At March 24, 2000, the Company had 320 full-time
employees, which includes 90 employees of digital fusion, Inc. who joined us
upon our merger with digital fusion, Inc. (see "Management's Discussion &
Analysis--Recent Events"). We have entered into employment agreements with 33 of
our employees, including our executive officers, which provide for aggregate
payments of $4,060,000 through and including the year ending December 31, 2003.
-14-
<PAGE>
1999 ACQUISITIONS
PURCHASES
On January 29, 1999, we acquired substantially all of the assets of
Mainsite Communications, Inc. ("Mainsite"), for approximately $53,000 in cash
and the assumption of certain liabilities. Mainsite is an Internet Service
Provider based in Bridgeport, New Jersey.
On February 22, 1999, we acquired substantially all of the assets of
the Renaissance Internet Services division ("Renaissance") of PIVC, LLC, for
approximately $365,000 in cash, a one-year promissory note of $228,000 and
44,046 shares of common stock, subject to certain adjustments, and the
assumption of certain liabilities. Renaissance is an ISP based in Huntsville,
Alabama. Renaissance was sold in October 1999 as part of the sale of our Alabama
Internet Access Services assets.
On March 1, 1999, we acquired substantially all of the assets of EZ
Net, Inc. ("EZ Net"), in exchange for $300,000 in cash, 33,289 shares of common
stock, subject to certain adjustments, and the assumption of certain
liabilities. EZ Net is an ISP based in Yorktown, Virginia.
On March 25, 1999, we acquired substantially all of the assets of the
ADViCOM division ("ADViCOM") of Multitronics, Inc., for approximately $118,000
in cash, 4,424 shares of common stock, subject to certain adjustments, and the
assumption of certain liabilities. ADViCOM is an ISP based in Huntsville,
Alabama. ADViCOM was sold in October 1999 as part of the sale of our Alabama
Internet Access assets.
On April 30, 1999, we acquired all of the issued and outstanding
capital stock of Realshare, Inc. ("Realshare"), for approximately 6,000 shares
of common stock, subject to certain adjustments. Realshare is a Cherry Hill, New
Jersey-based Web-site design and programming company.
On April 30, 1999, we acquired all of the issued and outstanding
capital stock of Millennium Computer Applications, Inc. ("Millennium"), in a
merger transaction, for approximately $200,000 in cash and 19,673 shares of
common stock, subject to certain adjustments. Millennium is an ISP based in
Shallotte, North Carolina.
On May 7, 1999, we acquired substantially all of the consumer dial-up
and ISDN accounts and related computer equipment of Planet Access, Inc. ("Planet
Access"), for approximately $380,000 in cash, 19,114 shares of common stock,
subject to certain adjustments and the assumption of certain liabilities. Planet
Access is a Stanhope, New Jersey-based ISP.
On July 30, 1999, we acquired all of the issued and outstanding capital
stock of Jaguar Systems, Inc. ("Jaguar"), in a merger, for approximately
$131,000 in cash payable in 12 substantially equal monthly installments and
44,965 shares of common stock, subject to adjustments. Jaguar is a Salem, New
Jersey-based Internet Service Provider.
On August 26, 1999, we acquired substantially all of the assets of
Florence Business Net ("Florence"), for approximately $68,750 in cash, 3,145
shares of our common stock, subject to adjustments, and the assumption of
certain liabilities. Florence is a Florence, South Carolina-based ISP.
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. Each acquisition does not represent a
significant subsidiary. Accordingly, condensed and pro forma financial
information is not presented.
POOLINGS OF INTERESTS
On March 31, 1999, we completed the acquisition of Spectrum that
provided for the exchange of all of the outstanding stock of Spectrum for
145,456 shares of our common stock.
On June 30, 1999, we completed the acquisition of Spencer that provided
for the exchange of all of the outstanding stock of Spencer for 260,005 shares
of common stock.
As required by this method of accounting, financial statements (and
amounts included in Management's Discussion and Analysis and Results of
Operations) contained in our Form 10-KSB for the year ended December 31, 1998
were restated and filed with the SEC in a Form 8-K dated December 20, 1999.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of our revenues represented by certain items reflected in our
consolidated statement of operations data:
- - ----------------------------------------------- --------------------------------
YEARS ENDED DECEMBER 31,
- - ----------------------------------------------- --------------------------------
1998 1999
---- ----
- - ----------------------------------------------- ----------- -----------
Revenues....................................... 100% 100%
- - ----------------------------------------------- ----------- -----------
Cost of services............................... 67 69
- - ----------------------------------------------- ----------- -----------
Gross Profit................................... 33 31
- - ----------------------------------------------- ----------- -----------
Selling, general and administrative expense.... 32 56
- - ----------------------------------------------- ----------- -----------
Amortization expense........................... 1 3
- - ----------------------------------------------- ----------- -----------
Non-cash compensation expenses................. 2 2
- - ----------------------------------------------- ----------- -----------
Merger expenses................................ 1 1
- - ----------------------------------------------- ----------- -----------
Operating loss................................. (3) (31)
- - ----------------------------------------------- ----------- -----------
Interest and other expenses.................... (1) 2
- - ----------------------------------------------- ----------- -----------
Loss before income taxes....................... (2) (33)
- - ----------------------------------------------- ----------- -----------
Income tax provision........................... - -
- - ----------------------------------------------- ----------- -----------
Net loss....................................... (2) (33)
- - ----------------------------------------------- ----------- -----------
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. Revenues increased by $3,561,000, or 23%, from $15,213,000
for the year ended December 31, 1998, to $18,774,000 for the year ended December
31, 1999. Professional Services and Web-Site Hosting revenues increased by
$794,000, or 6%, from $13,912,000 in 1998 to $14,706,000 in 1999. Internet
Access Services revenues increased by $2,767,000 or 213% from $1,301,000 in 1998
to $4,068,000 in 1999.
The increase in Professional Services and Web-Site Hosting revenues was
due to increases in networking service revenues and programming service revenues
offset by decreases in consulting service revenues. The increase in Internet
Access Services revenues was due to the acquisition of several ISPs throughout
1999.
COST OF SERVICES. Cost of services for Professional Services and
Web-Site Hosting consists primarily of expenses relating to cost of equipment
and applications sold to clients, salaries and expenses of engineering,
programming and technical personnel, equipment costs for Web-site hosting and
fees paid to outside consultants engaged for client projects. Cost of services
for Internet Access Services consists of personnel and equipment expenses
relating to the operation of the network and costs associated with monitoring
network traffic and quality. Cost of services increased by $2,796,000, or 27%,
from $10,207,000 for 1998 to $13,003,000 for 1999. Growth in our direct payroll
expense accounted for $688,000, or 7%, of the increase in total cost of
services. Professional Services and Web-Site Hosting cost of services increased
by $769,000 or 9% from $8,907,000 in 1998 to $9,676,000 in 1999. Internet Access
Services cost of services increased by $1,872,000 or 144% from $1,300,000 in
1998 to $3,172,000 in 1999.
The increase in Professional Services and Web-Site Hosting cost of
services was primarily due to direct payroll costs associated with the growth of
the business. The increase in Internet Access Services cost of services was due
to direct payroll and network and equipment cost increases arising from 1999
acquisitions of several ISPs.
-16-
<PAGE>
GROSS PROFIT. Our gross profit was $5,006,000 or 33% of revenues in
1998 and $5,771,000 or 31% of revenues in 1999. The decrease in gross profit as
a percentage of sales was due to the increase in lower margin revenues
associated with the Internet Access Services business. Professional Services and
Web-Site Hosting gross profit increased by $25,000, or 1%, from $5,005,000 in
1998 to $5,030,000 in 1999. Internet Access Services gross profit increased by
$1,000 from $895,000 in 1998 to $896,000 in 1999.
The decrease in Professional Services and Web-Site Hosting gross profit
was primarily due to increased direct payroll costs associated with the growth
of the business. The increase in Internet Access Services gross profit was due
to the 1999 acquisition of several ISPs.
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 $5,640,000, or 115%, from
$4,905,000 in 1998 to $10,545,000 for 1999. Such increase was primarily
attributable to the Company's expanded promotional and marketing activities, the
hiring of additional marketing and sales personnel, the hiring of additional
administrative personnel to support the increase in our professional staff and
client base, and additional administrative and professional costs associated
with operating as a public company.
Professional Services and Web-Site Hosting selling, general and
administrative expenses increased by $1,182,000, or 29%, from $4,146,000 in 1998
to $5,328,000 in 1999. Internet Access Services selling, general and
administrative expenses increased by $1,292,000, or 515%, from $251,000 in 1998
to $1,543,000 in 1999. The increase in Professional Services and Web-Site
Hosting selling, general and administrative expenses was due to the hiring of
additional marketing and sales personnel, and expanded promotional and selling
activities. The increase in Internet Access Services selling, general and
administrative expenses was due to increased salaries, adverstising, and
overhead costs associated with the businesses acquired in 1999. Corporate
selling, general and administrative expenses increased by $3,166,000 or 623%
from $508,000 in 1998 to $3,674,000 in 1999. The increase in Corporate selling,
general and administrative expenses was due to increased professional fees
associated with operating as a public company for seven additional months during
1999 as compared to 1998, and increased overhead costs associated with the
Company's growth.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased by $341,000, from $173,000 for 1998 to $514,000 for 1999. This
increase is primarily attributable to the amortization of intangible assets
(customer lists and goodwill), related to the ISP acquisitions throughout 1999.
Amortization expense will significantly increase in future periods as a result
of the Company's March 2000 acquisition of digital fusion, inc. (See "Recent
Events")
NON-CASH COMPENSATION EXPENSE. Non-cash compensation expense increased
from $290,000 in 1998 to $332,000 in 1999. This increase was due primarily to
additional grants and the related timing of restricted stock to an executive
officer. We expect charges of $94,000, $94,000, and $28,000 in the years ending
December 31, 2000, 2001 and 2002 for such grants. We expect to incur charges of
approximately $197,000 and $17,000 in the years ending December 31, 2000 and
2001, respectively, in connection with the issuance of certain shares of common
stock to the former Entelechy stockholders.
MERGER RELATED EXPENSES. During 1999 we incurred charges of $232,000
for fees and costs associated with the acquisitions of Halo, Spectrum and
Spencer. During 1998 we incurred charges of $109,000 for fees and costs
associated with the acquisition of DesignFX and a lesser portion of expenses
related to Halo. Such amounts, for transactions accounted for as a pooling of
interests, are expensed as services are rendered and costs are incurred.
INTEREST EXPENSE. Interest expense consists of interest on indebtedness
and capital leases and financing charges incurred in connection with financing
efforts. Excluding the nonrecurring interest charges of $35,000 in 1998 and
$43,000 in 1999 associated with the amortization of warrants granted to debt
holders, interest expense was $94,000 and $38,000, respectively, for 1998 and
1999. This decrease is due to debt repayments totaling $558,000 in 1998 with
proceeds from our IPO and declines in overall borrowings. Interest expense is
expected to increase substantially in the future as a result of our assumption
-17-
<PAGE>
of approximately $4.2 million of indebtedness in connection with our acquisition
of digital fusion, inc. (See, "Recent Events").
INTEREST INCOME. Interest income decreased from $185,000 in 1998 to
$116,000 in 1999 due to a decrease in our cash position in 1999 relative to
1998, as a result of the timing of our IPO in May 1998 and our private placement
financings in October and December 1999. We have invested proceeds from the 1999
private placements in money market funds and overnight deposits.
LOSS ON DISPOSAL OF ASSETS. The loss on disposal of assets in 1999 of
$350,000 was related to the sale of our Alabama Internet Access Services
business.
OTHER (INCOME) EXPENSE, NET. Other expenses of $26,000 in 1999 are
comprised of miscellaneous items.
NET LOSS. As a result of the foregoing, we recognized a net loss of
$6,238,000 for the year ended December 31, 1999 compared to a net loss of
$366,000 for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
On May 14, 1998, the registration statement relating to our IPO was
declared effective by the SEC. In connection with the IPO, we 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 IPO price of $6.00 per share resulting in proceeds
to us (net of underwriting discount, commissions and other expenses payable by
us) in the aggregate approximate amount of $6,642,000. Additionally, we
registered 120,000 shares of common stock underlying warrants to purchase common
stock we sold to the underwriter for $100. The warrants are exercisable for a
four-year period that commenced on May 14, 1999 at a price of $8.10 per share.
From the effective date of the Registration Statement through December
31, 1999, we applied an aggregate of $854,000 of the net proceeds of the IPO for
the full repayment of certain indebtedness; $665,000 towards the purchase of
equipment; $1,689,000 towards the purchase of assets of, or the outright
acquisition of, companies; $1,260,000 towards sales and marketing; and
$2,174,000 towards general administrative expenses. We believe that none of the
proceeds used were paid, directly or indirectly, to (i) directors or officers of
the Company or their affiliates, (ii) persons owning ten percent or more of the
common stock or (iii) affiliates of the Company. We believe that we have used
the net proceeds of the Offering in a manner consistent with the use of proceeds
described in the Registration Statement and the Prospectus dated May 14, 1998.
All net proceeds of the IPO in the amount of $6,642,000 have been used.
Subsequent to the IPO, our primary operating cash requirements have
been to fund expenses in connection with providing Professional Services and
Web-site Hosting to clients and Internet Access Services to subscribers and
customers. We have historically satisfied our working capital requirements
principally through the issuance of debt and equity securities. At December 31,
1999, we had working capital of $6,294,000, compared to working capital of
$7,011,000 at December 31, 1998.
In September and October 1999, we raised $600,000 through the sale of
our 1999 Debentures. Pursuant to the terms of the 1999 Debentures, in December
1999 $600,000 of the 1999 Debentures were converted at our option into 60,000
shares of common stock and five year warrants to purchase an additional 15,000
shares of common stock at $12.50. In addition, the holders of the 1999
Debentures received warrants to purchase another 13,680 shares of common stock
at $12.50.
In December 1999, we received net proceeds of $4,697,500 in the October
Private Placement of units. Each unit was offered at a price of $50,000 and
consisted of 5,000 shares of common stock and five-year warrants to purchase
2,500 shares of common stock at a price of $12.50 per share. We converted all
$600,000 of our 1999 Debentures into 12 units of the October Private Placement.
Holders of the 1999 Debentures also received warrants to purchase an additional
13,680 shares of common stock at a price per share of $12.50. We recognized a
non-cash charge on the amortization of the warrants' fair values upon conversion
of the 1999 Debentures.
-18-
<PAGE>
In December 1999, we received net proceeds of $940,000 in the December
Private Placement of units having the same terms as the October units. In
connection with the December Private Placement, we issued five-year warrants to
purchase 8,000 shares of common stock at an exercise price of $12.50 to LaSalle
St. Securities, LLC as partial payment for its services as a placement agent.
In February 2000, we commenced a $9.9 million private placement
consisting of units of common stock and warrants (the "2000 Private Placement").
Each unit is offered at a price of $110,000 and consists of 10,000 shares of
common stock and three-year warrants to purchase 2,500 shares of common stock at
a price of $13.75 per share. Through March 24, 2000, we have received $2,068,000
in net proceeds from the 2000 Private Placement. No assurances can be given that
we will be able to successfully raise any or all of the balance of the 2000
Private Placement.
The year to year decrease in operating cash flow arose from losses from
operations (net loss of $366,000 in 1998 compared to $6,238,000 in 1999),
increases in accounts receivable of $1,517,000 and decreases in accrued expenses
and accounts payable of $1,094,000. These amounts were offset in part by
increases in non-cash charges of $1,238,000.
Net cash used in investing activities was $867,000 and $1,299,000 in
1998 and 1999, respectively. The increase in capital expenditures was due
principally to enhancements in our NOC, as well as upgrading and enhancing the
capabilities of the Internet Access Services businesses. Cash used in asset
acquisitions, principally ISP businesses, totaled $1,857,000 compared to
$116,000 in 1998. The sale of the Internet Access Service businesses based in
Alabama provided $835,000 of cash in 1999.
Financing activities provided cash and cash equivalents of $5,711,000
in 1998 compared to $5,552,000 in 1999. In 1998, our IPO net proceeds totaled
$6,667,000 and payments on existing indebtedness amounted to $731,000. Net
proceeds from our 1999 Private Placements and Convertible Debt Offering totaled
$5,026,000 and $600,000, respectively, and the exercise of warrants provided
$658,000 of cash. Distributions to owners of Spencer and Spectrum totaled
$329,000 in 1999.
At December 31, 1999, we had obligations pursuant to capital lease
obligations in the aggregate amount of $21,000. These capital lease obligations
are secured by the personal guarantees of Messrs. Loglisci, Frederick and
Altieri and, in addition, certain of these capital lease agreements are secured
by the equipment that is the subject of the capital lease.
In May 1998, 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 December 31, 1999.
In June 1998, we obtained a $1.5 million line of credit from a bank.
The line of credit was for a one-year period ending July 1, 1999 and was
extended through September 30,1999 at which point it was fully paid down and
terminated. As of December 31, 1999, we had no available line of credit.
Our working capital at December 31, 1999 was $6,294,000. We believe
that operating cash flow generated through existing customers, new business
activities and cost reduction efforts, current cash and cash equivalents and
working capital levels, and the expected proceeds from the 2000 Private
Placement will be sufficient to fund operating cash flow needs, debt principal
payment obligations, capital expenditures and acquisitions for a period of
twelve months. Our current estimate of capital expenditures for the year ending
December 31, 2000 approximates $250,000. In the event that we are unsuccessful
in raising the balance of the 2000 Private Placement, we will be required to
re-examine our current business plans and seek alternative financing. No
assurances can be given that alternative financing will be available on terms
acceptable to us.
FLUCTUATIONS IN OPERATING RESULTS
Our operating results may fluctuate significantly from period to period
as a result of the length of our 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. Our business is generally subject to lengthy sales
-19-
<PAGE>
cycles that require us to make expenditures and use significant resources prior
to receipt of corresponding revenues. Historically, our 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 our results of
operations.
YEAR 2000
We did not experience any material business interruptions as a result
of the Year 2000 issue. Our own hardware and software applications functioned
well and we did not experience any problems with the software applications of
any of the third parties upon whose systems we rely for our operations. We spent
approximately $50,000 in connection with our Year 2000 compliance efforts that
were expensed as incurred through 1999. We will continue to monitor our critical
computer applications and those of our third party suppliers and vendors
throughout the Year 2000 to ensure that any Year 2000 matters that may arise are
addressed promptly.
RECENT EVENTS
On March 1, 2000, we acquired all of the capital stock of digital
fusion, inc., an e-Business programming and consulting firm based in Tampa,
Florida, for 975,000 shares of common stock and a $500,000 subordinated note
paying interest of 6%. In addition, we issued options to purchase 470,000 shares
of common stock at $10.49 per share to certain executives of digital fusion as
an inducement to serve as employees of the Company. We also assumed bank debt of
approximately $3.3 million (the "digital fusion Bank Debt") and a subordinated
note of $827,500 accruing interest at 4.56% per annum. As of March 24, 2000 we
were negotiating the terms of the repayment of the principal of the digital
fusion Bank Debt. It is expected that the digital fusion Bank Debt will pay
interest at the prime rate plus 2% and that the principal will have to be repaid
by August 29, 2000. In addition, the digital fusion Bank Debt is expected to be
secured by all of the assets of the Company. We expect to pay down the digital
fusion Bank Debt through proceeds from our 2000 Private Placement if available.
In February 2000, we commenced the 2000 Private Placement. Each unit is
offered at a price of $110,000 and consists of 10,000 shares of common stock and
three-year warrants to purchase 2,500 shares of common stock at a price of
$13.75 per share. Through March 24, 2000, we had raised $2,068,000 in net
proceeds through our 2000 Private Placement. No assurance can be given that we
will be able to successfully raise any or all of the balance of the 2000 Private
Placement.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE.
LIMITED OPERATING HISTORY. We have only been in operation since 1995
and many of our services have only been offered since 1997 or later. In
addition, we have only been a publicly reporting company since May 1998.
Accordingly, we have a limited operating history on which you may evaluate us.
You should consider the risks and difficulties frequently encountered by early
stage companies in new, rapidly evolving and technology-dependent markets. If we
fail to adequately address these risks, our business will be materially and
adversely affected.
PRIOR OPERATING LOSSES; LACK OF PROFITABILITY; FUTURE OPERATING
RESULTS. We have recently experienced significant losses in our operations. We
expect to continue to incur significant losses for the foreseeable future. For
the year ended December 31, 1999 our operating loss was $6,238,000. We expect
our expenses to increase as we seek to grow our business and as our business
expands. We cannot assure you that our revenues will increase as a result of our
increased spending. If revenues grow more slowly than anticipated, or if
operating expenses exceed expectations, we may not become profitable. Even if we
become profitable, we may be unable to sustain our profitability. We may not
generate sufficient cash flow from operations or be able to raise capital in
sufficient amounts to enable us to continue to operate our business. An
inability to sustain profitability may also result in an impairment loss in the
-20-
<PAGE>
value of our long-lived assets, principally goodwill, property and equipment,
and other tangible and intangible assets. If we are unable to generate
sufficient cash flow from operations or raise capital in sufficient amounts, our
business will be materially and adversely affected.
DEPENDENCE ON AETNA; NON-RECURRING REVENUE. For the year ended December
31, 1999, our largest client, Aetna accounted for approximately 15% of our
revenues. In December 1998, we entered into a contractual agreement with Aetna
to provide certain IT professional services. Non-renewal or termination of our
contract with Aetna would have a material adverse effect on us. Revenues derived
from our consulting contracts are generally non-recurring in nature. There can
be no assurance that we will obtain additional contracts for projects similar in
scope to those previously obtained from Aetna or any other client, that we will
be able to retain existing clients or attract new clients or that we will not
remain largely dependent on a limited client base, which may continue to account
for a substantial portion of our revenues. In addition, we generally will be
subject to delays in client funding; lengthy client review processes for
awarding contracts; non-renewal; delay, termination, reduction or modification
of contracts in the event of changes in client policies or as a result of
budgetary constraints; and increased or unexpected costs resulting in losses in
the event of "fixed-price" contracts.
Our revenues are difficult to forecast. We plan to significantly
increase our operating expenses to increase the number of our sales, marketing
and technical personnel to sell, provide and support our products and services.
We may not be able to adjust our spending quickly enough to offset any
unexpected revenue shortfall. In addition, at any given point in time, we may
have significant accounts receivable balances with customers that expose us to
credit risks if such customers are unable to settle such obligations. If we have
an unexpected shortfall in revenues in relation to our expenses, or significant
bad debt experience, our business will be materially and adversely affected.
EMERGING AND EVOLVING MARKETS. The markets for our services are
relatively new and evolving, and therefore the ultimate level of demand for our
services is subject to a high degree of uncertainty. Any significant decline in
demand for programming and applications development, networking services, IT
consulting, Web-site hosting or Internet access services could materially
adversely effect our business and prospects.
UNCERTAINTY OF MARKET ACCEPTANCE. Our success is dependent on our
ability to continually attract and retain new clients as well as to replace
clients who have not renewed their contracts. Achieving significant market
acceptance will require substantial efforts and expenditures on our part to
create awareness of our services.
LIMITED MARKETING, SERVICE AND SUPPORT CAPABILITIES. To effectively
market and sell our services, we will need to expand our client service and
support capabilities to satisfy increasingly sophisticated client requirements.
We currently have limited marketing experience and limited marketing, service,
client support and other resources, which may not be adequate to meet the needs
of clients.
COMPETITION. Competition for the e-Business and IT professional
services and Web-hosting and Internet access services that we provide is
significant, and we expect that competition will continue to intensify. We may
not have the financial resources, technical expertise, sales and marketing or
support capabilities to successfully meet this competition. If we are unable to
compete successfully against such competitors, our business will be adversely
affected. We compete against numerous large companies that have substantially
greater market presence, longer operating histories, more significant customer
bases, and financial, technical, facilities, marketing, capital and other
resources than we have.
Our competitors include international, national, regional and
commercial ISPs, established on-line service providers, cable operators,
specialized ISPs, regional Bell operating companies and national long-distance
carriers such as:
-- Performance Systems International, Earthlink, Mindspring, UUNet
WorldCom, America Online, Bell Atlantic Corp., Bell South Corp., AT&T
Corp., MCI WorldCom, Sprint Corp., Concentric Network Corporation,
Exodus Communications, Inc., Globix Corporation, QWESTCommunications,
21
<PAGE>
Frontier GlobalCenter, GTE/BBN, DIGEX, Verio Inc., AboveNet, AirGate
PCS, Cypress Communications, Darwin Networks, Teligent, Winstar
Communications, ICG Communications. Network Access Solutions,
Intermedia Communications, ITC DeltaCom, Knology Holdings, Triton PCS,
and Z-Tel Technologies.
Our competitors also include national, regional and local e-Business
professional IT professional services firms, software development firms and
major accounting firms such as:
-- Andersen Consulting; Cambridge Technology Partners; Electronic Data
Systems Corporation; American Management Systems; IBM, Microsoft
Corp.; Netplex Group, Inc.; Deloitte & Touche; Braun Consulting, Inc.;
Diamond Technology Partners; eLoyalty; iXL Enterprises; Sapient
Corporation; Zamba Solutions; Catalyst International; E3 Corporation;
Modis Professional Services; Employease, Inc.; Great Plains, Inc.;
MAPICS, Inc.; Planning Technologies, Inc.; Technology Solutions
Company; Whittman-Hart Inc.; and Third Millenium Communications, Inc.
Still other competitors who offer some of the services the Company
offers may expand their capabilities to include a full suite of services.
Companies in this arena include Applied Theory, US Interactive, Interliant,
Appnet, Breakaway Solutions, and Internet Commerce Corporation.
In addition, we also encounter competition from numerous other
businesses that provide one or more similar goods or services, including
numerous resellers of Internet-related hardware and software and Web-site
development companies.
Our competitors may respond more quickly than we can to new or emerging
technologies and changes in customer requirements. Our competitors may also
devote greater resources than we can to the development, promotion and sale of
their products and services. They may develop e-Business products and services
that are superior to or have greater market acceptance than ours. Competitors
may also engage in more extensive research and development, undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to our existing and potential employees and strategic
partners. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties.
New competitors, including large computer hardware, software,
professional services and other technology and telecommunications companies, may
enter our markets and rapidly acquire significant market share. As a result of
increased competition and vertical and horizontal integration in the industry,
we could encounter significant pricing pressures. These pricing pressures could
result in significantly lower average selling prices for our products and
services. For example, telecommunications companies may be able to provide
customers with reduced communications costs in connection with their Internet
access services, significantly increasing pricing pressures on us. We may not be
able to offset the effects of any price reductions with an increase in the
number of customers, higher revenue from professional services, cost reductions
or otherwise. In addition, Internet access and professional services businesses
are likely to encounter consolidation in the near future, which could result in
decreased pricing and other competition.
RAPID TECHNOLOGICAL CHANGE. The market for e-Business and IT
professional services and web-site-hosting and Internet access services has only
recently begun to develop and is rapidly evolving. Significant technological
changes could render our existing products and services obsolete. To be
successful, we must adapt to this rapidly changing market by continually
improving the responsiveness, functionality and features of our products and
services to meet customers' needs. If we are unable to respond to technological
advances and conform to emerging industry standards in a cost-effective and
timely basis, our business will be materially and adversely affected.
DEPENDENCE ON OPERATIONS CENTER. Our success depends in large part upon
the performance of our network operations center ("NOC") and our ability to
expand our NOC as our customer base gets larger and the needs of our customers
for Internet access, Web-site hosting and Web-site programming services become
more demanding. If we are unsuccessful in providing a NOC with the necessary
capabilities, our business will be materially and adversely affected. Our
existing NOC relies entirely on third-party data communications and
telecommunications providers. These include ISPs, such as UUNet Worldcom,
Sprint, Winstar, ICI/Digex, CRL, Cox and Cable & Wireless, and long-distance and
local carriers, such as Bell Atlantic, Bell South, MCI WorldCom, Sprint,
Hyperion, ICI/Digex and KMC, to provide leased telecommunication lines on a
cost-effective and continuous basis. These carriers
-22-
<PAGE>
are subject to price constraints, including tariff controls, that in the future
may be relaxed or lifted. This could have a material and adverse effect on the
costs of maintaining our NOC. In accordance with industry custom, we do not
maintain agreements with these suppliers. Accordingly, we cannot assure you that
these suppliers will continue to provide services to us or that we can replace
them on comparable terms.
Other risks and difficulties that we may encounter in connection with
expanding our network include our ability to adapt our network infrastructure to
changing customer requirements and changing industry standards.
SYSTEMS FAILURE RISK. Our business depends predominantly on the
efficient and uninterrupted operation of our computer and communications
hardware systems and infrastructure. We currently maintain most of our computer
systems in our facility in New Jersey. While we have taken precautions against
systems failure, interruptions could result from natural disasters as well as
power loss, telecommunications failure and similar events. We also lease
telecommunications lines from local and regional carriers, whose service may be
interrupted. Any damage or failure that interrupts or delays our network
operations could materially and adversely affect our business.
SECURITY ISSUES. We have taken measures to protect the integrity of our
infrastructure and the privacy of confidential information. Nonetheless, our
infrastructure is potentially vulnerable to physical or electronic break-ins,
viruses or similar problems. If a person circumvents our security measures, he
or she could jeopardize the security of confidential information stored on our
systems, misappropriate proprietary information or cause interruptions in our
operations. We may be required to make significant additional investments and
efforts to protect against or remedy security breaches. Security breaches that
result in access to confidential information could damage our reputation and
expose us to a risk of loss or liability.
The security services that we offer in connection with customers' use
of the networks cannot assure complete protection from computer viruses,
break-ins and other disruptive problems. Although we attempt to limit
contractually our liability in such instances, the occurrence of these problems
may result in claims against us or liability on our part. These claims,
regardless of their ultimate outcome, could result in costly litigation and
could have a material adverse effect on our business and reputation and on our
ability to attract and retain customers.
DEPENDENCE ON HARDWARE AND SOFTWARE SUPPLIERS. We rely on outside
vendors to supply us with computer hardware, software and networking equipment.
These products are available from only a few sources. We primarily buy these
products from Hewlett Packard, Sun Microsystems, Ascend, Cisco and Adtran. We
cannot assure you that we will be able to obtain the products and services that
are needed on a timely basis and at affordable prices.
We have in the past experienced delays in receiving shipments of
equipment purchased for resale. We may not be able to obtain computer equipment
on the scale, at the times required by us or at an affordable price. Our
suppliers may enter into exclusive arrangements with our competitors or stop
selling their products or services to us at commercially reasonable prices. If
our sole or limited source suppliers do not provide us with products or
services, our business may be materially and adversely affected.
DIFFICULTY IN ESTABLISHING AND MANAGING EXPANDING OPERATIONS. A key
element of our business strategy is the expansion of our continuing business
segments, which requires a great deal of management time and the expenditure of
large amounts of money. Our success will depend on our ability to complete,
integrate, operate and further expand and upgrade our continuing business
segments would materially and adversely affect our business plans. In addition,
our inability to manage and expand our continuing business segment, if we do not
institute adequate financial and managerial controls and reporting systems and
procedures to operate from multiple facilities in geographically dispersed
locations, our operations will be materially and adversely affected.
IDENTIFYING SUITABLE ACQUISITION CANDIDATES. A key element of our
expansion strategy is to grow through acquisitions. If we do identify suitable
candidates, we may not be able to make investments or acquisitions on
commercially acceptable terms. Acquisitions may cause a disruption in our
ongoing business, distract our management and other resources and make it
-23-
<PAGE>
difficult to maintain our standards, controls and procedures. We may not be able
to successfully integrate the services, products and personnel of any acquired
business into our operations. We may not be able to retain key employees of the
acquired companies or maintain good relations with their customers or suppliers.
We may be required to incur additional debt, and we may be required to issue
equity securities, which may be dilutive to existing stockholders, to fund
acquisitions.
UNSUCCESSFUL ACQUISITIONS. We may acquire and integrate complementary
businesses, products, services or technologies, but we have limited experience
in these activities. If we seek to make investments or acquisitions, it will be
subject to the following risks:
-- The difficulty of assimilating the operations and personnel of
acquired companies.
-- The potential disruption of our business.
-- The inability of our management to maximize our financial and
strategic position by the incorporation of an acquired technology or
business into our service offerings.
-- The difficulty of maintaining uniform standards, controls, procedures
and policies.
-- The potential loss of key employees of acquired businesses, and the
impairment of relationships with employees and customers as a result
of changes in management.
We cannot assure you that any completed acquisition will enhance our
business. If we proceed with one or more significant acquisitions in which the
consideration consists of cash, a substantial portion of our available cash
could be used to consummate the acquisitions. If we were to consummate one or
more acquisitions in which the consideration consisted of stock, our
stockholders could suffer significant dilution of their interest in us. In
addition, we could incur or assume significant amounts of indebtedness in
connection with acquisitions. Acquisitions required to be accounted for under
the purchase method could result in significant goodwill and/or amortization
charges. In addition, an inability to sustain profitability may also result in
an impairment loss in the value of our long-lived assets, principally goodwill,
property and equipment, and other tangible and intangible assets.
RETAINING KEY PERSONNEL. As we continue to increase the scope of our
operations, our workforce has grown significantly. As of March 24, 2000, the
Company had 320 full-time and five part-time employees, including 90 employees
from our merger with digital fusion. We will need to attract, train and retain
more employees for management, engineering, programming, sales and marketing,
and customer support technician positions. Competition for qualified employees,
particularly engineers, programmers and technicians, is intense. Consequently,
we may not be successful in attracting, training and retaining the people we
need to continue to offer solutions and services to present and future clients
in a cost effective manner or at all.
NEED FOR CAPITAL. Our future capital uses and requirements will
depend on numerous factors, including:
-- The extent to which our solutions and services gain market acceptance.
-- The level of revenues from our present and future solutions and
services.
-- The expansion of operations.
-- The costs and timing of product and service developments and sales and
marketing activities.
-- Costs related to acquisitions of technology or businesses.
-- Competitive developments.
24
<PAGE>
In order to continue to increase sales and marketing efforts, continue
to expand and enhance the solutions and services we are able to offer to present
and future clients and fund potential acquisitions, we will require additional
capital that may not be available on terms acceptable to us, or at all. In
addition, if unforeseen difficulties arise in the course of these or other
aspects of our business, we may be required to spend greater-than-anticipated
funds. As a consequence, we will be required to raise additional capital through
public or private equity or debt financings, collaborative relationships, bank
facilities or other arrangements. There can be no assurances that such
additional capital will be available on terms acceptable to us, or at all. Any
additional equity financing is expected to be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants and increased
interest costs. We have financed our operations to date primarily through
private sales of equity securities, proceeds from our IPO and loan facilities.
There can be no assurance that additional funding will be available for
us to finance our ongoing operations when needed or that adequate funds for our
operations, whether from financial markets, collaborative or other arrangements
with corporate partners or from other sources, will be available when needed, if
at all, or on terms acceptable to us. Our inability to obtain sufficient funds
may require us to delay, scale back or eliminate some or all of our expansion
programs, to limit the marketing of our services, or to license to third parties
the rights to commercialize products or technologies that we would otherwise
seek to develop and market ourselves. This would have a material adverse effect
on our business.
FLUCTUATION IN QUARTERLY OPERATING RESULTS MAY NEGATIVELY IMPACT OUR
STOCK PRICE. Our revenues and operating results vary significantly from quarter
to quarter due to a number of factors, not all of which are in our control. You
should not rely on quarter-to-quarter comparisons of our results of operations
as an indication of future performance. It is possible that in some future
periods our results of operations may be below the expectations of public market
analysts and investors. In that event, the market price of our common stock may
fall.
Factors that could cause quarterly results to fluctuate include:
-- Customer demand for services.
-- The timing of the expansion of operations.
-- Seasonality in revenues, principally during the summer and year-end
holidays.
-- The mix of products and services revenues from our operating
divisions.
-- Changes in the growth rate of Internet usage.
-- Changes in pricing by us or competitors.
-- The introduction of new products or services by us or competitors.
-- Costs related to acquisitions of technology or businesses.
CHANGES IN GOVERNMENT REGUALTIONS. There are an increasing number of
laws and regulations pertaining to the Internet. These laws and regulations
relate to liability for information received from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services. The government may also seek to regulate some segments of
our activities as basic telecommunications services. Moreover, the applicability
to the Internet of existing laws governing intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment,
personal privacy and other issues is uncertain and developing. We cannot predict
the impact, if any, that future regulation or regulatory changes may have on our
business.
LIMITED INTELLECTUAL PROPERTY PROTECTION. We rely on a combination of
copyright and trademark laws, trade secrets laws and license and nondisclosure
agreements to protect our proprietary information, particularly the computer
-25-
<PAGE>
software applications that we have developed. We currently have no registered
copyrights or patents or patent applications pending. It may be possible for
unauthorized third parties to copy aspects of, or otherwise obtain and use, our
proprietary information without authorization. The majority of our current
contracts with our clients contain provisions granting to the client
intellectual property rights to certain of our work product, including the
customized programming that we create for such client. We anticipate that
contracts with future clients will contain similar provisions. Other existing
agreements to which we are a party are, and future agreements may be, silent as
to the ownership of such rights. To the extent that the ownership of such
intellectual property rights is expressly granted to a client or is ambiguous,
our ability to reuse or resell such rights will or may be limited.
Our policy is to execute confidentiality agreements with our employees
and consultants upon the commencement of an employment or consulting
relationship with us. These agreements generally require that all confidential
information developed or made known to the individual by us during the course of
the individual's relationship with us be kept confidential and not disclosed to
third parties. These agreements also generally provide that inventions conceived
by the individual in the course of rendering services to us shall be our
exclusive property. There can be no assurance that such agreements will not be
breached, that we would have adequate remedies for any breach or that our trade
secrets will not otherwise become known to or be independently developed by
competitors.
POTENTIAL LIABILITY TO CLIENTS. Our services involve development,
implementation and maintenance of computer systems and computer software that
are critical to the operations of our clients' businesses. Our failure or
inability to meet a client's expectations in the performance of our services
could harm our business reputation or result in a claim for substantial damages
against us, regardless of our responsibility for such failure or inability. In
addition, in the course of performing services, our personnel often gain access
to technologies and content that includes confidential or proprietary client
information. Although we have implemented policies to prevent such client
information from being disclosed to unauthorized parties or used
inappropriately, any such unauthorized disclosure or use could result in a claim
for substantial damages. We attempt to limit contractually our damages arising
from negligent acts, errors, mistakes or omissions in rendering services and,
although we maintain general liability insurance coverage, including coverage
for errors and omissions, there can be no assurance that such coverage will
continue to be available on reasonable terms or will be available in sufficient
amounts to cover one or more large claims. The successful assertion of one or
more large claims against us that are uninsured, exceed available insurance
coverage or result in changes to our insurance policies, including premium
increases or the imposition of a large deductible or co-insurance requirements,
would adversely affect us.
LIABILITY FOR MATERIAL CUSTOMERS DISTRIBUTE OVER THE INTERNET. The law
relating to the liability of online service providers, private network operators
and ISPs for information carried on or disseminated through their networks is
currently unsettled. We may become subject to legal claims relating to the
content in the Web-sites we host or in email messages that we transmit. For
example, lawsuits may be brought against us claiming that material inappropriate
for viewing by young children can be accessed from the Web-sites we host. Claims
could also involve matters such as defamation, invasion of privacy and copyright
infringement. Providers of Internet products and services have been sued in the
past, sometimes successfully, based on the content of material. If we have to
take costly measures to reduce our exposure to these risks, or are required to
defend ourselves against such claims, our business may be materially adversely
affected.
FUTURE SALES OF COMMON STOCK BY EXISTING STOCKHOLDERS. The market price
of our common stock could decline as a result of sales by our existing
stockholders of a large number of shares of common stock in the market after
this offering, or the perception that these sales may occur. These sales also
might make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate.
We have granted options to purchase 680,000 shares under our 1998 and
1999 Stock Option Plans. We have granted options to purchase an additional
470,000 shares in connection with the digital fusion merger. If the holders of
these options were to exercise their rights and sell the shares issued to them,
it could have an adverse effect on the market price of our common stock.
-26-
<PAGE>
We have also granted 32,500 shares of restricted stock to one of our
officers. Of these shares, 5,000 vested in 1999 and, of the remaining 27,500
shares, 9,167 shares will vest in each of 2000 and 2001 and 9,166 shares will
vest in 2002 (5,000 of these shares have been issued in 2000). In addition, the
Company has reserved up to approximately 117,000 shares for issuance in
connection with certain acquisitions (including 50,000 shares to be reserved in
connection with the digital fusion merger) and has agreed to issue warrants to
purchase up to 327,000 shares in connection with the consulting agreements,
private placement financings, the conversion of the 1999 Debentures and other
agreements. If and when these shares are issued by the Company and sold by the
various holders, sale of these shares could have an adverse effect on the market
price of our common stock.
COMMON STOCK VOLATILITY. The market price of our common stock has
fluctuated in the past and is likely to continue to be highly volatile and could
be subject to wide fluctuations. In addition, the stock market has experienced
extreme price and volume fluctuations. The market prices of the securities of
Internet-related companies have been especially volatile. Investors may be
unable to resell their shares of our common stock at or above the offering
price.
LACK OF DIVIDENDS. We have never paid cash dividends on our capital
stock and do not anticipate paying cash dividends in the foreseeable future.
Instead, we intend to retain future earnings for reinvestment in our business.
ANTI-TAKEOVER PROVISIONS. Provisions of our Restated Certificate of
Incorporation, our Amended and Restated By-laws, and Delaware law, could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are attached hereto following page F-2.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information appearing under the captions "Proposal 1 - Election of
Directors," "Executive Officers of the Company," "Promoters and Control Persons"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy
Statement for our 2000 Annual Meeting of Stockholders (the "2000 Proxy
Statement") is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" in the
2000 Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Security Ownership of
Beneficial Owners and Management" in the 2000 Proxy Statement is incorporated
herein by reference.
-27-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under the caption "Certain Transactions" in the
2000 Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following is a list of Exhibits filed as a part of this Report.
EXHIBIT NO. DESCRIPTION
*3.1 Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1 to our Registration Statement on Form
SB-2, File No. 333-47741, filed on April 23, 1998 (the
"Registration Statement")).
*3.2 Amended and Restated By-Laws of the Company (filed as Exhibit
3.2 to our Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1999).
4.1 See Exhibit numbers 3.1 and 3.2 for provisions of the
Restated Certificate of Incorporation and Restated By-Laws
of the Company, as amended, defining the rights of the holders
of common stock.
*4.2 Specimen form of certificate evidencing the shares of common
stock of the Company (filed as Exhibit 4.1 to our Registration
Statement).
*10.1 Form of Registration Rights Agreement, dated as of May 6,
1997, between the Company and the holders of certain shares of
common stock (filed as Exhibit 10.2 to our Registration
Statement).
*10.2 Form of Warrant to Purchase Shares of Stock, dated as of
October 31, 1997 (filed as Exhibit 10.4 to our Registration
Statement).
*10.3 Employment Agreement, dated as of May 3, 1999, by and between
IBS and Nicholas R. Loglisci, Jr. (filed as Exhibit 10.1 to
our Quarterly Report on form 10-QSB for the quarter ended
June 30, 1999).+
*10.4 Employment Agreement, dated as of May 3, 1999, by and between
IBS and Frank R. Altieri, Jr. (filed as Exhibit 10.3 to
our Quarterly Report on form 10-QSB for the quarter ended
June 30, 1999).+
*10.5 Employment Agreement, dated as of May 3, 1999, by and between
IBS and Jeffrey E. Brenner (filed as Exhibit 10.4 to
our Quarterly Report on form 10-QSB for the quarter ended
June 30, 1999).+
**10.6 Employment Agreement, dated as of May 7, 1999, by and between
IBS and Howard Johnson.+
*10.7 Stock Purchase Agreement, dated as of January 31, 1998,
between the Company and Entelechy, Inc. and the stockholders
of Entelechy, Inc. named therein (filed as Exhibit 10.12
to our Registration Statement).
*10.8 Membership Interest Purchase Agreement, dated September 24,
1998, by and among the Company and Peter Bowman, Lawrence
Rafkin, Robert Gillespie, Steven Rotella, Steven Swartz,
Jospeh Calabro, Febe Dwyer, Barbara Glass-Seran, Clifford
Seran, Stanley Lerner, Annette Monti, Christina Monti, Jack
Monti, Rogelio Valencia, Linda Valencia and Phyllis Wood
(filed as Exhibit 2.1 to our Report on Form 8-K, filed on
October 9, 1998).
*10.9 Membership Interest Acquisition Agreement, dated December 10,
1998, by and among the Company, Carl Broadbent, Keith Lowy,
Stephen Lowy and Halo Network Management, LLC (filed as
Exhibit 2.1 to our Report on Form 8-K, filed on December 22,
1998).
*10.10 IBS Interactive, Inc. 1998 Stock Option Plan (filed
as Exhibit 10.14 to our Registration Statement).+
*10.11 IBS Interactive, Inc. 1999 Stock Option Plan (filed as part of
our Proxy Statement for the Annual Meeting of Stockholders
held on June 4, 1999).+
*10.12 Second Lease Modification Agreement, dated as of March 3,
1998, by and among the Company and EI Realty, 2 Ridgedale
Avenue, Inc. and Hanover Park for Industry, in connection with
our premises in Cedar Knolls, New Jersey (filed as Exhibit
10.17 to our Registration Statement).
*10.13 Letter Agreement, dated as of October 21, 1997, between the
Company and EI Realty in connection with our premises in Cedar
Knolls, New Jersey (filed as Exhibit 10.18 to our Registration
Statement).
*10.14 Lease Agreement, dated as of May 1, 1997, by and between the
Company and Iron Investment Corp. and Hanover Park for
Industry, in connection with our premises in Cedar Knolls, New
Jersey (filed as Exhibit 10.19 to our Registration Statement).
*10.15 Network Services Contract, dated as of December 27, 1996,
between the Company and the Catholic Healthcare Network (filed
as Exhibit 10.20 to our Registration Statement).
*10.16 Professional Service Agreement Consulting, dated as of October
23, 1997, between Aetna Life Insurance Company and the Company
(filed as Exhibit 10.21 to our Registration Statement).
-28-
<PAGE>
*10.17 Lease Agreement, dated as of January 31, 1998, between the
Company and R&G International, in connection with our premises
in Huntsville, Alabama (filed as Exhibit 10.22 to our
Registration Statement).
*10.18 Loan Agreement, dated October 30, 1998, by and between
the Company and First Union National Bank (filed as Exhibit
10.18 to our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1998).
*10.19 IBS Interactive, Inc. Deferred Compensation Plan, effective
May 1, 1999 (filed as Exhibit 10.5 to our Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1999).+
*10.20 Amendment 1 to IBS Interactive, Inc. Deferred Compensation
Plan, effective August 1, 1999 (filed as Exhibit 10.1 to our
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1999).+
*10.21 Exchange Agreement, dated as of March 31, 1999, by and among
IBS, Dan E. Spencer, Raymond Deep, Michael Bayless, Michael
Ivy, Belly Lenox and Spectrum Information Services, Inc.
(filed as Exhibit 2.1 to our Report on Form 8-K filed on
April 15, 1999).
*10.22 Agreement and Plan of Merger dated as of June 30, 1999, among
Arnold Schron, Spencer Analysis, Inc., IBS and SAI Acquisition
Corp. (filed as Exhibit 2.1 to our Report on Form 8-K, filed
on July 15, 1999).
*10.23 Agreement and Plan of Merger dated as of February 10, 2000,
among Sean D. Mann, Roy E. Crippen III, Michael E. Mandt, Ali
A. Husain, Robert E. Siegmann, digital infusion, inc., IBS,
and Digital Fusion Acquisition Corp. (filed as Exhibit 2.1 to
our Report on 8-K, filed March 24, 2000).
**10.24 Employment Agreement dated as of March 1, 2000 by and
between IBS and Roy E. Crippen, III.+
**10.25 Employment Agreement dated as of March 1, 2000 by and
between IBS and Sean D. Mann.+
**21.1 Subsidiaries of the Company.
**23.1 Consent of BDO Seidman, LLP
**24.1 Power of Attorney (appears on signature page).
**27.1 Financial Data Schedule.
- - -------------
* Incorporated by reference.
** Filed herewith.
+ Management contract or compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K
On December 20, 1999, we filed a report with the SEC on Form 8-K, under
Item 2, amending our Form 10-KSB filed with the SEC on March 31, 1999, restating
our financial statements (and amounts included in Management's Discussion &
Analysis and Results of Operations) contained in our Report on Form 10-KSB for
the year ended December 31, 1998, to reflect the acquisition of Spencer
Analysis, Inc., which was accounted for as a pooling of interests.
-29-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this Report to be signed on our behalf by the undersigned,
thereunto duly authorized.
BS INTERACTIVE, INC.
Dated: March 30, 2000 By: /S/ NICHOLAS R. LOGLISCI, JR.
--------------------------------------
Nicholas R. Loglisci, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints both Nicholas R. Loglisci, Jr. and Frank
R. Altieri, Jr. his true and lawful attorney-in-fact and agent, with full power
of substitution and re-substitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments to this Annual Report
on Form 10-KSB, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or their or
his substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities
indicated on the 30th day of March, 2000.
SIGNATURE TITLE(S)
--------- --------
/S/ NICHOLAS R. LOGLISCI, JR. President, Chief Executive Officer
- - ------------------------------- and Director (Principal Executive Officer)
Nicholas R. Loglisci, Jr.
/S/ FRANK R. ALTIERI, JR. Chief Technical Officer and Director
- - -------------------------------
Frank R. Altieri, Jr.
/S/ROY E. CRIPPEN III Chief Operating Officer and Director
- - -------------------------------
Roy E. Crippen III
/S/ HOWARD B. JOHNSON Chief Financial Officer
- - ------------------------------- (Principal Financial and Accounting Officer)
Howard B. Johnson
/S/ CLARK FREDERICK Director
- - -------------------------------
Clark Frederick
/S/ SUSAN HOLLOWAY TORRICELLI Director
- - -------------------------------
Susan Holloway Torricelli
/S/ BARRETT N. WISSMAN Director
- - -------------------------------
Barrett N. Wissman
/S/ DAVID FAEDER Director
- - -------------------------------
David Faeder
<PAGE>
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
Report of Independent Certified Public Accountants............. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1999................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998 and 1999............................. F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998 and 1999............................. F-6
Notes to Consolidated Financial Statements..................... F-7
<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 as of December 31, 1998 and 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IBS Interactive,
Inc. and Subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
March 24, 2000
<PAGE>
IBS INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
December 31,
------------------------------
1998 1999
------------------------------
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 5,532,000 $ 2,892,000
Accounts receivable (net of allowance for
doubtful accounts of $73,000 in 1998 and
$261,000 in 1999)........................... 2,678,000 4,117,000
Prepaid income taxes............................ 54,000 164,000
Prepaid expenses and other current assets....... 184,000 279,000
Deferred income tax asset....................... 126,000 -
------------------------------
Total current assets............................ 8,574,000 7,452,000
Property and equipment, net..................... 983,000 1,012,000
Intangible assets, net.......................... 1,418,000 4,794,000
Deferred income tax asset....................... 5,000 -
Advance to related party........................ 70,000 -
Other assets.................................... 126,000 217,000
------------------------------
TOTAL ASSETS.................................... $11,176,000 $13,475,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt............ $ 79,000 $ 130,000
Accounts payable................................ 696,000 527,000
Deferred revenue................................ 45,000 102,000
Accrued salaries and related expenses........... 206,000 -
Accrued professional fees....................... 60,000 164,000
Customer deposits............................... 59,000 25,000
Accrued warranty expense........................ 90,000 -
Deferred income tax liability................... 84,000 -
Other current liabilities....................... 244,000 210,000
------------------------------
Total current liabilities....................... 1,563,000 1,158,000
Long-term debt, less current maturities......... 277,000 142,000
Deferred compensation........................... 705,000 590,000
Pension obligation.............................. 208,000 267,000
Acquisition liabilities......................... - 546,000
------------------------------
Total liabilities............................... 2,753,000 2,703,000
------------------------------
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 4,002,541 shares - 1998 and
5,020,532 shares - 1999..................... 39,000 50,000
Additional paid in capital...................... 9,280,000 18,185,000
Accumulated deficit............................. (896,000) (7,463,000)
------------------------------
Total Stockholders' Equity...................... 8,423,000 10,772,000
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $11,176,000 $13,475,000
==============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2
<PAGE>
IBS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
December 31,
------------------------------
1998 1999
------------------------------
Revenues........................................ $15,213,000 $18,774,000
Cost of services................................ 10,207,000 13,003,000
------------------------------
Gross Profit.................................... 5,006,000 5,771,000
Operating expenses:
Selling, general and administrative........... 4,905,000 10,545,000
Amortization of intangible assets............. 173,000 514,000
Non-cash compensation expenses................ 290,000 332,000
Merger related expenses....................... 109,000 232,000
------------------------------
5,477,000 11,623,000
------------------------------
Operating loss...................... (471,000) (5,852,000)
Interest expense................................ (129,000) (81,000)
Interest income................................. 185,000 116,000
Loss on disposal of assets...................... - (350,000)
Other income (expense), net..................... 75,000 (26,000)
------------------------------
Loss before income taxes........................ (340,000) (6,193,000)
Income tax (provision).......................... (26,000) (45,000)
------------------------------
Net loss........................................ $ (366,000) $(6,238,000)
==============================
Loss per share
Net loss per share - basic and diluted........ $ (.10) $ (1.45)
==============================
Weighted average number of common stock and
equivalents................................... 3,509,380 4,310,458
==============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3
<PAGE>
IBS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
Common stock Additional
---------------------- Paid-in Unearned Accumulated Stockholders'
No. of shares Amount Capital Compensation Deficit Equity
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998,
as restated 2,445,738 $24,000 $ 1,723,000 $(7,000) $ (240,000) $ 1,500,000
Net proceeds from initial
public offering 1,380,000 14,000 6,628,000 - - 6,642,000
Issuance and amortization
of directors' options - - 79,000 - - 79,000
Shares issued in
connection with
acquisition - Entelechy 147,310 1,000 670,000 - - 671,000
Conversion of Entelechy
demand note 25,000 - 150,000 - - 150,000
Shares issued in
connection with
acquisition - MBS 4,493 - 30,000 - - 30,000
Amortization of unearned
compensation - - - 7,000 - 7,000
Distribution to Spectrum
and Spencer shareholders - - - - (290,000) (290,000)
Net loss - - - - (366,000) (366,000)
- - ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 4,002,541 39,000 9,280,000 - (896,000) 8,423,000
Shares issued in
connection with
acquisitions 138,045 2,000 2,216,000 - - 2,218,000
Shares issued upon
conversation of debt 60,000 1,000 599,000 - - 600,000
Shares issued in
connection with private
placements 520,000 5,000 5,195,000 - - 5,200,000
Distribution to Spectrum
& Spencer shareholders - - - - (329,000) (329,000)
Issuance and amortization
of directors' options - - 59,000 - - 59,000
Exercise of warrants 136,656 1,000 657,000 - - 658,000
Offering costs in
connection with debt
offering and private
placement - - (174,000) - - (174,000)
Interest expense for
warrants in connection
with debt offering - - 43,000 - - 43,000
Additional shares issued
in connection with
acquisitions 163,290 2,000 310,000 - - 312,000
Net loss - - - - (6,238,000) (6,238,000)
- - ---------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 5,020,532 $50,000 $18,185,000 $ - $(7,463,000) $10,772,000
=========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4
</TABLE>
<PAGE>
IBS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
December 31,
------------------------------
1998 1999
------------------------------
Cash flows from operating activities:
Net loss...................................... $ (366,000) $(6,238,000)
Adjustments to reconcile net loss to net cash.
provided by (used in) operating activities:
Depreciation and amortization............. 667,000 1,388,000
Loss on disposals of fixed assets......... 18,000 -
Bad debt expense.......................... 40,000 188,000
Non-cash interest expense................. 49,000 43,000
Compensation expense - Entelechy.......... 180,000 197,000
Non-cash compensation..................... 110,000 136,000
Deferred income tax provision (benefit)... (123,000) 47,000
Loss on disposal of assets................ - 350,000
Changes in operating assets and liabilities (net
of effects of purchase acquisitions):
Accounts receivable.................... 616,000 (1,517,000)
Prepaid expenses and other assets...... (210,000) (125,000)
Accounts payable and accrued expenses.. (34,000) (1,094,000)
Deferred revenue....................... (458,000) 57,000
Income taxes........................... (79,000) (110,000)
Deposits and other..................... (57,000) (274,000)
Pension Obligation..................... 58,000 59,000
------------------------------
Net cash provided by (used in)
operating activities............... 411,000 (6,893,000)
------------------------------
Cash flows from investing activities:
Capital expenditures - property and equipment. (751,000) (277,000)
Asset acquisitions and related costs.......... (116,000) (1,857,000)
Proceeds on assets sold....................... 835,000
------------------------------
Net cash used in investing activities (867,000) (1,299,000)
------------------------------
Cash flows from financing activities:
Proceeds from initial public offering......... 8,280,000
Private placements of common stock............ - 5,200,000
Capital distributions......................... (290,000) (329,000)
Offering costs................................ (1,613,000) (174,000)
Repayments of notes payable................... (396,000) (352,000)
Proceeds from warrants........................ - 658,000
Proceeds from notes payable................... 65,000 600,000
Advances to related parties. (70,000)
Repayment of 1997 Notes....................... (200,000)
Payments of capital lease obligations......... (65,000) (51,000)
------------------------------
Net cash provided by financing
activities 5,711,000 5,552,000
------------------------------
Net increase (decrease) in cash and cash
equivalents................................... 5,255,000 (2,640,000)
Cash and cash equivalents, at beginning of year. 277,000 5,532,000
------------------------------
Cash and cash equivalents, at end of year....... $ 5,532,000 $2,892,000
==============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5
<PAGE>
IBS INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
NOTE 1- ORGANIZATION AND BACKGROUND
IBS Interactive, Inc. (the "Company") and its subsidiaries provides a broad
range of computer networking, programming, applications development, Internet
Web-site development, Internet subscriber access ("Internet Access Services" or
"IS"), network consulting 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, New York, Virginia, and Alabama.
The Company is evaluating strategic alternatives and options on its Internet
Services segment, which may include the possible sale of a portion or all of its
remaining IS businesses. The IS Segment was comprised, as of December 31, 1999,
of six distinct companies throughout the eastern United States. In the fourth
quarter of 1999, the Company consummated the sale of two IS companies based in
Virginia and Alabama to raise operating funds. The sale of these companies
resulted in a loss of $350,000. Total allocated assets, revenues and operating
losses of the IS business as of and for the years ended December 31, 1998 and
1999 are as follows:
1998 1999
Total Assets $ 84,000 $4,301,000
Revenues $1,301,000 $4,068,000
Operating losses $ (269,000) $ (943,000)
No assurances can be given that if the remaining IS businesses are 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 with a
high degree of certainty at this time. Such factors include but are not limited
to: the timing of adopting a formal plan for disposition, future market
conditions, and the availability of a suitable buyer(s) for the IS segment on
acceptable terms to the Company.
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"), Spectrum Information
Systems, Inc. ("Spectrum") and Spencer Analysis, Inc. ("Spencer") (see Note 3).
Such restated financial statements were initially filed with the Securities &
Exchange Commission on Form 8-K on December 20, 1999.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and all of its wholly-owned subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation.
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, 1998 and 1999, the Company recognized revenues
of $29,000 and $436,000, respectively, on projects in process. Such unbilled
amounts are included in accounts receivable, net, at December 31, 1998 and 1999,
respectively.
<PAGE>
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 loss and 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 are used in connection with financing
arrangements and professional services agreements (see Note 8) are amortized
over the expected life of the underlying debt or the term of the agreement.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Valuation 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, Spectrum and
Spencer 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, Spectrum's and
Spencer's net income or loss. Accordingly, the Company is only able to record a
provision or benefit for federal and state income taxes for the periods from the
respective acquisition dates forward.
In future periods, the Company's consolidated income tax provision or benefit
will include the operating results of DesignFX, Halo, Spectrum and Spencer. As
such, the historical tax provision of the Company, as reflected in the
accompanying consolidated 1998 and 1999 statements of operations, is not
necessarily indicative of the tax provision or benefit that would have been
recorded had DesignFX, Halo, Spectrum and Spencer been acquired at the beginning
of 1998.
Valuation allowances have been established against certain Company's deferred
tax assets due to uncertainties in the Company's ability to generate sufficient
taxable income in future periods to make realization of such assets more likely
than not. The Company's income tax receivable at December 31, 1999 represents
net operating loss carrybacks to previous periods.
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.
<PAGE>
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, 1998, two customers accounted for 30% and 12% of total net accounts
receivable. At December 31, 1999, one customer accounted for 12% 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 years ended December 31, 1998 and 1999 the Company's allowance for
doubtful accounts was decreased by $39,000 and increased by $188,000,
respectively (for bad debt provisions) and was decreased by $39,000 and $0,
respectively, for written off balances.
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. Cash equivalents at
December 31, 1999 of $2,892,000 are comprised of money market fund investments
and overnight deposits.
The Company maintains substantially all of the machinery and communications
network equipment utilized in its IS business at limited locations.
SOURCES OF SUPPLIES AND VENDORS
The Company has multiple vendors, which provide data communications and Internet
access services to customers of its IS business. 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.
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, 1998
and 1999.
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.
PENSION ACCOUNTING
The Company has adopted SFAS No. 132 "Employers' Disclosures about Pensions and
Other Post-retirement Benefits" as it relates to a Spencer pension plan.
Subsequent to the acquisition of Spencer in 1999, the plan was amended to no
longer require the Company to accrue future service benefits. The provisions of
<PAGE>
SFAS No. 132 revise employers' disclosures about pension and other
post-retirement benefit plans. It does not change the measurement or recognition
of these plans. It standardizes the disclosure re-quirements for pensions and
other post-retirement benefits to the extent practicable.
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.
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 910,223 shares at December 31, 1999), 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 $.09 per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Significant estimates include
the assumptions utilized in the development of the Company's allowance for
doubtful accounts, given its concentration of accounts receivable balances with
a limited number of customers. In addition, many of the Company's estimates and
assumptions used in the consolidated financial statements relate to the
Company's continued ability to deliver state-of-the-art technical 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, as amended, will be adopted by the Company no later
than its year ending December 31, 2000.
NOTE 3 - BUSINESS COMBINATIONS (Also, see Note 16)
POOLINGS-OF-INTERESTS
On September 24, 1998, December 10, 1998, March 31, 1999 and June 30, 1999 the
Company acquired DesignFX, Halo, Spectrum and Spencer 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 200,160 shares of
<PAGE>
the Company's common stock 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 219,231 shares of the Company's common stock 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 (exclusive of the reserved
shares discussed below) for all of the outstanding shares of Spectrum. Spencer,
which is a provider of network consulting to a wide array of businesses, became
a wholly-owned subsidiary of the Company through the exchange of 240,505 shares
of the Company's common stock(exclusive of the reserved shares discussed below)
for all of the outstanding shares of Spencer. The ultimate number of shares to
be issued to the former owners of Spectrum and Spencer is contingent upon the
resolution of specific and, to a lesser extent, general financial matters. The
Company has reserved 10,909 and 19,500 of common shares for issuance to the
owners of Spectrum and Spencer respectively, pending the outcome of such
matters. With respect to DesignFX and Halo, the Company reached an agreement on
the ultimate number of shares issued in the year ended December 31, 1999. The
accompanying financial statements are based on the assumption that the Company,
DesignFX, Halo, Spectrum and Spencer were combined as of the earliest period
presented and, accordingly, financial statements of prior years have been
restated to give effect to the combinations. Such restated financial statements
were initially filed with the Securities & Exchange Commission on Form 8-K on
December 20, 1999.
Summarized unaudited results of operations of the Company and DesignFX through
September 30, 1998 (the closest practical date to the date of the acquisition)
are as follows:
Company DesignFX
---------- ----------
Net revenues $6,091,000 $1,181,000
Net income 52,000 42,000
Summarized unaudited results of operations of the Company and Halo through
December 31, 1998 (the closest practical date to the date of the acquisition)
are as follows:
Company Halo
---------- ----------
Net revenues $7,853,000 $1,952,000
Net income (326,000) 266,000
Summarized unaudited results of operations of the Company and Spectrum (the date
of the acquisition) for the year ended December 31, 1998 and the three months
ended March 31, 1999 are as follows:
Three Months Ended
1998 March 31, 1999
Company Spectrum Company Spectrum
-------------- ------------- ------------ --------------
Net revenues $9,805,000 $1,674,000 $2,601,000 $672,000
Net income (loss) (60,000) (419,000) (280,000) 117,000
Summarized unaudited results of operations of the Company and Spencer for the
year ended December 31, 1998 and the six months ended June 30, 1999 (the date of
acquisition) are as follows:
Six Months Ended
1998 June 31, 1999
Company Spencer Company Spencer
-------------- ------------- ------------ --------------
Net revenues $11,479,000 $3,734,000 $ 7,076,000 $1,677,000
Net income (loss) (479,000) 113,000 (1,578,000) 135,000
<PAGE>
There were no material adjustments to conform the accounting policies of
DesignFX, Halo, Spectrum and Spencer to the accounting policies used by the
Company.
In 1998 and 1999 the Company incurred charges of $109,000 and $232,000,
respectively, for fees and costs associated with the acquisitions of DesignFX,
Halo, Spectrum, and Spencer. Such amounts, for transactions accounted for as a
pooling-of-interests, are expensed as services are rendered and costs are
incurred.
PURCHASES
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.
ENTELECHY, INC.
On January 31, 1998, the Company acquired substantially all the assets of
Entelechy, Inc. ("Entelechy"), in exchange for 277,434 shares of Company common
stock in a business combination accounted for as a purchase. The Company issued
147,310 shares at closing, and will issue an additional 130,124 shares (the
"Contingent Shares") over a three-year period on each of January 31, 1999, 2000
and 2001 to the former Entelechy stockholders. The issuance of such shares is
contingent upon the former Entelechy stockholders remaining in the continuous
employ of the Company. The total purchase price for Entelechy was based upon the
value of shares issued at closing and related acquisition costs. Goodwill
arising from the Entelechy acquisition totaled $828,000, and is being amortized
over a period of five years. The values ascribed to the Contingent Shares will
result in a charge to operations as such shares are earned through the Company's
year ending December 31, 2001. The related charge to operations for the years
ended December 31, 1998 and 1999 totaled $180,000 and $197,000, respectively.
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
and $17,000 in the years ending December 31, 2000 and 2001, respectively. The
Company's liability for the values ascribed to these shares approximates
$281,000 and is included in "Deferred Compensation" in the accompanying December
31, 1999 consolidated balance sheet. The liability has been reduced by $310,000
for shares formally issued in 1999.
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. Entelechy's results of operations
for the month of January 1998 were not material and, accordingly, pro forma
results of operations for the year ended December 31, 1998 are not presented.
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 $156,000, 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
<PAGE>
January 1, 1998 through the acquisition date were not material and, accordingly,
pro forma operating results are not presented.
IS Acquisitions
During 1999, the Company consummated nine distinct acquisitions of Internet
Service Providers throughout the Eastern United States. All of these
acquisitions were accounted for using the purchase method of accounting. None of
the acquisitions were considered significant subsidiaries and, as a result,
condensed and pro forma financial information is not presented. The carrying
value of these assets have been increased and a liability has been established
at December 31, 1999, to reflect the value of consideration ($546,000;
principally Company common stock) that is probable of issuance to the
predecessor owners under existing contracts and commitments. The liability will
be reduced as common shares are formally issued in the year ending December 31,
2000. Management does not expect, at present, that the ultimate disposition of
these commitments will have a material effect on the carrying values of such
assets at December 31, 1999. The aggregate value of consideration issued
(including common stock that is probable of issuance), assumed liabilities and
direct costs related to these nine acquisitions is as follows:
Cash payments $1,857,000
Fair value of issued common stock 2,219,000
Fair value of likely to be issued common stock 546,000
Assumed liabilities and direct costs 1,048,000
-----------
Total $5,670,000
===========
Goodwill and intangible assets arising from these acquisitions ($3,915,000 at
December 31, 1999) are amortized over a ten year period.
NOTE 4 - PROPERTY AND EQUIPMENT
Major classes of property and equipment, net, consist of the following:
December 31,
------------------------------
1998 1999
----------- ------------
Network equipment $ 1,661,000 $ 2,194,000
Office equipment, fixtures and
vehicles 427,000 485,000
Leasehold improvements 86,000 96,000
----------- ------------
2,174,000 2,775,000
Less: accumulated depreciation (1,191,000) (1,763,000)
----------- ------------
$ 983,000 $ 1,012,000
=========== ============
At December 31, 1998 and 1999, equipment subject to capital leases, less
accumulated depreciation, amounted to $60,000 and $22,000, respectively.
Depreciation expense for the years ended December 31, 1998 and 1999 amounted to
$492,000 and $600,000, respectively, which includes depreciation of equipment
subject to capital lease agreements of $38,000 and $38,000, respectively.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets, net, are comprised of the following:
<PAGE>
December 31,
------------------------------
1998 1999
----------- ------------
Intangibles - IS Acquisitions $ - $ 3,915,000
Goodwill - Entelechy 828,000 828,000
Goodwill - MBS 156,000 156,000
Goodwill - JDT 26,000 26,000
Deferred compensation 705,000 900,000
Customer lists 69,000 69,000
------------ ------------
1,784,000 5,894,000
Less: accumulated amortization (366,000) (1,100,000)
------------ ------------
$1,418,000 $ 4,794,000
============ ============
Amortization expense was $378,000 and $788,000 for the years ended December 31,
1998 and 1999, respectively.
NOTE 6 - BORROWINGS
At December 31, 1998 and 1999, the Company's outstanding borrowings were
comprised of the following:
December 31,
------------------------------
1998 1999
----------- ------------
DesignFX - development loan $ 200,000 $ 142,000
Spectrum - notes payable 84,000 -
Promissory Notes - 109,000
Capital leases 72,000 21,000
------------ ------------
356,000 272,000
Less: current portion (79,000) (130,000)
------------ ------------
Total-long term borrowings $ 277,000 $ 142,000
============ ============
1997 NOTES
On October 31, 1997, the Company entered into a series of financing agreements
with eight individual investors for proceeds of $200,000 (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.
In connection with the issuance of the 1997 Notes, investors also received
warrants to purchase an aggregate of 48,872 shares of the Company's common stock
at an exercise price of $3.54 per share through October 2000 (see Note 8). 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. Such costs were amortized over the
life of the 1997 Notes. Interest expense for the year ended December 31, 1998,
including the amortization of the value ascribed to warrants, totaled $45,000.
The effective interest rate on the 1997 Notes, which includes the amortization
of the value of the warrants, approximated 68% per annum.
CONVERTIBLE DEBT
In the third and fourth quarter of 1999, the Company raised $600,000 through
sales of 12% convertible debt instruments (the "Convertible Debt"). The
Convertible Debt was converted at the option of the Company at the established
price of $10.00 per share in December of 1999. Holders of the Convertible Debt
received warrants to purchase common stock equal to 25% of any unpaid principal
and accrued interest divided by the defined value of the Company's common stock.
The Company has incurred a non-cash interest charge of $43,000 relating to the
fair value of the warrants issued in connection with the sale of the Convertible
Debt. The effective interest rate on the Convertible Debt over the two months
they were outstanding approximated 115% per annum.
<PAGE>
DESIGNFX - DEVELOPMENT LOAN
In March 1997, DesignFX entered into an agreement with a bank to develop and
design the software and hardware for the bank's sites on the Internet and the
worldwide web. Provisions of the agreement provided for various advances to
DesignFX in order to provide working capital for expenses incurred with the
design and development of such web sites. In September 1998, this agreement was
terminated and a new agreement was executed. Terms of the new agreement provide
for the advances to be repaid in monthly installments equal to 50% of DesignFX's
defined revenues received through the bank's web-site. Based on the negotiated
terms in the settlement of this obligation, management does not anticipate that
any contractual repayments of this loan will be due during the year ending
December 31, 2000. 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 $200,000
and $142,000 at December 31, 1998 and 1999, respectively.
SPECTRUM - NOTES PAYABLE
Spectrum notes payable of $84,000 at December 31, 1998, accrued interest at
rates of 8.25% to 12%. The notes were paid off in 1999.
PROMISSORY NOTES
In connection with two of its 1999 IS acquisitions, the Company entered into
agreements to pay the former owners approximately $307,000 in the form of
unsecured promissory notes. The notes are payable in 2000 and bear interest at
average rates of approximately 6% per annum. At December 31, 1999, the Company
was still obligated to pay approximately $109,000 under the terms of the
agreements.
LINE OF CREDIT
In October 1998, the Company entered into a promissory note agreement with a
bank for a line of credit. Borrowings were 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 was 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. The agreement expired on September 30, 1999. Interest
expense related to this line of credit totaled $10,000 during 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,
1998 and 1999 totaled $72,000 and $21,000, respectively. Interest expense
related to such agreements was $18,000 and $7,000 for the years ended December
31, 1998 and 1999, respectively.
DEBT AND LEASE MATURITIES
At December 31, 1999, aggregate required principal payments, including the
present value of amounts owed under capital leases, are as follows:
YEAR ENDING DECEMBER 31, Amount
---------
2000 $130,000
2001 142,000
---------
Total $272,000
=========
<PAGE>
NOTE 7 BENEFIT PLANS
DEFINED BENEFIT PLAN
Substantially all Spencer employees who met certain requirements of age and
length of service are covered by Spencer sponsored non-qualified,
non-contributory defined benefit pension plan. The benefits become fully vested
upon the employees retirement. Benefits paid to retirees are based upon age at
retirement, compensation levels and years of credited service. Subsequent to the
acquisition of Spencer in 1999, the plan was amended to no longer require the
Company to accrue future service benefits. Plan assets are stated at fair value
and are comprised of stocks and bonds.
Net periodic pension cost for this plan includes the following components:
DECEMBER 31, 1998 1999
---------------------------------------------------------------------------
Components of net periodic pension cost:
Service cost $185,000 $148,000
Interest cost 26,000 46,000
Actual return on plan assets (27,000) (8,000)
Recognized net actuarial (gain) loss 13,000 (7,000)
---------------------------------------------------------------------------
Net periodic pension cost $197,000 $179,000
===========================================================================
The following provides a reconciliation of benefit obligations, plan assets, the
funded status of the plan and the amounts recorded in the Company's balance
sheets:
DECEMBER 31, 1998 1999
---------------------------------------------------------------------------
Changes in benefit obligation:
Benefit obligation, beginning of year $370,000 $769,000
Service cost 186,000 148,000
Interest cost 26,000 46,000
Actuarial loss 187,000 (439,000)
---------------------------------------------------------------------------
Benefit obligation, end of year 769,000 524,000
---------------------------------------------------------------------------
Changes in plan assets:
Fair value of plan assets, beginning of year 133,000 299,000
Actual return on plan assets 26,000 9,000
Employer contribution 140,000 120,000
---------------------------------------------------------------------------
Fair value of plan assets, end of year 299,000 428,000
---------------------------------------------------------------------------
Unfunded status (470,000) (96,000)
Unrecognized prior service cost - (231,000)
Unrecognized net actuarial loss 262,000 60,000
---------------------------------------------------------------------------
Accrued benefit cost $(208,000) $(267,000)
===========================================================================
Assumptions used in these actuarial valuations were:
DECEMBER 31, 1998 1999
--------------------------------------------------------------
Discount rate 7.0% 7.0%
Expected long-term rate of return 8.0% 7.5%
==============================================================
401(K) PLAN
The Company sponsors a defined contribution benefit plan covering substantially
all employees. Eligible employees are allowed to contribute up to 6% of their
compensation. Company contributions are at the sole discretion of management.
There were no contributions for the years ended December 31, 1998 and 1999.
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (ALSO, SEE NOTE 16)
In May 1998, the Company completed an initial public offering of its common
stock. In connection with the offering, the Company registered, issued and sold
1,380,000 shares of common stock, including 180,000 shares of common stock
issued in connection with the exercise in full of the underwriter's
over-allotment option at an initial public offering price of $6.00 per share.
The proceeds to the Company (net of underwriting discounts, commissions and
other expenses payable by the Company) totaled approximately $6,642,000.
Additionally, the Company registered 120,000 shares of common stock underlying
warrants, which were sold to the underwriter ("Underwriter Warrants"). The
warrants are exercisable for a four-year period commencing on May 14, 1999 at a
price of $8.10 per share.
The Company incurred costs in connection with the issuance and distribution of
securities in the offering in the amount of $1,638,000. Such costs include
underwriting discounts and commissions in the amount of $828,000, expenses paid
to or for the underwriting in the amount of $248,000 and other expenses in the
amount of $562,000.
STOCK SPLITS
On March 9, 1998, the Company effected a 1,029.1 for 1 stock split and on April
21, 1998, a 1.187 for 1 stock split. All share and per share data have been
restated for all periods presented to reflect the splits.
CAPITAL STOCK
At December 31, 1999, 327,241 shares of common stock were reserved for the
exercise of stock warrants, comprised of the unexercised Underwriter's Warrants,
of 60,561, 145,000 reserved shares for the 1998 private placement investors,
100,000 for investment advisory firms and 21,680 to other parties (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 PLACEMENTS
In November 1999, the Board of Directors of the Company approved private
placements of up to $10 million of defined units which consist of 1,000,000
shares of common stock and 250,000 warrants to purchase common stock. Through
December 31, 1999, the Company had raised $5.2 million (which excludes the
proceeds from convertible debt subsequently exchanged for units) in connection
with this private placement and ceased efforts on additional sales of units in
early 2000.
In February 2000, the Board of Directors of the Company approved a private
placement of up to $9.9 million of defined units which consist of 900,000 shares
of common stock and 225,000 warrants to purchase common stock. Through March 24,
2000, the Company had raised approximately $2.1 million in connection with this
private placement.
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 have exercised the warrants in 1999 at an exercise price
of $3.54 per share.
In November 1998, the Company entered into an agreement with an investment
advisory firm who directly assisted the Company in acquisition efforts. In
return for such services, the Company has issued 50,000 warrants to this firm.
The warrants have vested and the requisite number of acquisitions have been
consummated. The exercise prices of the warrants are $6.60 per share and were
based, in part, on the fair market value of the Company's common stock at the
<PAGE>
date of the agreement. The values ascribed to the warrants have been capitalized
and have been amortized over the useful lives of the acquisitions.
In October 1999, the Company entered into a consulting agreement with an
investment advisory firm in which the Company agreed to issue: (a) warrants to
purchase 50,000 shares of Common Stock at an exercise price of $10.25 per share
and (b) warrants to purchase 50,000 shares of Common Stock at an exercise price
of $11.25 per share upon the closing of certain mergers or acquisitions to be
identified. The exercise prices were based on or set above the fair market value
of the Company's common stock at the date of the agreement. In the event that
the requisite services are rendered and the warrants are issued, the Company
will realize a non-cash charge to operations for the fair value of these
warrants. The period(s) that such charge will be recognized over will be
determined based upon the nature of the merger or acquisition involved, if any
(that is whether the merger is accounted for as a purchase or a pooling of
interests).
STOCK AWARDS
The Company has issued 32,500 shares of restricted stock to an officer. The
stock awards vest over a four-year period; however, if certain events occur, the
unvested portion of the awards will automatically vest. The value ascribed to
the stock awards ($309,000) was based, in part, on the fair market values of the
Company's common stock on the award dates. Compensation expense for these
agreements for the years ended December 31, 1998 and 1999 totaled $31,000 and
$77,000, respectively. The Company's liability for the values ascribed to these
shares approximates $309,000 and is included in "Deferred Compensation" in the
accompanying December 31, 1999 consolidated balance sheet. Such liability is
reduced when the shares are formally issued.
STOCK OPTION PLAN
The Company maintains two qualified stock option plans. Under the terms of both
plans, the Company has reserved 680,000 shares of common stock for future
grants.
Under the Company's Stock Option Plans, 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,
1999, the Company could grant an aggregate of 170,450 shares under the plans.
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 and $59,000 in 1998 and 1999, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1999:
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 to $6.38 192,658 8.6 $ 6.03 101,681 $ 6.03
$7.25 to $8.63 27,700 8.7 7.76 15,389 7.76
$16.00 17,142 2.54 16.00 6,636 16.00
$20.00 to $21.75 249,658 2.98 21.16 48,087 21.16
$22.00 to $23.438 22,392 4.25 23.30 2,778 23.30
- - ---------------------------------------------------- --------------------------
509,550 5.46 $14.62 174,571 $11.00
- - ---------------------------------------------------- --------------------------
<PAGE>
There were no option grants prior to the Company's 1998 initial public offering.
Transactions under various qualified and non qualified option plans for 1998 and
1999 are summarized as follows:
Weighted
average
exercise
Shares price
---------------------------------------------------------------------------
Outstanding at January 1, 1998 - -
Granted 267,150 $6.14
Exercised - -
Canceled - -
---------------------------------------------------------------------------
Outstanding at December 31, 1998 267,150 6.14
Granted 294,942 21.00
Exercised - -
Canceled (52,542) 7.53
---------------------------------------------------------------------------
Outstanding at December 31, 1999 509,550 $14.62
Options exercisable at December 31, 1999 174,571 $11.00
---------------------------------------------------------------------------
Options available for grant at December 31, 1999 170,450
---------------------------------------------------------------------------
Under the accounting provisions of SFAS 123, the Company's 1998 and 1999 pro
forma net loss and loss per share would have been:
1998 1999
--------------------------------------- -------------- ------------
Net loss $(431,000) $(6,909,000)
Net loss per share; basic and diluted $(.12) $(1.60)
--------------------------------------- -------------- ------------
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:
1998 1999
--------------------------------------- -------------- ------------
Dividend yield 0% 0%
Expected volatility 46.1% 45.8%
Risk-free interest rate 5.39% 5.25%
Expected life - years 10 10
Weighted average fair value of
options granted $3.47 $6.22
--------------------------------------- --------------- -------------
NOTE 9 - TAXES
Provisions (benefits) for federal and state income taxes consist of the
following:
December 31,
---------------------------
1998 1999
---------------------------
Current:
Federal.......................................... $ 102,000 $(133,000)
State............................................ 47,000 131,000
---------------------------
149,000 (2,000)
---------------------------
Deferred:
Federal.......................................... (91,000) 111,000
State............................................ (32,000) (64,000)
---------------------------
(123,000) 47,000
---------------------------
Total income tax provision....................... $ 26,000 $ 45,000
===========================
<PAGE>
Deferred tax assets (liabilities) arise from the following temporary differences
and are classified as follows:
December 31,
---------------------------
1998 1999
---------------------------
Deferred Tax Asset, Current:
Accounts receivables ............................ $ (90,000) $ 104,000
Accrued compensation............................. 117,000 94,000
Change in tax status of Spencer.................. - (90,000)
Other, net....................................... 15,000 -
Valuation allowance.............................. - (108,000)
---------------------------
$ 42,000 $ -
===========================
Deferred Tax Asset (Liabilities), Non-Current:
Intangible assets................................ $ 1,185,000 $1,092,000
Property and equipment........................... 16,000 228,000
Other............................................ (11,000) -
Tax benefit of state income tax net
operating loss carryforwards................... - 304,000
Tax benefit of federal income tax, net
operating loss carryforwards................... - 1,668,000
Change in tax status of Spencer.................. - (90,000)
Valuation allowance.............................. (1,185,000) (3,202,000)
---------------------------
$ 5,000 $ -
===========================
<PAGE>
Differences between the federal benefit computed at a statutory rate and the
Company's effective tax rate and provision are as follows:
December 31,
---------------------------
1998 1999
---------------------------
Statutory benefit.................................. $(116,000) $(2,106,000)
State taxes, net of federal benefit................ 10,000 (384,000)
Results attributed to DesignFX, Halo, Spectrum
and Spencer owners............................... 29,000 254,000
Amortization of non-deductible goodwill............ 52,000 99,000
Non-deductible expenses............................ 45,000 36,000
Increase in deferred income tax valuation allowance - 2,125,000
Other, net......................................... 6,000 21,000
---------------------------
$ 26,000 $ 45,000
===========================
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 an assessment of all available evidence, including 1999 operating
results, management does not consider realization of the deferred tax assets
generated from operations to be more likely than not, and has established a
valuation allowance against the gross deferred tax asset.
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, the Company has established a
valuation allowance against this 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.
As of December 31, 1999, the Company had available federal and state net
operating loss carryforwards of approximately $4,906,000 and $5,238,000 which
expire in 2019 and 2006, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases facilities and equipment under operating leases and subleases
expiring through December 2004. Some of the leases have renewal options and most
contain provisions for passing through certain incremental costs. At December
31, 1999, future net minimum annual rental payments under non-cancelable leases
are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- - ------------------------- ---------
2000 $1,800,000
2001 1,555,000
2002 1,064,000
2003 530,000
2004 265,000
------------
Total $5,214,000
============
<PAGE>
Total rental expense for the years ended December 31, 1998 and 1999 was
approximately $451,000 and $1,219,000, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment and consulting contracts with certain
officers and employees, which provide for minimum annual salaries to be paid
over specified terms. Future commitments for such payments (including those to
individuals employed by digital fusion [see Note 16]) were as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- - ------------------------- ---------
2000 $2,383,000
2001 1,059,000
2002 490,000
2003 128,000
------------
Total $4,060,000
============
NOTE 11 - 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% and were paid off in 1998. Interest expense
for the year ended December 31, 1998 amounted to $2,000.
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
of the note totaled $15,000 and was paid off in 1998. The imputed interest
expense for the year ended December 31, 1998 was not material.
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
$72,000 and $21,000 at December 31, 1998 and 1999, respectively.
OTHER TRANSACTIONS (ALSO SEE NOTE 8)
During 1999, an outstanding advance to an officer of $70,000 was charged to
operations in the form of employee compensation.
In 1998 and 1999 Spencer and Spectrum distributed an aggregate $290,000 and
$329,000, respectively, of cash to its shareholders.
<PAGE>
NOTE 12 - CASH FLOW INFORMATION
As disclosed in Note 3, the Company has consummated various asset acquisitions
in 1998 and 1999. In conjunction with such acquisitions, liabilities were
assumed as follows:
1998 1999
----------- -----------
Fair value of assets acquired $1,010,000 $5,670,000
Cash proceeds 50,000 1,857,000
Fair value of issued common stock 700,000 2,765,000
----------- -----------
Liabilities assumed $ 260,000 $1,048,000
=========== ===========
Cash paid for interest and income taxes are as follows:
1998 1999
----------- -----------
Interest $109,000 $38,000
Income Taxes 197,000 50,000
=========== ===========
During 1999, the Company converted $600,000 of debt and $310,000 of deferred
compensation liabilities into common stock. In 1999, the carrying values of IS
acquisitions were increased and a liability established by $546,000 to reflect
common stock likely to be issued. In 1998, the Company acquired $32,000, of
equipment subject to capital lease obligations. In 1998, a demand note of
$150,000 was settled through the issuance of 25,000 shares of Company common
stock.
NOTE 13 - MAJOR CLIENTS OF THE COMPANY
One client accounted for 23% and 15% of the Company's revenues for the years
ended December 31, 1998 and 1999, respectively. One consulting project provided
to the same client accounted for 18% of the Company's revenues for the year
ended December 31, 1998.
NOTE 14 - SEGMENT INFORMATION
The Company operates in two segments: Professional Services and Web-Site Hosting
("Professional Services") and IS. The Professional Services segment consists
primarily of custom programming for Intranet and Internet applications
(including distance learning and e-commerce), web-site development and
maintenance, programming and hosting services. Professional Services also
provides full service network solutions including planning, consulting,
installation and maintenance. The IS Segment provides dedicated lease line,
frame relay and digital subscriber line communications, dial-up access and mail
services. 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, 1998 and 1999.
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.
<PAGE>
Segment information as of and for the years ended December 31, 1998 and 1999 are
as follows (in thousands):
Professional
December 31, 1998 Services IS Corporate Total
- - --------------------------------------------------------------------------------
Revenues $13,912 $1,301 $- $15,213
Cost of services 8,907 1,300 - 10,207
- - --------------------------------------------------------------------------------
Gross profit 5,005 1 - 5,006
Selling, general & administrative 4,146 251 508 4,905
Amortization of intangible assets 154 19 - 173
Non-cash compensation expense - - 290 290
Merger expenses - - 109 109
- - --------------------------------------------------------------------------------
Operating income (loss) 705 (269) (907) (471)
Interest expense - - (129) (129)
Interest income - - 185 185
Other income (expense), net - - 75 75
Income tax (provision) benefit (332) 108 198 (26)
- - --------------------------------------------------------------------------------
Net loss $373 $(161) $(578) $(366)
================================================================================
Allocated assets $3,532 $84 $7,560 $11,176
================================================================================
Expenditures for allocated assets $244 $336 $171 $751
================================================================================
Professional
December 31, 1999 Services IS Corporate Total
- - --------------------------------------------------------------------------------
Revenues $14,706 $4,068 $- $18,774
Cost of services 9,676 3,172 155 13,003
- - --------------------------------------------------------------------------------
Gross profit 5,030 896 (155) 5,771
Selling, general & administrative 5,328 1,543 3,674 10,545
Amortization of intangible assets 218 296 - 514
Non-cash compensation expense 197 - 135 332
Merger expenses - - 232 232
- - --------------------------------------------------------------------------------
Operating income (loss) (713) (943) (4,196) (5,852)
Interest expense - - (81) (81)
Interest income - - 116 116
Loss on disposal of assets - (350) - (350)
Other income (expense), net - - (26) (26)
Income tax (provision) benefit (45) - - (45)
- - --------------------------------------------------------------------------------
Net income (loss) $(758) $(1,293) $(4,187) $(6,238)
================================================================================
Allocated assets $4,512 $4,301 $4,662 $13,475
================================================================================
Expenditures for allocated assets $ - $ - $277 $277
================================================================================
NOTE 15 - 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.
<PAGE>
In the fourth quarter of 1999, the Company recognized, as changes in estimates,
the pre tax effects of (i) increasing the allowance for doubtful accounts by
$100,000, and (ii) increased employee benefit expenses of $88,000. The Company
also recognized a loss of $350,000 on the sale of certain IS businesses and
interest expense of $43,000 on warrants granted on the convertible debt (see
Note 6).
NOTE 16- SUBSEQUENT EVENT
On March 1, 2000 the Company signed an agreement to purchase the outstanding
stock of digital fusion, inc. ("digital fusion") in return for 975,000 shares
(50,000 shares of which will be reserved upon settlement of certain matters) and
$500,000 of a subordinated note (accruing 6% per annum) and assumption of debt
totaling $4.2 million. digital fusion is a Tampa, Florida based provider of
e-business professional services to a wide array of commercial businesses.
Certain digital fusion officers and employees will also receive non qualified
options to purchase 470,000 shares of Company common stock; such options will
vest over a period of 3 years. Of the assumed $4.2 million of debt, $3.3 million
is secured and payable in 2000.
The following summarized, unaudited pro forma information for the year ended
December 31, 1999 assumes that the acquisition of Digital Fusion had occurred on
January 1, 1999:
Unaudited
------------
Net revenues $30,874,000
Operating loss (8,553,000)
Net loss (9,226,000)
Loss per share:
Basic and diluted $ (1.75)
============
The pro forma operating results reflect estimated pro forma adjustments for the
amortization of intangibles arising from the acquisition ($3,167,000) reduced
interest expense from the conversion of digital fusion debt prior to closing
($203,000) and the pro forma operating results of a digital fusion 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 of future results of
the combined companies.
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of March 1, 2000, is made by and between IBS
Interactive, Inc., a Delaware corporation (the "Company") with its corporate
offices at 2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927, and
Sean D. Mann (the "Executive"), residing at 33 Solana Road, Ponte Vedra Beach,
Florida 32082.
RECITALS
WHEREAS, Company desires to employ Executive and Executive desires to be
employed by the Company;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT; TERM.
(A) EMPLOYMENT Subject to the terms and conditions set forth herein, the
Company agrees to employ and Executive agrees to serve as the
Company's Executive Vice President to perform such services, including
but not limited to negotiating acquisitions, and to have such powers
and authority as are specified in the Company's Restated By-Laws, as
in effect from time to time, or as may be assigned to the Executive by
the Company's Board of Directors, PROVIDED, THAT, the same is not
inconsistent with such position. Executive agrees that he will use his
full business time to promote the interests of the Company and its
affiliates and to fulfill his duties hereunder. Nothing in this
Agreement shall however preclude Executive from engaging, so long as,
in the reasonable determination of the Company's Board of Directors,
such activities do not interfere with the execution of his duties and
responsibilities hereunder, in charitable and community affairs, from
managing any passive investment made by Executive in publicly traded
equity securities or other property (PROVIDED, THAT, no such
investment may exceed 5% of the equity of any entity, without the
prior approval of the Company's Board of Directors) or from serving,
subject to the prior approval of the Company's Board of Directors, as
a member of boards of directors or as a trustee of any other
corporation, association or entity (PROVIDED, THAT, no such prior
approval shall be required for any such boards on which Executive
shall currently serve). For purposes of the preceding sentence, any
approval of the Company's Board of Directors required herein shall not
be unreasonably withheld.
(B) TERM. Unless sooner terminated pursuant to Section 3, the term of
Executive's employment pursuant to this Agreement shall commence on
the date set forth above (the "Effective Date") and shall continue
thereafter for a period of three years.
<PAGE>
2. COMPENSATION. During the employment term under this Agreement, the Company
shall compensate Executive as follows:
(A) BASE SALARY. Subject to adjustment as set forth below, the Company
will pay Executive an annual salary at a rate of Seventy-Five Thousand
Dollars ($75,000) per year, payable in substantially equal monthly
installments, or more frequently in accordance with Company's usual
payroll policy. On each anniversary of the Effective Date, Executive's
then existing base salary will automatically increase at the rate of
20% per year and in the discretion of the Compensation Committee (or
Board of Directors, if at the time there shall be no Compensation
Committee) at such additional rate or amounts as the Compensation
Committee shall deem appropriate. Any such increases granted in the
discretion of the Compensation Committee will be retroactive to the
beginning of the then current fiscal year. The Company will review
annually Executive's performance and compensation.
(B) PERFORMANCE BONUS. Executive shall be entitled to such bonus
compensation as the Compensation Committee deems appropriate. Such
bonus compensation shall be based, in part, on the achievement of
performance criteria established by the Compensation Committee,
including criteria relating to the profitability of the Company.
(C) PARTICIPATION IN EMPLOYEE STOCK OWNERSHIP PLAN. During the period of
Executive's employment, Executive will be entitled to participate in
the Company's 2000 Stock Option Plan (or such other successor plan),
as the Board of Directors or Compensation Committee, in its sole
discretion, may determine.
(D) BENEFITS. Executive will be eligible to participate in all benefit
programs of the Company which are in effect for its senior executive
personnel and, to the extent available to executive personnel, its
employees generally from time to time.
(E) VACATION. Executive will be entitled each year to vacation for a
period or periods not inconsistent with the normal policy of Company
in effect from time to time, but in any event not less than twenty
vacation days each year and to such holidays as may be customarily
afforded to its employees by the Company, during which periods
Executive's compensation shall be paid in full.
2
<PAGE>
(F) REIMBURSEMENT OF EXPENSES.
(i) All reasonable travel and entertainment expenses incurred by
Executive in the course of fulfilling this Agreement or otherwise
promoting the Company and its business shall be reimbursed by the
Company. Such reimbursement shall be made to Executive promptly
following submission to the Company of receipts and other
documentation of such expenses reasonably satisfactory to the
Company.
(ii) In addition to the expenses reimbursable pursuant to paragraph
(i) above, the Company shall also pay to Executive a monthly
allowance of $600.00 for automobile expenses, PROVIDED, HOWEVER,
that the Company shall be entitled to withhold from such
allowance, any amounts required to be withheld by applicable
federal, state or local tax laws.
3. TERMINATION.
(A) DEATH AND LEGAL INCAPACITY. Executive's employment hereunder shall
terminate upon Executive's death or legal incapacity.
(B) DISABILITY. Executive's employment hereunder may be terminated by the
Company in the event of Executive's physical or mental incapacity or
inability to perform his duties as contemplated under this Agreement
for a period of at least one hundred twenty (120) consecutive days.
Until such termination occurs, Executive shall continue to receive his
base salary as then in effect, provided, however, that such salary
shall be reduced to the extent of any short-term disability benefits
provided to Executive under a short-term disability plan sponsored by
the Company. The determination of disability shall be made by an
independent physician selected by the Compensation Committee and
approved by Executive or his legal representative.
(C) FOR CAUSE. Executive's employment hereunder may be terminated after
the expiration of the respective time periods set forth below by the
Company for cause ("Cause") upon the occurrence of any of the
following events:
(i) Executive's intentional breach of any provision hereof, which
breach shall not have been cured within 20 days after written
notice thereof from the Company (or cure commenced within said 20
day period if said breach is not curable within said 20 day
period) which breach has a material adverse effect on the
Company;
(ii) Executive's intentional violation of any other duty or obligation
owed by Executive to the Company which violation shall not have
been cured within 20 days after written notice thereof from the
Company (or cure commenced within said 20 day period if said
violation is not curable within said 20 day period) which
violation has a material adverse effect on the Company.
3
<PAGE>
(iii)Executive is convicted or pleads guilty or nolo contendre to any
felony (other than traffic violation) or any crime involving
fraud, dishonesty or misappropriation;
(iv) Executive willfully fails to perform and discharge his duties
hereunder in a competent manner and such failure shall continue
for a period in excess of 20 days after written notice thereof
specifying the failures is given by the Company to Executive.
(v) Executive willfully engages in misconduct that causes material
harm to the Company and such misconduct shall continue for a
period in excess of 20 days after written notice thereof
specifying such misconduct and the resulting harm is given by the
Company to Executive.
(D) CONSENT OF DIRECTORS. Termination of this Agreement by the Company for
reasons other than: (i) for Cause or (ii) Executive's death, legal
capacity or disability must be approved by a vote of 2/3 of the
members of the Company's Board of Directors.
(E) FOR GOOD REASON. Executive may terminate his employment hereunder for
good reason ("Good Reason") if such termination occurs within six
months after:
(i) The Company assigns to Executive any duties or responsibilities
inconsistent with Section 1, which assignment is not withdrawn
within 20 business days after Executive's notice to the Company
of his reasonable objection thereto;
(ii) Executive is relocated more than 40 miles from Jacksonville,
Florida without his prior written consent; or
(iii)The Company breaches any material provision of this Agreement
and such breach and the effects thereof are not remedied by the
Company within 20 business days after Executive's notice to the
Company of the existence of such breach.
(F) EFFECT OF TERMINATION.
(i) If the Company terminates Executive's employment for reasons
other than for Cause, or Executive's death, legal incapacity or
disability, or if Executive terminates this Agreement for Good
Reason, the obligations of Executive under this Agreement will
terminate except that the covenants contained in Section 4(a)
shall continue indefinitely, and the obligations in this section
shall continue pursuant to their terms. In such event, for a
period of two (2) years after the date of Executive's
termination, the Company shall pay Executive, in accordance with
customary payroll procedures, Executive's base salary as then in
effect and, in addition, any Performance Bonus that Executive
4
<PAGE>
would have earned in the year he was terminated, prorated as of
the date of termination. For such two-year period, the Company
shall continue to provide medical coverage to Executive under
substantially the same terms as were in effect on the date
Executive's employment terminated under this provision.
Additionally, any and all options, warrants or other securities
awarded to Executive pursuant to the Company's 2000 Stock Option
Plan or any other similar plan or other written option agreement
shall, as of the date of Executive's termination, immediately
vest and become exercisable and all such options, warrants or
other securities shall remain exercisable by Executive for the
duration of the period during which the options, warrants or
other securities would have remained exercisable if Executive had
remained employed by the Company. The amounts paid to Executive
under this paragraph shall not be affected in any way by
Executive's acceptance of other employment during the two-year
period described above. The provisions set forth herein this
Paragraph 3(f)(i) shall supercede the provisions of Paragraph 3.4
of the Option Agreement dated as of February 10, 2000 between the
Executive and the Company.
(ii) Except as otherwise provided herein, if Executive terminates his
employment for any reason other than Good Reason or Executive's
employment is terminated for Cause, the obligations of Executive
and the Company under this Agreement will terminate except that
the covenants of Executive contained in Section 4(a) shall
continue indefinitely and the covenants of Executive contained in
Section 4(d) shall continue until the first anniversary of the
date of Executive's termination. In such event, Executive shall
be entitled to receive only the compensation hereunder accrued
and unpaid as of the date of Executive's termination.
(iii)If Executive's employment terminates due to a disability, as
defined in Section 3(b), the obligations of Executive under this
Agreement will terminated except that the covenants in Section
4(a) shall continue indefinitely. In such event, for a period of
one year after the date of Executive's termination, the Company
shall pay Executive, in accordance with customary payroll
procedures, Executive's base salary as then in effect, provided,
however, that the payment of such salary shall be reduced to the
extent of any long-term disability benefits provided to Executive
under a long-term disability plan sponsored by the Company. The
vesting and exercise of any and all options, warrants or other
securities awarded to Executive pursuant to the Company's 2000
Stock Option Plan or any other similar plan shall be governed by
the terms of such plan, or if awarded pursuant to a written
option agreement, then the terms of such agreement. The amounts
payable to Executive under this paragraph shall not be affected
in any way by Executive's acceptance of other employment during
the one-year period described above.
5
<PAGE>
(iv) No amount payable to Executive pursuant to this Agreement shall
be subject to mitigation due to Executive's acceptance or
availability of other employment.
4. RESTRICTIVE COVENANTS; NON-COMPETITION.
Executive in consideration of his employment hereunder agrees as follows:
(a) Except as otherwise permitted hereby, or by the Company's Board of
Directors, Executive shall treat as confidential and not communicate
or divulge to any other person or entity any information related to
the Company or its affiliates or the business, affairs, prospects,
financial condition or ownership of the Company or any of its
affiliates (the "Information") acquired by Executive from the Company
or the Company's other employees or agents, except (i) as may be
required to comply with legal proceedings (PROVIDED, THAT, prior to
such disclosure in legal proceedings Executive notifies the Company
and reasonably cooperates with any efforts by the Company to limit the
scope of such disclosure or to obtain confidential treatment thereof
by the court or tribunal seeking such disclosure) or (ii) while
employed by the Company, as Executive reasonably believes necessary in
performing his duties. Executive shall use the Information only in
connection with the performance of his duties hereunder, and not
otherwise for his benefit or the benefit of any other person or
entity. For the purposes of this Agreement, Information shall include,
but not be limited to, any confidential information concerning
clients, subscribers, marketing, business and operational methods of
the Company or its affiliates and its and its affiliates' clients,
subscribers, contracts, financial or other data, technical data or any
other confidential or proprietary information possessed, owned or used
by the Company. Excluded from Executive's obligations of
confidentiality is any part of such Information that: (i) was in the
public domain prior to the date of commencement of Executive's
employment with the Company or (ii) enters the public domain other
than as a result of Executive's breach of this covenant. This Section
(4)(a) shall survive the expiration or termination of the other
provisions of this Agreement.
(b) Executive shall fully disclose to the Company all discoveries,
concepts, and ideas, whether or not patentable, including, but not
limited to, processes, methods, formulas, and techniques, as well as
improvements thereof or know-how related thereto (collectively,
"Inventions") concerning or relating to the business conducted by the
Company and concerning any present or prospective activities of the
Company which are published, made or conceived by Executive, in whole
or in part, during Executive's employment with the Company.
(c) Executive shall make applications in due form for United States
letters patent and foreign letters patent on such Inventions at the
request of the Company and at its expense, but without additional
compensation to Executive. Executive further agrees that any and all
such Inventions shall be the absolute property of Company or its
designees. Executive shall assign to the Company all of Executive's
right, title and interest in any and all Inventions, execute any and
all instruments and do any and all acts necessary or desirable in
6
<PAGE>
connection with any such application for letters patent or to
establish and perfect in the Company the entire right, title, and
interest in such Inventions, patent applications, or patents, and
shall execute any instrument necessary or desirable in connection with
any continuations, renewals, or reissues thereof or in the conduct of
any related proceedings or litigation.
(d) During Executive's employment with the Company and for a period of one
(1) year after the earlier of the expiration date of this Agreement or
the termination of Executive's employment hereunder by the Company for
Cause or by Executive (other than for Good Reason) or subsequent to a
Change in Control, as hereinafter defined:
(i) Executive will not, in any geographical area within which the
Company is, at the time of Executive's termination or during the
term of Executive's employment, marketing its products or
services or conducting other business activities, directly or
indirectly, engage in, own or control an interest in (except as a
passive investor in publicly held companies and except for
investments held at the date hereof) or act as an officer,
director, or employee of, or consultant or adviser to, any firm,
corporation or institution (except as provided in Section 1(a)
hereof) directly or indirectly that is in competition with the
Company at the time of Executive's termination or during the term
of Executive's employment with the Company; and
(ii) Executive will not recruit or hire any employee of the Company,
or otherwise induce such employee to leave the employment of the
Company, to become an employee of or otherwise be associated with
Executive or any company or business with which Executive is or
may become associated.
7
<PAGE>
5. CHANGE OF CONTROL.
In the event of a Change of Control, the following provisions shall apply:
(a) If, immediately upon a Change of Control or at any time within one (1)
year thereafter, Executive is no longer employed by the Company (or
any entity to which this Agreement may be assigned in connection with
such Change of Control) for any reason other than Executive's death,
legal incapacity or disability, Executive shall be entitled to
receive, within 10 days after the termination date, a lump sum payment
("Change of Control Payment") equal to two times the amount of
Executive's annual base salary then in effect plus any other amounts
accrued and unpaid as of the date of termination (i.e., earned
bonuses, car allowance, unreimbursed business expenses, and any other
amount due to Executive under employee benefit or fringe benefit plans
of the Company). Notwithstanding the foregoing, if Executive shall so
request, any Change of Control Payment may be paid to Executive in
substantially equal monthly installments, or more frequently in
accordance with the Company's usual payroll policy. Additionally, any
and all options, warrants or other securities awarded to Executive
pursuant to the Company's 2000 Stock Option Plan or any other similar
plan shall, as of the date of Executive's termination, immediately
vest and become exercisable by Executive for the duration of the
period during which the options, warrants or other securities would
have remained exercisable if Executive had remained employed by the
Company.
(b) For purposes of this Section 5, a "Change of Control" shall be deemed
to occur upon any of the following events:
(1) Any "person" or "group" within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act (i) becomes the "beneficial owner,"
as defined in Rule 13d-3 under the Exchange Act, of 50% or more
of the combined voting power of the Company's then outstanding
securities, otherwise than through a transaction or series of
related transactions arranged by, or consummated with the prior
approval of, the Board or (ii) acquires by proxy or otherwise the
right to vote 50% or more of the then outstanding voting
securities of the Company, otherwise than through an arrangement
or arrangements consummated with the prior approval of the Board,
for the election of directors, for any merger or consolidation of
the Company or for any other matter or question.
(2) During any period of 12 consecutive months (not including any
period prior to the adoption of this Section), Present Directors
and/or New Directors cease for any reason to constitute a
majority of the Board. For purposes of the preceding sentence,
"Present Directors" shall mean individuals who at the beginning
8
<PAGE>
of such consecutive 12-month period were members of the Board,
and "New Directors" shall mean any director whose election by the
Board or whose nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the
directors then still in office who were Present Directors or New
Directors.
(3) Consummation of (i) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation
or pursuant to which shares of Stock would be converted into
cash, securities or other property, other than a merger of the
Company in which the holders of Stock immediately prior to the
merger have the same proportion and ownership of common stock of
the surviving corporation immediately after the merger or (ii)
any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially
all, of the assets of the Company; PROVIDED, THAT, the
divestiture of less than substantially all of the assets of the
Company in one transaction or a series of related transactions,
whether effected by sale, lease, exchange, spin-off sale of the
stock or merger of a subsidiary or otherwise, shall not
constitute a Change in Control.
For purposes of this Section 5(b), the rules of Section 318(a) of the Code
and the regulations issued thereunder shall be used to determine stock
ownership.
(C) EXCISE TAX GROSS-UP. If Executive becomes entitled to one or more
payments (with a "payment" including the vesting of restricted
stock, a stock option, or other non-cash benefit or property),
whether pursuant to the terms of this Agreement or any other plan
or agreement with the Company or any affiliated company
(collectively, "Change of Control Payments"), which are or become
subject to the tax ("Excise Tax") imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), the
Company shall pay to Executive at the time specified below such
amount (the "Gross-up Payment") as may be necessary to place
Executive in the same after-tax position as if no portion of the
Change of Control Payments and any amounts paid to Executive
pursuant to this paragraph 5(c) had been subject to the Excise
Tax. The Gross-up Payment shall include, without limitation,
reimbursement for any penalties and interest that may accrue in
respect of such Excise Tax. For purposes of determining the
amount of the Gross-up Payment, Executive shall be deemed: (A) to
pay federal income taxes at the highest marginal rate of federal
income taxation for the year in which the Gross-up Payment is to
be made; and (B) to pay any applicable state and local income
taxes at the highest marginal rate of taxation for the calendar
year in which the Gross-up Payment is to be made, net of the
maximum reduction in federal income taxes which could be obtained
from deduction of such state and local taxes if paid in such
9
<PAGE>
year. If the Excise Tax is subsequently determined to be less
than the amount taken into account hereunder at the time the
Gross-up Payment is made, Executive shall repay to the Company at
the time that the amount of such reduction in Excise Tax is
finally determined (but, if previously paid to the taxing
authorities, not prior to the time the amount of such reduction
is refunded to Executive or otherwise realized as a benefit by
Executive) the portion of the Gross-up Payment that would not
have been paid if such Excise Tax had been used in initially
calculating the Gross-up Payment, plus interest on the amount of
such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder at the time the
Gross-up Payment is made, the Company shall make an additional
Gross-up Payment in respect of such excess (plus any interest and
penalties payable with respect to such excess) at the time that
the amount of such excess is finally determined.
The Gross-up Payment provided for above shall be paid on the 30th
day (or such earlier date as the Excise Tax becomes due and
payable to the taxing authorities) after it has been determined
that the Change of Control Payments (or any portion thereof) are
subject to the Excise Tax; provided, HOWEVER, that if the amount
of such Gross-up Payment or portion thereof cannot be finally
determined on or before such day, the Company shall pay to
Executive on such day an estimate, as determined by counsel or
auditors selected by the Company and reasonably acceptable to
Executive, of the minimum amount of such payments. The Company
shall pay to Executive the remainder of such payments (together
with interest at the rate provided in Section 1274(b)(2)(B) of
the Code) as soon as the amount thereof can be determined. In the
event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess
shall constitute a loan by the Company to Executive, payable on
the fifth day after demand by the Company (together with interest
at the rate provided in Section 1274(b)(2)(B) of the Code). The
Company shall have the right to control all proceedings with the
Internal Revenue Service that may arise in connection with the
determination and assessment of any Excise Tax and, at its sole
option, the Company may pursue or forego any and all
administrative appeals, proceedings, hearings, and conferences
with any taxing authority in respect of such Excise Tax
(including any interest or penalties thereon); PROVIDED, HOWEVER,
that the Company's control over any such proceedings shall be
limited to issues with respect to which a Gross-up Payment would
be payable hereunder, and Executive shall be entitled to settle
or contest any other issue raised by the Internal Revenue Service
or any other taxing authority. Executive shall cooperate with the
Company in any proceedings relating to the determination and
assessment of any Excise Tax and shall not take any position or
action that would materially increase the amount of any Gross-up
Payment hereunder.
6. NO VIOLATION.
10
<PAGE>
Executive warrants that the execution and delivery of this Agreement and
the performance of his duties hereunder will not violate the terms of any other
agreement to which he is a party or by which he is bound. Additionally,
Executive warrants that Executive has not brought and will not bring to the
Company or use in the performance of Executive's responsibilities at the Company
any materials or documents of a former employer that are not generally available
to the public, unless Executive has obtained express written authorization from
the former employer for their possession and use. Executive represents that he
is not and, since the commencement of Executive's employment with the Company
has not been a party to any employment, proprietary information,
confidentiality, or noncompetition agreement with any of Executive's former
employers which remains in effect as the date hereof. The warranties set forth
in this Section 6 shall survive the expiration or termination of the other
provisions of this Agreement.
7. BREACH BY EXECUTIVE.
Both parties recognize that the services to be rendered under this
Agreement by Executive are special, unique and extraordinary in character, and
that in the event of the breach by Executive of the terms and conditions of this
Agreement to be performed by him or in the event Executive performs services for
any person, firm or corporation engaged in a competing line of business with
Company, the Company shall be entitled, if it so elects, to institute and
prosecute proceedings in any court of competent jurisdiction, whether in law or
in equity, to, by way of illustration and not limitation, obtain damages for any
breach of this Agreement, or to enforce the specific performance thereof by
Executive, or to enjoin Executive from competing with the Company or, performing
services for himself or any such other person, firm or corporation. The Company
may obtain an injunction restraining any such breach by Executive and no bond or
other security shall be required in connection therewith. The Company and
Executive each consent to the jurisdiction of United States Federal District
Court for the Northern District of Florida.
8. MISCELLANEOUS.
(a) This Agreement shall be binding upon and inure to the benefit of the
Company, its successors, and assigns and may not be assigned by
Executive.
(b) This Agreement contains the entire agreement of the parties hereto and
supersedes all prior or concurrent agreements, whether oral or
written, relating to the subject matter hereof. This Agreement may be
amended only by a writing signed by the party against whom enforcement
is sought.
(C) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW JERSEY WITHOUT REGARD TO ITS CONFLICTS OF
LAWS, RULES OR PRINCIPLES.
(d) Any notices or other communications required or permitted hereunder
shall be in writing and shall be deemed effective when delivered in
person or, if mailed, on the date of deposit in the mails, postage
11
<PAGE>
prepaid, to the other party at the respective address of such party
set forth herein or to such other address as shall have been specified
in writing by either party to the other in accordance herewith.
(e) The provisions of Sections 4(a), 4(d) and 6 and the other provisions
of this Agreement which by their terms contemplate survival of the
termination of this Agreement, shall survive termination of this
Agreement and be deemed to be independent covenants.
(f) If any term or provision of this Agreement or its application to any
person or circumstance is to any extent invalid or unenforceable, the
remainder of this Agreement, or the application of such term or
provision to persons or circumstances other than those as to which it
is held invalid or unenforceable, shall not be affected thereby, and
each term and provision shall be valid and enforced to the fullest
extent permitted by law.
(g) No delay or omission to exercise any right, power or remedy accruing
to any party hereto shall impair any such right, power or remedy or
shall be construed to be a waiver of or an acquiescence to any breach
hereof. No waiver of any breach of this Agreement shall be deemed to
be a waiver of any other breach of this Agreement theretofore or
thereafter occurring. Any waiver of any provision hereof shall be
effective only to the extent specifically set forth in the applicable
writing. All remedies afforded under this Agreement to any party
hereto, by law or otherwise, shall be cumulative and not alternative
and shall not preclude assertion by any party hereto of any other
rights or the seeking of any other rights or remedies against any
other party hereto.
(h) It is the intent of the Company that Executive not be required to
incur any legal fees or disbursements associated with (i) the
interpretation of any provision in, or obtaining of any right or
benefit under this Agreement, or (ii) the enforcement of his rights
under this Agreement, including, without limitation by litigation or
other legal action, because the cost and expense thereof would
substantially detract from the benefits to be extended to Executive
hereunder. Accordingly, the Company irrevocably authorizes Executive
from time to time to retain counsel of his choice, at the expense of
the Company as hereafter provided, to represent Executive in
connection with the interpretation and/or enforcement of this
Agreement, including without limitation the initiation or defense of
any litigation or other legal action, whether by or against the
Company, or any Director, officer, stockholder, or any other person
affiliated with the Company in any jurisdiction. The Company shall pay
or cause to be paid and shall be solely responsible for any and all
attorneys' and related fees and expenses incurred by Executive under
this Section 8(h).
9. INDEMNIFICATION.
The Company agrees to indemnify Executive to the fullest extent permitted
by applicable law, as such law may be hereafter amended, modified or
supplemented and to the fullest extent permitted by each of the Company's
12
<PAGE>
Restated Certificate of Incorporation and the Company's Restated By-Laws, as
from time to time amended, modified or supplemented. The Company further agrees
that Executive is entitled to the benefits of any directors and officers
liability insurance policy, in accordance with the terms and conditions of that
policy, if such a policy is maintained by the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first stated above.
COMPANY
IBS INTERACTIVE, INC.
BY: /S/ NICHOLAS R. LOGLISCI, JR.
---------------------------------
NICHOLAS R. LOGLISCI, JR.
PRESIDENT AND CEO
EXECUTIVE
/S/ SEAN D. MANN
---------------------------------
SEAN D. MANN
13
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of March 1, 2000, is made by and between IBS
Interactive, Inc., a Delaware corporation (the "Company") with its corporate
offices at 2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927, and
Roy E. Crippen, III (the "Executive"), residing at 908 Anchorage Road, Tampa,
Florida 33602.
RECITALS
WHEREAS, Company desires to employ Executive and Executive desires to be
employed by the Company;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT; TERM.
(A) EMPLOYMENT Subject to the terms and conditions set forth herein, the
Company agrees to employ and Executive agrees to serve as the
Company's Chief Operating Officer to perform such services, and to
have such powers and authority as are specified in the Company's
Restated By-Laws, as in effect from time to time, or as may be
assigned to the Executive by the Company's Board of Directors,
PROVIDED, THAT, the same is not inconsistent with such position.
Executive agrees that he will use his full business time to promote
the interests of the Company and its affiliates and to fulfill his
duties hereunder. Nothing in this Agreement shall however preclude
Executive from engaging, so long as, in the reasonable determination
of the Company's Board of Directors, such activities do not interfere
with the execution of his duties and responsibilities hereunder, in
charitable and community affairs, from managing any passive investment
made by Executive in publicly traded equity securities or other
property (PROVIDED, THAT, no such investment may exceed 5% of the
equity of any entity, without the prior approval of the Company's
Board of Directors) or from serving, subject to the prior approval of
the Company's Board of Directors, as a member of boards of directors
or as a trustee of any other corporation, association or entity
(PROVIDED, THAT, no such prior approval shall be required for any such
boards on which Executive shall currently serve). For purposes of the
preceding sentence, any approval of the Company's Board of Directors
required herein shall not be unreasonably withheld.
(B) TERM. Unless sooner terminated pursuant to Section 3, the term of
Executive's employment pursuant to this Agreement shall commence on
the date set forth above (the "Effective Date") and shall continue
thereafter for a period of three years.
<PAGE>
2. COMPENSATION. During the employment term under this Agreement, the Company
shall compensate Executive as follows:
(A) BASE SALARY. Subject to adjustment as set forth below, the Company
will pay Executive an annual salary at a rate of One Hundred Thousand
Dollars ($100,000) per year, payable in substantially equal monthly
installments, or more frequently in accordance with Company's usual
payroll policy. On each anniversary of the Effective Date, Executive's
then existing base salary will automatically increase at the rate of
20% per year and in the discretion of the Compensation Committee (or
Board of Directors, if at the time there shall be no Compensation
Committee) at such additional rate or amounts as the Compensation
Committee shall deem appropriate. Any such increases granted in the
discretion of the Compensation Committee will be retroactive to the
beginning of the then current fiscal year. The Company will review
annually Executive's performance and compensation.
(B) PERFORMANCE BONUS. Executive shall be entitled to such bonus
compensation as the Compensation Committee deems appropriate. Such
bonus compensation shall be based, in part, on the achievement of
performance criteria established by the Compensation Committee,
including criteria relating to the profitability of the Company.
(C) PARTICIPATION IN EMPLOYEE STOCK OWNERSHIP PLAN. During the period of
Executive's employment, Executive will be entitled to participate in
the Company's 2000 Stock Option Plan (or such other successor plan),
as the Board of Directors or Compensation Committee, in its sole
discretion, may determine.
(D) BENEFITS. Executive will be eligible to participate in all benefit
programs of the Company which are in effect for its senior executive
personnel and, to the extent available to executive personnel, its
employees generally from time to time.
(E) VACATION. Executive will be entitled each year to vacation for a
period or periods not inconsistent with the normal policy of Company
in effect from time to time, but in any event not less than twenty
vacation days each year and to such holidays as may be customarily
afforded to its employees by the Company, during which periods
Executive's compensation shall be paid in full.
(F) REIMBURSEMENT OF EXPENSES.
(i) All reasonable travel and entertainment expenses incurred by
Executive in the course of fulfilling this Agreement or otherwise
promoting the Company and its business shall be reimbursed by the
Company. Such reimbursement shall be made to Executive promptly
following submission to the Company of receipts and other
documentation of such expenses reasonably satisfactory to the
Company.
(ii) In addition to the expenses reimbursable pursuant to paragraph
(i) above, the Company shall also pay to Executive a monthly
allowance of $600.00 for automobile expenses, PROVIDED, HOWEVER,
2
<PAGE>
that the Company shall be entitled to withhold from such
allowance, any amounts required to be withheld by applicable
federal, state or local tax laws.
3. TERMINATION.
(A) DEATH AND LEGAL INCAPACITY. Executive's employment hereunder shall
terminate upon Executive's death or legal incapacity.
(B) DISABILITY. Executive's employment hereunder may be terminated by the
Company in the event of Executive's physical or mental incapacity or
inability to perform his duties as contemplated under this Agreement
for a period of at least one hundred twenty (120) consecutive days.
Until such termination occurs, Executive shall continue to receive his
base salary as then in effect, provided, however, that such salary
shall be reduced to the extent of any short-term disability benefits
provided to Executive under a short-term disability plan sponsored by
the Company. The determination of disability shall be made by an
independent physician selected by the Compensation Committee and
approved by Executive or his legal representative.
(C) FOR CAUSE. Executive's employment hereunder may be terminated after
the expiration of the respective time periods set forth below by the
Company for cause ("Cause") upon the occurrence of any of the
following events:
(i) Executive's intentional breach of any provision hereof, which
breach shall not have been cured within 20 days after written
notice thereof from the Company (or cure commenced within said 20
day period if said breach is not curable within said 20 day
period) which breach has a material adverse effect on the
Company;
(ii) Executive's intentional violation of any other duty or obligation
owed by Executive to the Company which violation shall not have
been cured within 20 days after written notice thereof from the
Company (or cure commenced within said 20 day period if said
violation is not curable within said 20 day period) which
violation has a material adverse effect on the Company.
(iii)Executive is convicted or pleads guilty or nolo contendre to any
felony (other than traffic violation) or any crime involving
fraud, dishonesty or misappropriation;
(iv) Executive willfully fails to perform and discharge his duties
hereunder in a competent manner and such failure shall continue
for a period in excess of 20 days after written notice thereof
specifying the failures is given by the Company to Executive.
3
<PAGE>
(v) Executive willfully engages in misconduct that causes material
harm to the Company and such misconduct shall continue for a
period in excess of 20 days after written notice thereof
specifying such misconduct and the resulting harm is given by the
Company to Executive.
(D) CONSENT OF DIRECTORS. Termination of this Agreement by the Company for
reasons other than: (i) for Cause or (ii) Executive's death, legal
capacity or disability must be approved by a vote of 2/3 of the
members of the Company's Board of Directors.
(E) FOR GOOD REASON. Executive may terminate his employment hereunder for
good reason ("Good Reason") if such termination occurs within six
months after:
(i) The Company assigns to Executive any duties or responsibilities
inconsistent with Section 1, which assignment is not withdrawn
within 20 business days after Executive's notice to the Company
of his reasonable objection thereto;
(ii) Executive is relocated more than 40 miles from Tampa, Florida
without his prior written consent; or
(iii)The Company breaches any material provision of this Agreement
and such breach and the effects thereof are not remedied by the
Company within 20 business days after Executive's notice to the
Company of the existence of such breach.
(F) EFFECT OF TERMINATION.
(i) If the Company terminates Executive's employment for reasons other
than for Cause, or Executive's death, legal incapacity or disability,
or if Executive terminates this Agreement for Good Reason, the
obligations of Executive under this Agreement will terminate except
that the covenants contained in Section 4(a) shall continue
indefinitely, and the obligations in this section shall continue
pursuant to their terms. In such event, for a period of two (2) years
after the date of Executive's termination, the Company shall pay
Executive, in accordance with customary payroll procedures,
Executive's base salary as then in effect and, in addition, any
Performance Bonus that Executive would have earned in the year he was
terminated, prorated as of the date of termination. For such two-year
period, the Company shall continue to provide medical coverage to
Executive under substantially the same terms as were in effect on the
date Executive's employment terminated under this provision.
Additionally, any and all options, warrants or other securities
awarded to Executive pursuant to the Company's 2000 Stock Option Plan
4
<PAGE>
or any other similar plan or other written option agreement shall, as
of the date of Executive's termination, immediately vest and become
exercisable and all such options, warrants or other securities shall
remain exercisable by Executive for the duration of the period during
which the options, warrants or other securities would have remained
exercisable if Executive had remained employed by the Company. The
amounts paid to Executive under this paragraph shall not be affected
in any way by Executive's acceptance of other employment during the
two-year period described above. The provisions set forth herein this
Paragraph 3(f)(i) shall supercede the provisions of Paragraph 3.4 of
the Option Agreement dated as of February 10, 2000 between the
Executive and the Company.
(ii) Except as otherwise provided herein, if Executive terminates his
employment for any reason other than Good Reason or Executive's
employment is terminated for Cause, the obligations of Executive and
the Company under this Agreement will terminate except that the
covenants of Executive contained in Section 4(a) shall continue
indefinitely and the covenants of Executive contained in Section 4(d)
shall continue until the first anniversary of the date of Executive's
termination. In such event, Executive shall be entitled to receive
only the compensation hereunder accrued and unpaid as of the date of
Executive's termination.
(iii)If Executive's employment terminates due to a disability, as defined
in Section 3(b), the obligations of Executive under this Agreement
will terminated except that the covenants in Section 4(a) shall
continue indefinitely. In such event, for a period of one year after
the date of Executive's termination, the Company shall pay Executive,
in accordance with customary payroll procedures, Executive's base
salary as then in effect, provided, however, that the payment of such
salary shall be reduced to the extent of any long-term disability
benefits provided to Executive under a long-term disability plan
sponsored by the Company. The vesting and exercise of any and all
options, warrants or other securities awarded to Executive pursuant to
the Company's 2000 Stock Option Plan or any other similar plan shall
be governed by the terms of such plan, or if awarded pursuant to a
written option agreement, then the terms of such agreement. The
amounts payable to Executive under this paragraph shall not be
affected in any way by Executive's acceptance of other employment
during the one-year period described above.
(iv) No amount payable to Executive pursuant to this Agreement shall be
subject to mitigation due to Executive's acceptance or availability of
other employment.
4. RESTRICTIVE COVENANTS; NON-COMPETITION.
Executive in consideration of his employment hereunder agrees as follows:
(a) Except as otherwise permitted hereby, or by the Company's Board of
Directors, Executive shall treat as confidential and not communicate
or divulge to any other person or entity any information related to
the Company or its affiliates or the business, affairs, prospects,
5
<PAGE>
financial condition or ownership of the Company or any of its
affiliates (the "Information") acquired by Executive from the Company
or the Company's other employees or agents, except (i) as may be
required to comply with legal proceedings (PROVIDED, THAT, prior to
such disclosure in legal proceedings Executive notifies the Company
and reasonably cooperates with any efforts by the Company to limit the
scope of such disclosure or to obtain confidential treatment thereof
by the court or tribunal seeking such disclosure) or (ii) while
employed by the Company, as Executive reasonably believes necessary in
performing his duties. Executive shall use the Information only in
connection with the performance of his duties hereunder, and not
otherwise for his benefit or the benefit of any other person or
entity. For the purposes of this Agreement, Information shall include,
but not be limited to, any confidential information concerning
clients, subscribers, marketing, business and operational methods of
the Company or its affiliates and its and its affiliates' clients,
subscribers, contracts, financial or other data, technical data or any
other confidential or proprietary information possessed, owned or used
by the Company. Excluded from Executive's obligations of
confidentiality is any part of such Information that: (i) was in the
public domain prior to the date of commencement of Executive's
employment with the Company or (ii) enters the public domain other
than as a result of Executive's breach of this covenant. This Section
(4)(a) shall survive the expiration or termination of the other
provisions of this Agreement.
(b) Executive shall fully disclose to the Company all discoveries,
concepts, and ideas, whether or not patentable, including, but not
limited to, processes, methods, formulas, and techniques, as well as
improvements thereof or know-how related thereto (collectively,
"Inventions") concerning or relating to the business conducted by the
Company and concerning any present or prospective activities of the
Company which are published, made or conceived by Executive, in whole
or in part, during Executive's employment with the Company.
(c) Executive shall make applications in due form for United States
letters patent and foreign letters patent on such Inventions at the
request of the Company and at its expense, but without additional
compensation to Executive. Executive further agrees that any and all
such Inventions shall be the absolute property of Company or its
designees. Executive shall assign to the Company all of Executive's
right, title and interest in any and all Inventions, execute any and
all instruments and do any and all acts necessary or desirable in
connection with any such application for letters patent or to
establish and perfect in the Company the entire right, title, and
interest in such Inventions, patent applications, or patents, and
shall execute any instrument necessary or desirable in connection with
any continuations, renewals, or reissues thereof or in the conduct of
any related proceedings or litigation.
(d) During Executive's employment with the Company and for a period of one
(1) year after the earlier of the expiration date of this Agreement or
the termination of Executive's employment hereunder by the Company for
Cause or by Executive (other than for Good Reason) or subsequent to a
Change in Control, as hereinafter defined:
6
<PAGE>
(i) Executive will not, in any geographical area within which the
Company is, at the time of Executive's termination or during the
term of Executive's employment, marketing its products or
services or conducting other business activities, directly or
indirectly, engage in, own or control an interest in (except as a
passive investor in publicly held companies and except for
investments held at the date hereof) or act as an officer,
director, or employee of, or consultant or adviser to, any firm,
corporation or institution (except as provided in Section 1(a)
hereof) directly or indirectly that is in competition with the
Company at the time of Executive's termination or during the term
of Executive's employment with the Company; and
(ii) Executive will not recruit or hire any employee of the Company,
or otherwise induce such employee to leave the employment of the
Company, to become an employee of or otherwise be associated with
Executive or any company or business with which Executive is or
may become associated.
7
<PAGE>
5. CHANGE OF CONTROL.
In the event of a Change of Control, the following provisions shall apply:
(a) If, immediately upon a Change of Control or at any time within one (1)
year thereafter, Executive is no longer employed by the Company (or
any entity to which this Agreement may be assigned in connection with
such Change of Control) for any reason other than Executive's death,
legal incapacity or disability, Executive shall be entitled to
receive, within 10 days after the termination date, a lump sum payment
("Change of Control Payment") equal to two times the amount of
Executive's annual base salary then in effect plus any other amounts
accrued and unpaid as of the date of termination (i.e., earned
bonuses, car allowance, unreimbursed business expenses, and any other
amount due to Executive under employee benefit or fringe benefit plans
of the Company). Notwithstanding the foregoing, if Executive shall so
request, any Change of Control Payment may be paid to Executive in
substantially equal monthly installments, or more frequently in
accordance with the Company's usual payroll policy. Additionally, any
and all options, warrants or other securities awarded to Executive
pursuant to the Company's 2000 Stock Option Plan or any other similar
plan shall, as of the date of Executive's termination, immediately
vest and become exercisable by Executive for the duration of the
period during which the options, warrants or other securities would
have remained exercisable if Executive had remained employed by the
Company.
(b) For purposes of this Section 5, a "Change of Control" shall be deemed
to occur upon any of the following events:
(1) Any "person" or "group" within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act (i) becomes the "beneficial owner,"
as defined in Rule 13d-3 under the Exchange Act, of 50% or more
of the combined voting power of the Company's then outstanding
securities, otherwise than through a transaction or series of
related transactions arranged by, or consummated with the prior
approval of, the Board or (ii) acquires by proxy or otherwise the
right to vote 50% or more of the then outstanding voting
securities of the Company, otherwise than through an arrangement
or arrangements consummated with the prior approval of the Board,
for the election of directors, for any merger or consolidation of
the Company or for any other matter or question.
(2) During any period of 12 consecutive months (not including any
period prior to the adoption of this Section), Present Directors
and/or New Directors cease for any reason to constitute a
majority of the Board. For purposes of the preceding sentence,
"Present Directors" shall mean individuals who at the beginning
of such consecutive 12-month period were members of the Board,
8
<PAGE>
and "New Directors" shall mean any director whose election by the
Board or whose nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the
directors then still in office who were Present Directors or New
Directors.
(3) Consummation of (i) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation
or pursuant to which shares of Stock would be converted into
cash, securities or other property, other than a merger of the
Company in which the holders of Stock immediately prior to the
merger have the same proportion and ownership of common stock of
the surviving corporation immediately after the merger or (ii)
any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially
all, of the assets of the Company; PROVIDED, THAT, the
divestiture of less than substantially all of the assets of the
Company in one transaction or a series of related transactions,
whether effected by sale, lease, exchange, spin-off sale of the
stock or merger of a subsidiary or otherwise, shall not
constitute a Change in Control.
For purposes of this Section 5(b), the rules of Section 318(a) of
the Code and the regulations issued thereunder shall be used to
determine stock ownership.
(C) EXCISE TAX GROSS-UP. If Executive becomes entitled to one or more
payments (with a "payment" including the vesting of restricted
stock, a stock option, or other non-cash benefit or property),
whether pursuant to the terms of this Agreement or any other plan
or agreement with the Company or any affiliated company
(collectively, "Change of Control Payments"), which are or become
subject to the tax ("Excise Tax") imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), the
Company shall pay to Executive at the time specified below such
amount (the "Gross-up Payment") as may be necessary to place
Executive in the same after-tax position as if no portion of the
Change of Control Payments and any amounts paid to Executive
pursuant to this paragraph 5(c) had been subject to the Excise
Tax. The Gross-up Payment shall include, without limitation,
reimbursement for any penalties and interest that may accrue in
respect of such Excise Tax. For purposes of determining the
amount of the Gross-up Payment, Executive shall be deemed: (A) to
pay federal income taxes at the highest marginal rate of federal
income taxation for the year in which the Gross-up Payment is to
be made; and (B) to pay any applicable state and local income
taxes at the highest marginal rate of taxation for the calendar
year in which the Gross-up Payment is to be made, net of the
maximum reduction in federal income taxes which could be obtained
9
<PAGE>
from deduction of such state and local taxes if paid in such
year. If the Excise Tax is subsequently determined to be less
than the amount taken into account hereunder at the time the
Gross-up Payment is made, Executive shall repay to the Company at
the time that the amount of such reduction in Excise Tax is
finally determined (but, if previously paid to the taxing
authorities, not prior to the time the amount of such reduction
is refunded to Executive or otherwise realized as a benefit by
Executive) the portion of the Gross-up Payment that would not
have been paid if such Excise Tax had been used in initially
calculating the Gross-up Payment, plus interest on the amount of
such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder at the time the
Gross-up Payment is made, the Company shall make an additional
Gross-up Payment in respect of such excess (plus any interest and
penalties payable with respect to such excess) at the time that
the amount of such excess is finally determined.
The Gross-up Payment provided for above shall be paid on the 30th
day (or such earlier date as the Excise Tax becomes due and
payable to the taxing authorities) after it has been determined
that the Change of Control Payments (or any portion thereof) are
subject to the Excise Tax; provided, HOWEVER, that if the amount
of such Gross-up Payment or portion thereof cannot be finally
determined on or before such day, the Company shall pay to
Executive on such day an estimate, as determined by counsel or
auditors selected by the Company and reasonably acceptable to
Executive, of the minimum amount of such payments. The Company
shall pay to Executive the remainder of such payments (together
with interest at the rate provided in Section 1274(b)(2)(B) of
the Code) as soon as the amount thereof can be determined. In the
event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess
shall constitute a loan by the Company to Executive, payable on
the fifth day after demand by the Company (together with interest
at the rate provided in Section 1274(b)(2)(B) of the Code). The
Company shall have the right to control all proceedings with the
Internal Revenue Service that may arise in connection with the
determination and assessment of any Excise Tax and, at its sole
option, the Company may pursue or forego any and all
administrative appeals, proceedings, hearings, and conferences
with any taxing authority in respect of such Excise Tax
(including any interest or penalties thereon); PROVIDED, HOWEVER,
that the Company's control over any such proceedings shall be
limited to issues with respect to which a Gross-up Payment would
be payable hereunder, and Executive shall be entitled to settle
or contest any other issue raised by the Internal Revenue Service
or any other taxing authority. Executive shall cooperate with the
Company in any proceedings relating to the determination and
assessment of any Excise Tax and shall not take any position or
action that would materially increase the amount of any Gross-up
Payment hereunder.
6. NO VIOLATION.
10
<PAGE>
Executive warrants that the execution and delivery of this Agreement and
the performance of his duties hereunder will not violate the terms of any other
agreement to which he is a party or by which he is bound. Additionally,
Executive warrants that Executive has not brought and will not bring to the
Company or use in the performance of Executive's responsibilities at the Company
any materials or documents of a former employer that are not generally available
to the public, unless Executive has obtained express written authorization from
the former employer for their possession and use. Executive represents that he
is not and, since the commencement of Executive's employment with the Company
has not been a party to any employment, proprietary information,
confidentiality, or noncompetition agreement with any of Executive's former
employers which remains in effect as the date hereof. The warranties set forth
in this Section 6 shall survive the expiration or termination of the other
provisions of this Agreement.
7. BREACH BY EXECUTIVE.
Both parties recognize that the services to be rendered under this
Agreement by Executive are special, unique and extraordinary in character, and
that in the event of the breach by Executive of the terms and conditions of this
Agreement to be performed by him or in the event Executive performs services for
any person, firm or corporation engaged in a competing line of business with
Company, the Company shall be entitled, if it so elects, to institute and
prosecute proceedings in any court of competent jurisdiction, whether in law or
in equity, to, by way of illustration and not limitation, obtain damages for any
breach of this Agreement, or to enforce the specific performance thereof by
Executive, or to enjoin Executive from competing with the Company or, performing
services for himself or any such other person, firm or corporation. The Company
may obtain an injunction restraining any such breach by Executive and no bond or
other security shall be required in connection therewith. The Company and
Executive each consent to the jurisdiction of United States Federal District
Court for the Northern District of Florida.
8. MISCELLANEOUS.
(a) This Agreement shall be binding upon and inure to the benefit of the
Company, its successors, and assigns and may not be assigned by
Executive.
(b) This Agreement contains the entire agreement of the parties hereto and
supersedes all prior or concurrent agreements, whether oral or
written, relating to the subject matter hereof. This Agreement may be
amended only by a writing signed by the party against whom enforcement
is sought.
(C) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW JERSEY WITHOUT REGARD TO ITS CONFLICTS OF
LAWS, RULES OR PRINCIPLES.
(d) Any notices or other communications required or permitted hereunder
shall be in writing and shall be deemed effective when delivered in
person or, if mailed, on the date of deposit in the mails, postage
11
<PAGE>
prepaid, to the other party at the respective address of such party
set forth herein or to such other address as shall have been specified
in writing by either party to the other in accordance herewith.
(e) The provisions of Sections 4(a), 4(d) and 6 and the other provisions
of this Agreement which by their terms contemplate survival of the
termination of this Agreement, shall survive termination of this
Agreement and be deemed to be independent covenants.
(f) If any term or provision of this Agreement or its application to any
person or circumstance is to any extent invalid or unenforceable, the
remainder of this Agreement, or the application of such term or
provision to persons or circumstances other than those as to which it
is held invalid or unenforceable, shall not be affected thereby, and
each term and provision shall be valid and enforced to the fullest
extent permitted by law.
(g) No delay or omission to exercise any right, power or remedy accruing
to any party hereto shall impair any such right, power or remedy or
shall be construed to be a waiver of or an acquiescence to any breach
hereof. No waiver of any breach of this Agreement shall be deemed to
be a waiver of any other breach of this Agreement theretofore or
thereafter occurring. Any waiver of any provision hereof shall be
effective only to the extent specifically set forth in the applicable
writing. All remedies afforded under this Agreement to any party
hereto, by law or otherwise, shall be cumulative and not alternative
and shall not preclude assertion by any party hereto of any other
rights or the seeking of any other rights or remedies against any
other party hereto.
(h) It is the intent of the Company that Executive not be required to
incur any legal fees or disbursements associated with (i) the
interpretation of any provision in, or obtaining of any right or
benefit under this Agreement, or (ii) the enforcement of his rights
under this Agreement, including, without limitation by litigation or
other legal action, because the cost and expense thereof would
substantially detract from the benefits to be extended to Executive
hereunder. Accordingly, the Company irrevocably authorizes Executive
from time to time to retain counsel of his choice, at the expense of
the Company as hereafter provided, to represent Executive in
connection with the interpretation and/or enforcement of this
Agreement, including without limitation the initiation or defense of
any litigation or other legal action, whether by or against the
Company, or any Director, officer, stockholder, or any other person
affiliated with the Company in any jurisdiction. The Company shall pay
or cause to be paid and shall be solely responsible for any and all
attorneys' and related fees and expenses incurred by Executive under
this Section 8(h).
9. INDEMNIFICATION.
The Company agrees to indemnify Executive to the fullest extent permitted
by applicable law, as such law may be hereafter amended, modified or
supplemented and to the fullest extent permitted by each of the Company's
12
<PAGE>
Restated Certificate of Incorporation and the Company's Restated By-Laws, as
from time to time amended, modified or supplemented. The Company further agrees
that Executive is entitled to the benefits of any directors and officers
liability insurance policy, in accordance with the terms and conditions of that
policy, if such a policy is maintained by the Company.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first stated above.
COMPANY
IBS INTERACTIVE, INC.
BY: /S/ NICHOLAS R. LOGLISCI, JR.
--------------------------------
NICHOLAS R. LOGLISCI, JR.
PRESIDENT AND CEO
EXECUTIVE
/S/ ROY E. CRIPPEN, III
--------------------------------
ROY E. CRIPPEN, III
14
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT dated as of May 7, 1999 between IBS Interactive, Inc., a
Delaware corporation (the "Company") with its corporate offices at 2 Ridgedale
Avenue, Suite 350, Cedar Knolls, New Jersey 07927, and Howard Johnson (the
"Executive"), 2140 Bonnycastle Avenue, #8D, Louisville, Kentucky 40205.
RECITALS
WHEREAS, Company desires to employ Executive and Executive desires to
be employed by the Company;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. Employment; Term.
(a) Employment Subject to the terms and conditions set forth herein,
the Company agrees to employ and Executive agrees to serve as the Company's
Chief Financial Officer, to perform such services, including but not limited to
financial reporting, negotiating acquisitions and communications with financial
investors, research analysts and banks, and have such powers and authority as
are specified in the Company's Restated By-Laws, as in effect from time to time,
or as may be assigned to the Executive by the Company's Board of Directors,
provided, that, the same is not inconsistent with such position. Executive
agrees that he will use his full business time to promote the interests of the
Company and its affiliates and to fulfill his duties hereunder. Nothing in this
Agreement shall however preclude Executive from engaging, so long as, in the
reasonable determination of the Company's Board of Directors, such activities do
not interfere with the execution of his duties and responsibilities hereunder,
in charitable and community affairs, from managing any passive investment made
by Executive in publicly traded equity securities or other property (provided,
that, no such investment may exceed 5% of the equity of any entity (with the
exception of Medworks Corporation, IVF Technology Corporation, Edgewise Press
and Middleton's The Spindle Rail Company), without the prior approval of the
Company's Board of Directors) or from serving, subject to the prior approval of
the Company's Board of Directors, as a member of boards of directors or as a
trustee of any other corporation, association or entity. For purposes of the
preceding sentence, any approval of the Company's Board of Directors required
herein shall not be unreasonably withheld.
(b) Term. Unless sooner terminated pursuant to Section 3, the term of
Executive's employment pursuant to this Agreement shall commence on the date set
forth above (the "Effective Date") and shall continue thereafter for a period of
three years.
2. Compensation. During the employment term under this Agreement, the
Company shall compensate Executive as follows:
(a) Base Salary. Subject to adjustment as set forth below, the Company
will pay Executive an annual salary at a rate of One Hundred Fifteen Thousand
Dollars ($115,000) per year, payable in substantially equal monthly
installments, or more frequently in accordance with Company's usual payroll
policy. On each anniversary of the Effective Date, Executive's then existing
base salary will automatically increase at the rate of 10% per year and in the
discretion of the Compensation Committee (or Board of Directors, if at the time
there shall be no Compensation Committee) at such additional rate or amounts as
the Compensation Committee shall deem appropriate. Any such increases granted in
the discretion of the Compensation Committee will be retroactive to the
beginning of the then current fiscal year. The Company will review annually
Executive's performance and compensation.
(b) Performance Bonus. Executive shall be entitled to such bonus
compensation as the Compensation Committee deems appropriate. Such bonus
compensation shall be based, in part, on the achievement of performance criteria
established by the Compensation Committee, including criteria relating to the
profitability of the Company.
(c) Participation in Employee Stock Ownership Plan. The Company hereby
awards to Executive an option to purchase One Hundred Fifty Thousand (150,000)
shares of the Company's Common Stock at a price per share of $21.50 which
options shall vest ratably over a three (3) year period, pursuant to the terms
and conditions, including but not limited to those relating to the vesting of
such options, as set forth in the Company's 1999 Stock Ownership Plan and 1999
Stock Option Plan Agreement, copies of which are attached hereto and made a part
hereof as Exhibits A and B, respectively. In addition, during the period of
Executive's employment, Executive will be entitled to further participate in the
Company's 1999 Stock Option Plan (or such other successor plan), as the Board of
Directors, in its sole discretion, may determine.
(d) Benefits. Executive will be eligible to participate in all benefit
programs of the Company which are in effect for its senior executive personnel
and, to the extent available to executive personnel, its employees generally
from time to time.
(e) Vacation. Executive will be entitled each year to vacation for a
period or periods not inconsistent with the normal policy of Company in effect
from time to time, but in any event not less than twenty vacation days each year
and to such holidays as may be customarily afforded to its employees by the
Company, during which periods Executive's compensation shall be paid in full.
(f) Reimbursement of Expenses.
(i) All reasonable travel and entertainment expenses incurred by
Executive in the course of fulfilling this Agreement or otherwise promoting the
Company and its business shall be reimbursed by the Company. Such reimbursement
shall be made to Executive promptly following submission to the Company of
receipts and other documentation of such expenses reasonably satisfactory to the
Company.
(ii) In addition to the expenses reimbursable pursuant to paragraph (i)
above, the Company shall also pay to Executive a monthly allowance of $400 for
automobile expenses, provided, however, that the Company shall be entitled to
withhold from such allowance, any amounts required to be withheld by applicable
federal, state or local tax laws.
3. Termination.
(a) Death and Legal Incapacity. Executive's employment hereunder shall
terminate upon Executive's death or legal incapacity.
(b) Disability. Executive's employment hereunder may be terminated by
the Company in the event of Executive's physical or mental incapacity or
inability to perform his duties as contemplated under this Agreement for a
period of at least one hundred twenty (120) consecutive days.
(c) For Cause. Executive's employment hereunder may be terminated after
the expiration of the respective time periods set forth below by the Company for
cause ("Cause") upon the occurrence of any of the following events:
(i) Executive's intentional breach of any provision hereof, which
breach shall not have been cured within 20 days after written notice thereof
from the Company (or cure commenced within said 20 day period if said breach is
not curable within said 20 day period) which breach has a material adverse
effect on the Company;
(ii) Executive's intentional violation of any other duty or obligation
owed by Executive to the Company which violation shall not have been cured
within 20 days after written notice thereof from the Company (or cure commenced
within said 20 day period if said violation is not curable within said 20 day
period) which violation has a material adverse effect on the Company.
(iii) Executive is convicted or pleads guilty or nolo contendre to any
felony (other than traffic violation) or any crime involving fraud, dishonesty
or misappropriation;
(iv) Executive willfully fails to perform and discharge his duties
hereunder in a competent manner and such failure shall continue for a period in
excess of 20 days after written notice thereof specifying the failures is given
by the Company to Executive.
(v) Executive willfully engages in misconduct that causes material harm
to the Company and such misconduct shall continue for a period in excess of 20
days after written notice thereof specifying such misconduct and the resulting
harm is given by the Company to Executive.
(d) Consent of Directors. Termination of this Agreement by the Company
for reasons other than: (i) for Cause or (ii) Executive's death, legal capacity
or disability must be approved by a vote of 2/3 of the members of the Company's
Board of Directors.
(e) For Good Reason. Executive may immediately terminate his employment
hereunder for good reason ("Good Reason") in the event:
(i) The Company assigns to Executive any duties or responsibilities
inconsistent with Section 1, which assignment is not withdrawn within 20
business days after Executive's notice to the Company of his reasonable
objection thereto; or
(ii) The Company breaches any material provision of this Agreement and
such breach and the effects thereof are not remedied by the Company within 20
business days after Executive's notice to the Company of the existence of such
breach.
(f) Effect of Termination.
(i) If the Company terminates Executive's employment for reasons other
than for Cause, or Executive's death, legal incapacity or disability or
Executive terminates this Agreement for Good Reason, the obligations of
Executive under this Agreement will terminate except that the covenants
contained in Section 4(a) shall continue indefinitely. In such event, for a
period of one (1) year after the date of Executive's termination, the Company
shall pay Executive, in accordance with customary payroll procedures,
Executive's base salary as then in effect. Additionally, any and all options,
warrants or other securities awarded to Executive pursuant to the Company's 1998
Stock Option Plan or any other similar plan shall, as of the date of Executive's
termination, immediately vest and become exercisable and all such options,
warrants or other securities shall remain exercisable by Executive for the
duration of the period during which the options, warrants or other securities
would have remained exercisable if Executive had remained employed by the
Company.
(ii) Except as otherwise provided herein, if Executive terminates his
employment for any reason other than Good Reason or Executive's employment is
terminated due to Executive's death, legal incapacity or disability, the
obligations of Executive and the Company under this Agreement will terminate
except that the covenants of Executive contained in Section 4(a) shall continue
indefinitely and the covenants of Executive contained in Section 4(d) shall
continue until the first anniversary of the date of Executive's termination. In
such event, Executive shall be entitled to receive only the compensation
hereunder accrued and unpaid as of the date of Executive's termination.
(iii) No amount payable to Executive pursuant to this Agreement shall
be subject to mitigation due to Executive's acceptance or availability of other
employment.
4. Restrictive Covenants; Non-Competition.
Executive in consideration of his employment hereunder agrees as
follows:
(a) Except as otherwise permitted hereby, or by the Company's Board of
Directors, Executive shall treat as confidential and not communicate or divulge
to any other person or entity any information related to the Company or its
affiliates or the business, affairs, prospects, financial condition or ownership
of the Company or any of its affiliates (the "Information") acquired by
Executive from the Company or the Company's other employees or agents, except
(i) as may be required to comply with legal proceedings (provided, that, prior
to such disclosure in legal proceedings Executive notifies the Company and
reasonably cooperates with any efforts by the Company to limit the scope of such
disclosure or to obtain confidential treatment thereof by the court or tribunal
seeking such disclosure) or (ii) while employed by the Company, as Executive
reasonably believes necessary in performing his duties. Executive shall use the
Information only in connection with the performance of his duties hereunder, and
not otherwise for his benefit or the benefit of any other person or entity. For
the purposes of this Agreement, Information shall include, but not be limited
to, any confidential information concerning clients, subscribers, marketing,
business and operational methods of the Company or its affiliates and its and
its affiliates' clients, subscribers, contracts, financial or other data,
technical data or any other confidential or proprietary information possessed,
owned or used by the Company. Excluded from Executive's obligations of
confidentiality is any part of such Information that: (i) was in the public
domain prior to the date of commencement of Executive's employment with the
Company or (ii) enters the public domain other than as a result of Executive's
breach of this covenant. This Section (4)(a) shall survive the expiration or
termination of the other provisions of this Agreement.
(b) Executive shall fully disclose to the Company all discoveries,
concepts, and ideas, whether or not patentable, including, but not limited to,
processes, methods, formulas, and techniques, as well as improvements thereof or
know-how related thereto (collectively, "Inventions") concerning or relating to
the business conducted by the Company and concerning any present or prospective
activities of the Company which are published, made or conceived by Executive,
in whole or in part, during Executive's employment with the Company.
(c) Executive shall make applications in due form for United States
letters patent and foreign letters patent on such Inventions at the request of
the Company and at its expense, but without additional compensation to
Executive. Executive further agrees that any and all such Inventions shall be
the absolute property of Company or its designees. Executive shall assign to the
Company all of Executive's right, title and interest in any and all Inventions,
execute any and all instruments and do any and all acts necessary or desirable
in connection with any such application for letters patent or to establish and
perfect in the Company the entire right, title, and interest in such Inventions,
patent applications, or patents, and shall execute any instrument necessary or
desirable in connection with any continuations, renewals, or reissues thereof or
in the conduct of any related proceedings or litigation.
(d) During Executive's employment with the Company and for a period of
one (1) year after the earlier of the expiration date of this Agreement or the
termination of Executive's employment hereunder by the Company for Cause or by
Executive (other than for Good Reason) or subsequent to a Change in Control, as
hereinafter defined:
(i) Executive will not, in any geographical area within which the
Company is, at the time of Executive's termination or during the term of
Executive's employment, marketing its products or services or conducting other
business activities, directly or indirectly, engage in, own or control an
interest in (except as a passive investor in publicly held companies and except
for investments held at the date hereof) or act as an officer, director, or
employee of, or consultant or adviser to, any firm, corporation or institution
directly or indirectly that is in competition with the Company at the time of
Executive's termination or during the term of Executive's employment with the
Company; and
(ii) Executive will not recruit or hire any employee of the Company, or
otherwise induce such employee to leave the employment of the Company, to become
an employee of or otherwise be associated with Executive or any company or
business with which Executive is or may become associated.
5. Change of Control.
In the event of a Change of Control, the following provisions shall
apply:
(a) If, immediately upon a Change of Control or at any time within one
(1) year thereafter, Executive is no longer employed by the Company (or any
entity to which this Agreement may be assigned in connection with such Change of
Control) for any reason other than (i) for Cause or (ii) Executive's death,
legal incapacity or disability, Executive shall be entitled to receive, within
10 days after the termination date, a lump sum payment ("Change of Control
Payment") equal to the amount of Executive's annual base salary then in effect
plus any other amounts accrued and unpaid as of the date of termination.
Notwithstanding the foregoing, if Executive shall so request, any Change of
Control Payment may be paid to Executive in substantially equal monthly
installments, or more frequently in accordance with the Company's usual payroll
policy.
(b) For purposes of this Section 5, a "Change of Control" shall mean
(i) any transaction or series of transactions (including, without limitation, a
tender offer, merger or consolidation) the result of which is that any "person"
or "group" (within the meaning of Section 13(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), other than the Principals and their
Related Parties (as such terms are defined herein) or an entity controlled by
each of the Principals and their Related Parties, becomes the "beneficial owner"
(as defined in Rule 13(d)(3) under the Exchange Act) of more than 50 % of the
total aggregate voting power of all classes of the Company's outstanding voting
stock and/or warrants or options to acquire such voting stock, calculated on a
fully diluted basis or (ii) during any period of two consecutive calendar years,
individuals who at the beginning of such period constituted the Company's Board
of Directors (together with any new directors whose election by stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the directors then in office unless such majority of
the directors then in office has been elected or nominated for election by the
Principals or their Related Parties or any entity controlled by each of the
Principals or their Related Parties. For purposes hereof, (x) "Principals" means
each of Nicholas R. Loglisci, Jr., Clark D. Frederick and Frank R. Altieri, Jr.;
and (y) "Related Party" with respect to any Principal means (A) the spouse or
immediate family member of such Principal or (B) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or persons beneficially holding an 80% or more controlling interest of which
consists of such Principal and/or such other persons referred to in the
immediately preceding clause (A).
6.No Violation.
Executive warrants that the execution and delivery of this Agreement
and the performance of his duties hereunder will not violate the terms of any
other agreement to which he is a party or by which he is bound. Additionally,
Executive warrants that Executive has not brought and will not bring to the
Company or use in the performance of Executive's responsibilities at the Company
any materials or documents of a former employer that are not generally available
to the public, unless Executive has obtained express written authorization from
the former employer for their possession and use. Executive represents that he
is not and, since the commencement of Executive's employment with the Company
has not been a party to any employment, proprietary information,
confidentiality, or noncompetition agreement with any of Executive's former
employers which remains in effect as the date hereof. The warranties set forth
in this Section 6 shall survive the expiration or termination of the other
provisions of this Agreement.
7. Breach by Executive.
Both parties recognize that the services to be rendered under this
Agreement by Executive are special, unique and extraordinary in character, and
that in the event of the breach by Executive of the terms and conditions of this
Agreement to be performed by him or in the event Executive performs services for
any person, firm or corporation engaged in a competing line of business with
Company, the Company shall be entitled, if it so elects, to institute and
prosecute proceedings in any court of competent jurisdiction, whether in law or
in equity, to, by way of illustration and not limitation, obtain damages for any
breach of this Agreement, or to enforce the specific performance thereof by
Executive, or to enjoin Executive from competing with the Company or, performing
services for himself or any such other person, firm or corporation. The Company
may obtain an injunction restraining any such breach by Executive and no bond or
other security shall be required in connection therewith. The Company and
Executive each consent to the jurisdiction of the Superior Court of the State of
New Jersey, located in Hackensack, New Jersey, and the United States Federal
District Court for the District of New Jersey.
8. Miscellaneous.
(a) This Agreement shall be binding upon and inure to the benefit of
the Company, its successors, and assigns and may not be assigned by Executive.
(b) This Agreement contains the entire agreement of the parties hereto
and supersedes all prior or concurrent agreements, whether oral or written,
relating to the subject matter hereof. This Agreement may be amended only by a
writing signed by the party against whom enforcement is sought.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the State of New Jersey without regard to its conflicts of
laws, rules or principles.
(d) Any notices or other communications required or permitted hereunder
shall be in writing and shall be deemed effective when delivered in person or,
if mailed, on the date of deposit in the mails, postage prepaid, to the other
party at the respective address of such party set forth herein or to such other
address as shall have been specified in writing by either party to the other in
accordance herewith.
(e) The provisions of Sections 4(a), 4(d) and 6 and the other
provisions of this Agreement which by their terms contemplate survival of the
termination of this Agreement, shall survive termination of this Agreement and
be deemed to be independent covenants.
(f) If any term or provision of this Agreement or its application to
any person or circumstance is to any extent invalid or unenforceable, the
remainder of this Agreement, or the application of such term or provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision shall
be valid and enforced to the fullest extent permitted by law.
(g) No delay or omission to exercise any right, power or remedy
accruing to any party hereto shall impair any such right, power or remedy or
shall be construed to be a waiver of or an acquiescence to any breach hereof. No
waiver of any breach of this Agreement shall be deemed to be a waiver of any
other breach of this Agreement theretofore or thereafter occurring. Any waiver
of any provision hereof shall be effective only to the extent specifically set
forth in the applicable writing. All remedies afforded under this Agreement to
any party hereto, by law or otherwise, shall be cumulative and not alternative
and shall not preclude assertion by any party hereto of any other rights or the
seeking of any other rights or remedies against any other party hereto.
9.Indemnification.
The Company agrees to indemnify Executive to the fullest extent
permitted by applicable law, as such law may be hereafter amended, modified or
supplemented and to the fullest extent permitted by each of the Company's
Restated Certificate of Incorporation and the Company's Restated By-Laws, as
from time to time amended, modified or supplemented. The Company further agrees
that Executive is entitled to the benefits of any directors and officers
liability insurance policy, in accordance with the terms and conditions of that
policy, if such a policy is maintained by the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first stated above.
COMPANY
IBS INTERACTIVE, INC.
By:/s/ Nicholas R. Loglisci, Jr.
Nicholas R. Loglisci, Jr.
President and CEO
EXECUTIVE
/S/ Howard Johnson
Howard Johnson
<PAGE>
EXHIBIT 21.1
IBS INTERACTIVE, INC.
LIST OF SUBSIDIARIES
The following is a list of all of the subsidiaries of the IBS
Interactive, Inc. and the jurisdictions of incorporation of such subsidiaries.
All of the listed subsidiaries do business under their names presented below:
1. CCL Telecommunication, Inc.
Delaware
(state of incorporation)
2. IBS Holdings Corp.
Delaware
(state of incorporation)
3. Halo Network Management, LLC
New Jersey
(state of formation)
4. Spectrum Information Services, Inc.
Alabama
(state of incorporation)
5. Realshare, Inc.
New Jersey
(state of incorporation)
6. Spencer Analysis, Inc.
New York
(state of incorporation)
7. digital fusion, inc.
Florida
(state of incorporation)
AM 35A3.12 - Version 15.0 (REV 1999)
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
IBS Interactive, Inc.
Cedar Knolls, New Jersey
We hereby consent to the incorporation by reference in the Registration
Statements of IBS Interactive, Inc. on Form S-3 (Nos. 333-80155 and 333-93595)
of our report dated March 17, 2000, relating to the consolidated financial
statements of IBS Interactive, Inc. appearing in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999.
BDO Seidman, LLP
Woodbridge, New Jersey
March 28, 2000
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBS
INTERACTIVE, INC.'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,892
<SECURITIES> 0
<RECEIVABLES> 4,378
<ALLOWANCES> 261
<INVENTORY> 0
<CURRENT-ASSETS> 7,452
<PP&E> 2,775
<DEPRECIATION> 1763
<TOTAL-ASSETS> 13,475
<CURRENT-LIABILITIES> 1,158
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 10,722
<TOTAL-LIABILITY-AND-EQUITY> 13,475
<SALES> 18,774
<TOTAL-REVENUES> 18,774
<CGS> 13,003
<TOTAL-COSTS> 24,626
<OTHER-EXPENSES> 26
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> (6,193)
<INCOME-TAX> (45)
<INCOME-CONTINUING> (6,238)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,238)
<EPS-BASIC> (1.45)
<EPS-DILUTED> (1.45)
</TABLE>
