<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
September 17, 1998 (September 9, 1998)
X-ceed, Inc.
(Exact name of registrant as specified in its charter)
Delaware
--------
(State or Other Jurisdiction of Incorporation)
0-13049 13-3006788
(Commission File Number) (I.R.S. Employer Identification No.)
488 Madison Avenue, New York, New York 10022
--------------------------------------------
(Address and zip code of principal executive offices)
212-753-5511
------------
(Registrant's Telephone Number)
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
1. On September 14, 1998, X-ceed completed the acquisition of Zabit and
Associates, Inc. and affiliate. Attached hereto are the Audited Financial
Statements of Zabit and Associates, Inc. and affiliate for the years ended
December 31, 1995, December 31, 1996 and December 31, 1997 and unaudited
statements for the eight months ended August 31, 1997 and 1998. Said
financial statements include:
(a) Independent Auditor's Report
(b) Balance Sheets
(c) Statement of Earnings
(d) Statement of Stockholders' Equity
(e) Statement of Cash Flows
(f) Notes to Financial Statements.
2. Attached hereto are unaudited pro forma condensed combined financial
statements for X-ceed, Inc. and subsidiaries, Reset, Inc., Mercury Seven,
Inc. and Zabit and Associates, Inc. as of May 31, 1998 and for the nine
months ended May 31, 1998 and the year ended August 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
X-ceed, Inc.
----------------------------
(Registrant)
By:/s/ Werner Haase
-------------------------
Werner Haase, President
DATED: November 25, 1998
-----------------
<PAGE>
ZABIT & ASSOCIATES, INC. and WATER STREET DESIGN GROUP, INC.
COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996, and 1997
BAKER & BARNETT
Certified Public Accountants
<PAGE>
BAKER & BARNETT
Certified Public Accountants
To the Shareholders' of X-ceed, Inc
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying combined balance sheets of Zabit &
Associates, Inc. and Water Street Design Group, Inc., as of December 31,
1996, and 1997, and the related combined statements of operations, stockholders'
equity and cash flows for the three years ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the combined financial position of Zabit & Associates,
Inc. and Water Street Design Group, Inc., at December 31, 1996, and 1997
and the combined results of their operations and their cash flows for the
three years ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/Baker & Barnett
Corte Madera CA
November 30, 1998
<PAGE>
<TABLE>
<CAPTION>
Zabit & Associates, Inc. and Water Street Design Group, Inc.
Combined Balance Sheets
December 31, Aug. 31,
ASSETS 1996 1997 1998
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 82,850 $ 29,638 $ 367,637
Accounts receivable 1,882,248 2,855,613 2,407,363
Allowance for doubtful accounts (63,000) (260,000) (260,000)
Receivable from stockholders and employees 76,866 134,341 112,565
Prepaid expenses and other current assets 31,164 157,023 260,068
-----------------------------------
Total current assets 2,010,128 2,916,615 2,887,633
-----------------------------------
Property and equipment:
Property and equipment 476,988 957,633 1,432,081
Leasehold improvements 55,822 72,158 88,553
-----------------------------------
532,810 1,029,791 1,520,634
Less accumulated depreciation 280,493 423,644 599,367
-----------------------------------
Property and equipment, net 252,317 606,147 921,267
-----------------------------------
Other assets: 1,311 407 0
-----------------------------------
$2,263,756 $3,523,169 $3,808,900
===================================
LIABILITIES
Current liabilities:
Accounts payable $ 672,159 $ 900,130 $ 766,673
Bank line of credit 75,000 600,000 787,000
Current portion of long-term debt 77,524 60,480 160,297
Sales tax payable 39,772 59,990 8,090
Other accrued liabilities 91,498 15,112 349,938
-----------------------------------
Total current liabilities 955,953 1,635,712 2,071,998
-----------------------------------
Long-term debt, less current portion 113,972 449,391 638,893
-----------------------------------
STOCKHOLDERS' EQUITY
Common Stock 10,000 10,000 10,000
Additional Paid in Capital 1,000 1,000 1,000
Retained Earnings 1,182,831 1,427,066 1,087,009
-----------------------------------
Total stockholders' equity 1,193,831 1,438,066 1,098,009
-----------------------------------
$2,263,756 $3,523,169 $3,808,900
===================================
</TABLE>
See accompanying notes
<PAGE>
Zabit & Associates, Inc. and Water Street Design Group, Inc.
Combined Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31, Eight months ended August 31,
1995 1996 1997 1997 1998
---- ---- ---- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Sales $3,575,826 $5,837,198 $7,872,578 $3,664,929 $6,148,711
Cost of sales 1,335,774 2,112,127 2,248,216 949,180 1,434,016
----------------------------------------------------------------------
Gross Profit 2,240,052 3,725,071 5,624,362 2,715,749 4,714,695
Operating expenses 1,846,447 2,905,807 5,030,586 2,887,072 4,770,606
----------------------------------------------------------------------
Operating income (loss) 393,605 819,264 593,776 (171,323) (55,911)
Other income - interest 0 0 4,784 0 0
Other expense - interest 37,619 26,647 82,327 78,194 64,280
----------------------------------------------------------------------
Income (loss) before provision for income taxes 355,986 792,617 516,233 (249,517) (120,191)
Provision for income taxes 7,279 23,688 13,998 800 800
----------------------------------------------------------------------
Net income (loss) $ 348,707 $ 768,929 $ 502,235 $ (250,317) $ (120,991)
======================================================================
Pro Forma Information:
Historical Income (loss) before provision
for taxes $ 355,986 $ 792,617 $ 516,233 $ (249,517) $ (120,991)
Pro forma provision for income taxes 154,142 343,203 223,529 (108,041) (52,043)
----------------------------------------------------------------------
Pro forma Net income (loss) $ 201,844 $ 449,414 $ 292,704 $ (141,476) $ (68,148)
======================================================================
Pro forma Net income (loss) per share $.20 $.44 $.29 $(.14) $(.07)
=== === === ===== ====
</TABLE>
See accompanying notes
<PAGE>
Zabit & Associates, Inc. and Water Street Design Group, Inc.
Combined Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
Number of Dollar Paid in Retained Total
Shares Amount Capital Earnings Equity
------ ------ ------ -------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,000,000 $10,000 $ 90,195 $ 100,195
Issuance of Water Street stock 10,000 $1,000 1,000
Net Income December 31, 1995 348,707 348,707
------------------------------------------------------------------------
Balance at December 31, 1995 1,010,000 10,000 1,000 438,902 449,902
Distributions (25,000) (25,000)
Net Income December 31, 1996 768,929 768,929
------------------------------------------------------------------------
Balance at December 31, 1996 1,010,000 10,000 1,000 1,182,831 1,193,831
Distributions (258,000) (258,000)
Net Income December 31, 1997 502,235 502,235
------------------------------------------------------------------------
Balance at December 31, 1997 1,010,000 10,000 1,000 1,427,066 1,438,066
Distributions (Unaudited) (219,066) (219,066)
Net Income August 31, 1998
(Unaudited) (120,991) (120,991)
------------------------------------------------------------------------
Balance at August 31, 1998 1,010,000 $10,000 $1,000 $1,087,009 $1,098,009
========================================================================
</TABLE>
See accompanying notes
<PAGE>
Zabit & Associates, Inc. and Water Street Design Group Inc.
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Eight months ended
August 31,
Years Ended December 31, 1997 1998
1995 1996 1997 (Unaudited) (Unaudited)
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operating activities:
Net income (loss) $ 348,707 $ 768,929 $ 502,235 $ (250,317) $ (120,991)
---------------------------------------------------------------------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Provision for doubtful accounts 55,768 133,398 272,913 106,458 177,043
Depreciation and amortization 88,316 118,583 144,055 80,648 176,130
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable (433,489) (1,211,776) (1,049,278) 478,939 271,207
(Increase) Decrease in other current assets (27,571) 31,994 (125,859) (56,076) (103,045)
Increase (Decrease) in accounts payable 22,726 414,726 227,971 (322,167) (133,457)
Increase (Decrease) in accrued liabilities 16,236 54,369 (56,168) 39,680 282,926
---------------------------------------------------------------------
Net cash provided by (used in) operating
activities 70,693 310,223 (84,131) 77,165 549,813
---------------------------------------------------------------------
Cash used in investing activities:
Acquisition of fixed assets (105,330) (177,310) (496,981) (182,128) (490,843)
Additions to other assets (270) 0 0 0 0
---------------------------------------------------------------------
Net cash used in investing activities (105,600) (177,310) (496,981) (182,128) (490,843)
---------------------------------------------------------------------
Cash provided by (used in) financing activities:
Loans from (to) stockholders 4,026 (51,088) (57,475) (79,003) 21,776
Loans from (Repayments to) banks 4,602 (36,077) 843,375 506,931 476,319
Capital Stock investment 1,000 0 0 0 0
Shareholder Distribution 0 (25,000) (258,000) (258,000) (219,066)
---------------------------------------------------------------------
Net cash provided by (used in) financing
activities 9,628 (112,795) 527,900 169,928 279,029
---------------------------------------------------------------------
Net change in cash and cash equivalents (25,279) 20,118 (53,212) 64,965 337,999
Cash and cash equivalents:
Beginning of year 88,011 62,732 82,850 82,850 29,638
---------------------------------------------------------------------
End of year $ 62,732 $ 82,850 $ 29,638 $ 147,815 $ 367,637
=====================================================================
</TABLE>
See accompanying notes
<PAGE>
Zabit & Associates and Water Street Design Group, Inc.
Notes to Financial Statements
Three Years Ended December 31, 1997
And Eight Months Ended August 31, 1997 and 1998
-----------------------------------------------
(Information with respect to the eight months ended August 31, 1997 and 1998
is unaudited)
Note 1-Business of the Company
Zabit & Associates, Inc. (Zabit) was founded in July 1993 to be a full service
provider of communication strategies. Zabit specializes in areas of company
culture and organization assessment, human resources, benefits, executive
compensation, stock plans, mergers, initial public offerings, organizational
change and corporate communication, technology and new media, public
relations, publicity communication, advertising, and marketing. The revenues
of Zabit are primarily derived from customers in North America.
Water Street Design Group, Inc. (Water Street) was founded in September 1995
to provide creative and design services across a wide spectrum of business
applications. Substantially all of Water Street's revenues are derived from
Zabit.
Note 2-Summary of Significant Accounting Policies
Principles of Combination
The combined financial statements include the accounts of Zabit & Associates,
Inc., a California Corporation, and Water Street Design Group, Inc., a Nevada
Corporation. Water Street is wholly owned by the stockholders of Zabit. The
combined entities shall be referred herein as the "Company". All inter-company
account transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect the reported amount 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.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
Fixed Assets
Fixed assets, other than leasehold improvements, are depreciated on a
straight-line basis over their estimated useful lives (3-5 years). Leasehold
improvements are amortized over the lesser of their useful life or remaining
term of the related lease.
Revenue Recognition
Revenue is recognized as services are rendered.
Income Taxes
Both Zabit and Water Street are S corporations reporting taxable income on a
cash basis. Both Zabit and Water Street pay California State taxes at one and
one half percent (1.5%) on cash basis income. Zabit also pays New York State
<PAGE>
and City taxes on cash basis income derived within those locales at 8% and 9%
respectively.
Interim financial statements
The unaudited financial statements for the eight months ended August 31, 1997
and 1998 reflect all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of management, necessary for a fair
statement of the results for the period. The results of operations are not
necessarily indicative of the results expected for the fiscal year.
<TABLE>
<CAPTION>
Supplemental Cash Flow Information
December 31, August 31,
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash paid during the year for: $36,242 $26,647 $82,327 $78,194 $64,279
Interest $ 0 $ 2,488 $26,995 $21,082 $(7,983)
Income Taxes (Refund)
</TABLE>
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and trade receivables. The Company
currently places its cash and equivalents with one financial institution.
Fair value of financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and other accrued liabilities
approximate fair value due to their short maturities.
Note 3-Fixed Assets
Depreciation expense was $55,408, $63,876, $102,321, $147,024, and $145,379
for the years ended December 31, 1995, 1996, 1997, and the eight months ended
August 31, 1997 and August 31, 1998, respectively. Amortization expense related
to capital leases was $32,908, 54,707, $41,734, $28,691, and $27,751 for the
years ended December 31, 1995, 1996, 1997, and the eight months ended August
31, 1997 and August 31, 1998, respectively.
Equipment recorded under capital leases included in Property and equipment is
$152,170, $195,987, $195,987, $195,987, and $195,987 for the years ended
December 31, 1995, 1996, 1997, and the eight months ended August 31, 1997 and
August 31, 1998, respectively. Related accumulated amortization is $54,842,
$109,549, $154,468, $138,244, and $182,219 for the years ended December 31,
1995, 1996, 1997, and the eight months ended August 31, 1997 and August 31,
1998, respectively.
Note 4-Advances to Stockholders
The Company has incurred certain liabilities on behalf of stockholders of the
Company. An interest rate has been imputed on the balance which estimates a
fair market value rate. As of December 31, 1997 the principal balance and
related interest was $134,341.
Note 5-Notes Payable to Stockholders
In July 1993, the Company entered into notes payable agreements with two
stockholders to borrow $150,000. Principal and interest are payable in 60
monthly installments through June 1998. Interest on the notes accrues at 9.5%
per annum.
<PAGE>
Future principal payments for years after 1997 are as follows:
Year Ending December 31, 1998 $18,389
Total $18,389
Note 6-Borrowings on Line of Credit
The Company entered into a line of credit agreement in July 1997 with
WestAmerica Bank whereas the Company may issue up to $700,000 in notes payable
to the bank. The notes bear interest at prime plus 1.75% (10.25% at 12/31/97).
Note 7-Notes Payable to Bank
The Company entered into a loan agreement in September 1997 with WestAmerica
Bank whereas the Company may draw up to $219,500 for the acquisition of
equipment. $219,500 was drawn in September 1997. The loan bears interest at
prime plus 1% (9.5% at 12/31/97). Principal and interest are payable in
monthly installments of $3,658,
plus accrued interest. $211,586
The Company entered into a loan agreement in July 1997 with
WestAmerica Bank whereas the Company may draw up to $200,000 for
working capital requirements. $200,000 was drawn in July 1997.
The loan bears interest at prime plus 2% (10.5% at 12/31/97).
Principal and interest are payable in monthly installments of
3,333 plus accrued interest. 183,333
Total $ 394,919
Future principal payments for years after 1997 are as follows:
Year Ending December 31,
1998 $ 83,900
1999 83,900
2000 83,900
2001 83,900
2002 59,319
---------
Total $ 394,919
=========
Note 8-Commitments
The Company leases its facilities and certain operating equipment under
non-cancelable operating leases which expire through June 2014. The Company is
responsible for taxes, maintenance and insurance. Rent expense incurred under
all operating leases charged to operations was $179,373, $228,140, and
$399,490 for the years ended December 31, 1995, 1996, and 1997, respectively
and, $370,847 and $283,790 for the eight months ended August 31, 1998 and 1997,
respectively.
Future minimum obligations under the facility leases at December
31, 1997 are as follows:
1998 $ 394,968
1999 289,902
2000 149,372
2001 142,176
----------
Total $ 976,422
==========
<PAGE>
Note 9-Capital Lease Obligations
The Company leases certain of its office equipment and computers under capital
leases which expire through June 2001. Capital lease obligations as of
December 31, 1997 are as follows:
1998 $52,558
1999 33,485
2000 22,539
2001 6,570
-------
Total minimum payments 115,152
Less amount representing interest (18,892)
-------
Present value of minimum lease payments 96,260
Less current portion (41,809)
-------
Capital lease obligation, less current portion $54,451
=======
Note 10-Stockholders' Equity
Under its Articles of Incorporation, Zabit is authorized to issue 100,000,000
shares of no par value capital stock. As of December 31, 1997, 1,000,000 shares
were issued and outstanding. Each share of capital stock is entitled to one
vote. The holders of capital stock are entitled to receive dividends whenever
funds are legally available and when declared by the Board of Directors.
Under its Articles of Incorporation, Water Street is authorized to issue
1,000,000 shares of $.000001 per share par value capital stock. As of December
31, 1997, 10,000 shares were issued and outstanding. Each share of capital
stock is entitled to one vote. The holders of capital stock are entitled to
receive dividends whenever funds are legally available and when declared by
the Board of Directors.
Stock Option Plan
The Company issued stock options to certain employees under a stock option plan
whereby those employees may purchase an equivelent number of shares of common
stock of the Company. The exercise price for options granted are at the sole
discretion of the Board of Directors. All options are fully vested upon issuance
and expire on September 30, 1998. The Company has reserved 26,000 shares of
authorized common stock for issuance under the plan. The grant of of these
options did not result in a charge to operations.
The following is a summary of stock option activity under the plan:
Number of Shares Option Price
---------------- ------------
Options granted 20,000 $1.00
Options exercised - -
Options canceled - -
Outstanding at December 31, 1996 20,000 $1.00
----------------------------
Options granted 6,000 $1.00
Options exercised - -
Options canceled - -
Outstanding at December 31, 1997 26,000 $1.00
----------------------------
Options granted (unaudited) - -
Options exercised (unaudited) - -
Options canceled (unaudited) - -
Outstanding at August 31, 1998 (unaudited) 26,000 $1.00
============================
Stock Split
In May 1998, Zabit's Board of Directors authorized a two for one stock split,
thereby increasing the number of shares issued and outstanding to 1,000,000. All
references in the accompanying financial statements to the number of common
shares and per share amounts have been retroactively restated to reflect the
stock split.
Note 11- Major Customers
Sales to four customers amounted to 16%, 15%, 14%, and 13% of revenue for the
year ended December 31, 1995. Sales to four customers amounted to 16%, 11%, 11%,
and 11% of revenue for the year ended December 31, 1996. Sales to four customers
amounted to 13%, 12%, 11%, and 10% of revenue for the year ended December 31,
1997. Sales to five customers amounted to 18%, 13%, 13%, 13%, and 11% of revenue
for the eight months ended August 31, 1997. Sales to one customer amounted to
17% for the eight months ended August 31, 1998. Note 12-Related Party
Transactions
The Company leases its main operating facilities from a partnership owned
partially by a stockholder. Rent expense on this lease totaled $132,000,
$137,440, $153,626, $98,877, and $104,809 in 1995, 1996, 1997, and the eight
months ended August 31, 1997 and 1998, respectively.
The Company rents office equipment from a related party. Rent expense incurred
from this related party totaled $7,911, $8,183, $10,221, $5,578, and $3,002 in
1995, 1996, 1997, and the eight months ended August 31 1997 and 1998,
respectively.
The Company purchased office equipment from a related party. Capital equipment
purchased from this related party totaled $3,847, $7,630, $94,652, $859, and
<PAGE>
$122,049 in 1995, 1996, 1997, and the eight months ended August 31 1997 and
1998, respectively.
Note 13-Subsequent Event
On September 14, 1998 the stockholders sold their shares in both companies to
a corporation resulting in Zabit & Associates and Water Street Design Group
becoming wholly-owned subsidiaries of the buyer. References to the "Company"
and "Stockholders" in these financial statements are based on conditions, prior
to the sale of the companies.
Note 14-Pro Forma Information (Unaudited)
Pro forma tax expense
Pursuant to an acquisition of Zabit & Associates and Water Street Design
Group, Inc., these entities would become taxable corporations for federal and
state tax purposes. The object of the pro forma financial information is to
show what the significant effects on historical information might have been
had the combined entities been subject to federal and state taxes for the
three years ended December 31, 1997 and the eight months ended August 31, 1997
and 1998.
Pro forma earnings per share
Earnings per share were computed by dividing earnings by the weighted average
number of shares during each period presented. The weighted average number of
shares is as follows:
<TABLE>
<CAPTION>
Year Year Year Eight Eight
Ended Ended Ended Months Months
Dec. Dec. Dec. Aug. Aug.
31, 31, 31, 31, 31,
1995 1996 1997 1997 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pro forma weighted average
Shares outstanding 1,002,500 1,010,000 1,010,000 1,010,000 1,010,000
==============================================================
</TABLE>
<PAGE>
X-CEED, INC. AND SUBSIDIARIES AND
RESET, INC. AND MERCURY SEVEN, INC.
AND ZABIT & ASSOCIATES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial
statements give effect to the mergers (the "Mergers") of X-Ceed, Inc.
("X-Ceed") with Reset, Inc. ("Reset") and Mercury Seven Inc. ("Mercury Seven")
and Zabit & Associates, Inc. and Water Street Design Group, Ltd. (collectively
"Zabit"). The mergers were accounted for as purchase transactions. These pro
forma financial statements are presented for illustrative purposes only, and
therefore are not necessarily indicative of the operating results and
financial position that might have been achieved had the Mergers occurred as
of an earlier date, nor are they necessarily indicative of operating results
and financial position which may occur in the future.
A pro forma condensed combined balance sheet is provided as of May 31,
1998, giving effect to the Mergers as though they had been consummated on that
date. The pro forma condensed combined balance sheet combines the consolidated
balance sheet of X-Ceed as of May 31, 1998 with that of Reset and Mercury
Seven as of June 30, 1998 and Zabit as of August 31, 1998. Pro forma condensed
combined statements of operations are provided combining X-Ceed for the nine
month period ended May 31, 1998 and the year ended August 31, 1997 with Reset
and Mercury Seven for the nine month periods ended June 30, 1998 and the years
ended September 30, 1997, and Zabit for the nine month period ended August 31,
1998 and the year ended November 30, 1997, giving effect to the Mergers as
though they had occurred on September 1, 1996.
The pro forma financial statements are based on preliminary estimates
of values and transaction costs and preliminary appraisals. The actual
recording of the transactions will be based on final appraisals, values and
transaction costs. Accordingly, the actual recording of the transactions can
be expected to differ from these pro forma financial statements.
The historical condensed statement of operations presented for the year
ended August 31, 1997 is derived from the separate historical consolidated
financial statements of X-Ceed, Reset and Mercury Seven, incorporated by
reference, and Zabit, included elsewhere herein, and should be read in
conjunction with the companies? separate financial statements. The historical
condensed financial statements as of or for the nine months ended May 31, 1998
are derived from the historical interim consolidated financial statements of
X-Ceed, Reset and Mercury Seven, incorporated by reference, and Zabit, included
elsewhere herein, and have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and, in the
opinion of X-Ceed's, Reset's, Mercury Seven's and Zabit's respective
management's, include all adjustments necessary for a fair presentation of
financial information for such interim periods.
<PAGE>
X-CEED, INC. AND SUBSIDIARIES AND
RESET, INC. AND MERCURY SEVEN, INC.
AND ZABIT & ASSOCIATES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MAY 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical
-------------------------------------------------------------------
X-Ceed, Mercury Zabit &
ASSETS Inc. Reset, Inc. Seven Inc. Associates Inc.
------ ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $15,993,800 $ 42,721 $ 36,832 $ 367,637
Investment in marketable securities 208,790 - - -
Accounts receivable, net 9,776,409 611,201 259,697 2,147,363
Costs in excess of customer billings 1,276,520 - - 169,872
Inventories 1,060,210 - - -
Prepaid expenses and other current assets 669,214 64,916 10,025 90,196
----------- ---------- --------- ------------
Total current assets 28,984,943 718,838 306,554 2,775,068
PROPERTY AND EQUIPMENT, net 1,326,407 264,762 99,903 921,267
INTANGIBLE ASSETS, net - - - -
INVESTMENT AND ADVANCES IN SUBSIDIARY 714,321 - - -
DUE FROM OFFICER 1,222,483 - - 112,565
DEFERRED INCOME TAXES 451,525 22,000 - -
OTHER ASSETS 424,650 15,158 42,334 -
----------- ---------- --------- ------------
$33,124,329 $1,020,758 $ 448,791 $ 3,808,900
=========== ========== ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses $ 7,141,909 $ 84,174 $ 78,532 $ 766,673
Income taxes payable, current 276,599 65,000 16,092 -
Note payable - bank - - - 787,000
Current maturities of long-term debt 39,200 226,247 - 160,297
Notes payable - - - -
Customer billings in excess of costs 5,253,429 - - 217,235
Deferred revenue - - 40,000 -
Other current liabilities - - - 140,793
Deferred income taxes 131,950 242,000 - -
----------- ---------- --------- ------------
Total current liabilities $12,843,087 617,421 134,624 2,071,998
----------- ---------- --------- ------------
LONG-TERM LIABILITIES:
Long-term debt 22,100 - 96,000 638,893
Notes payable - - - -
Accrued lease obligation 816,000 47,500 - -
----------- ---------- --------- ------------
Total long-term liabilities 838,100 47,500 96,000 638,893
---------- ---------- --------- ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value 89,389 51,000 15,500 10,000
Preferred stock, $.05 par value - - - -
Additional paid-in capital 16,185,833 - 36,885 1,000
Unrealized gain (loss) on investments (232) - - -
Unearned compensation (157,126) - - -
Retained earnings 3,380,908 414,837 165,782 1,087,009
----------- ---------- --------- ------------
19,498,772 465,837 218,167 1,098,009
Treasury stock (55,630) (110,000) - -
----------- ---------- --------- ------------
19,443,142 355,837 218,167 1,098,009
----------- ---------- --------- ------------
Total stockholders' equity $33,124,329 $1,020,758 $ 448,791 $ 3,808,900
=========== ========== ========= ============
<CAPTION>
Pro Forma Adjustments
----------------------------------------------------------------------------------
Acquisition of Acquisition of
Acquisition of Mercury Seven Zabit & Proforma
ASSETS Reset, Inc. Inc. Associates, Inc. Combined
- ------ ------------------ -------------------- ---------------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ - 2a(ii) $(1,500,000) 2a(iii) $ (5,200,000) $ 9,740,990
Investment in marketable securities - - - 208,790
Accounts receivable, net - - - 12,794,670
Costs in excess of customer billings - - - 1,446,392
Inventories - - - 1,060,210
Prepaid expenses and other current assets - - - 834,351
------------ ----------- ------------ -------------
Total current assets - (1,500,000) (5,200,000) 26,085,403
PROPERTY AND EQUIPMENT, net - - - 2,612,339
INTANGIBLE ASSETS, net 2a(i) 5,985,313 2a(ii) 9,331,833 2a(iii) 24,014,556 39,331,702
INVESTMENT AND ADVANCES IN SUBSIDIARY - - - 714,321
DUE FROM OFFICER - - 2a(iii) (112,565) 1,222,483
DEFERRED INCOME TAXES - - - 473,525
OTHER ASSETS - - - 482,142
------------ ----------- ------------ -------------
$ 5,985,313 $ 7,831,833 $ 18,701,991 $ 70,921,915
============ =========== ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses $ - $ - $ - $ 8,071,288
Income taxes payable, current - - - 357,691
Note payable - bank - - - 787,000
Current maturities of long-term debt - - - 425,744
Notes payable - - 2a(iii) 4,800,000 4,800,000
Customer billings in excess of costs - - - 5,470,664
Deferred revenue - - - 40,000
Other current liabilities - - - 140,793
Deferred income taxes - - - 373,950
------------ ----------- ------------ -------------
Total current liabilities - - 4,800,000 20,467,130
------------ ----------- ------------ -------------
LONG-TERM LIABILITIES:
Long-term debt - - - 756,993
Notes payable - - 2a(iii) 1,930,208 1,930,208
Accrued lease obligation - - - 863,500
------------ ----------- ------------ -------------
Total long-term liabilities - - 1,930,208 3,550,701
------------ ----------- ------------ -------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value 2a(i) (38,318) 2a(ii) (4,767) 2a(iii) 12,587 135,392
Preferred stock, $.05 par value - - - -
Additional paid-in capital 2a(i) 6,328,468 2a(ii) 8,002,382 2a(iii) 18,046,205 48,600,772
Unrealized gain (loss) on investments - - - (232)
Unearned compensation - - 2a(iii) (5,000,000) (5,157,126)
Retained earnings 2a(i) (414,837) 2a(ii) (165,782) 2a(iii) (1,087,009) 3,380,908
------------ ----------- ------------ -------------
5,875,313 7,831,833 11,971,783 46,959,714
Treasury stock 2a(i) 110,000 - - (55,630)
------------ ----------- ------------ -------------
5,985,313 7,831,833 11,971,783 46,904,084
------------ ----------- ------------ -------------
Total stockholders' equity $ 5,985,313 $ 7,831,833 $ 18,701,991 $70,921,915
============ =========== ============ =============
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
<PAGE>
X-CEED, INC. AND SUBSIDIARIES AND
RESET, INC. AND MERCURY SEVEN, INC.
AND ZABIT & ASSOCIATES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MAY 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical
-----------------------------------------------------------
Mercury Zabit &
X-Ceed, Reset, Seven Associates,
Inc. Inc. Inc. Inc.
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
REVENUES, net $44,347,843 $ 1,613,225 $1,505,142 $ 7,456,654
----------- ------------ ---------- -----------
COSTS AND EXPENSES:
Operating expenses 42,226,240 1,071,552 1,345,691 7,206,261
Amortization of intangibles - - - -
Non-cash compensation 104,875 - - -
----------- ------------ ---------- -----------
42,331,115 1,071,552 1,345,691 7,206,261
----------- ------------ ---------- -----------
INCOME (LOSS) FROM OPERATIONS 2,016,728 541,673 159,451 250,393
OTHER INCOME (EXPENSE) 854,270 (15,362) - (73,335)
----------- ------------ ---------- -----------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES 2,870,998 526,311 159,451 177,058
PROVISION (BENEFIT) FOR INCOME TAXES 1,582,000 227,000 50,113 70,823
----------- ------------ ---------- -----------
NET INCOME (LOSS) $ 1,288,998 $ 299,311 $ 109,338 $ 106,235
=========== ============ ========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $0.18
=====
Diluted $0.16
=====
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING:
Basic 7,279,691
=========
Diluted 7,865,096
=========
<CAPTION>
Pro Forma Adjustments
----------------------------------------------------------------------------------
Acquisition of Acquisition of
Acquisition of Mercury Seven Zabit & Proforma
Reset, Inc. Inc. Associates, Inc. Combined
------------------- --------------------- --------------------- ------------
<S> <C> <C> <C> <C>
REVENUES, net $ - $ - $ - $54,922,864
---------- ----------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses - - - 51,849,744
Amortization of intangibles 2b(i) 224,449 2b(i) 349,944 2b(i) 900,546 1,474,939
Non-cash compensation - - 2b(i) 1,875,000 1,979,875
---------- ----------- ----------- -----------
224,449 349,944 2,775,546 55,304,558
---------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (224,449) (349,944) (2,775,546) (381,694)
OTHER INCOME (EXPENSE) - - 2b(ii) (407,336) 358,237
---------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (224,449) (349,944) (3,182,882) (23,457)
PROVISION (BENEFIT) FOR INCOME TAXES - - 2b(iii) (1,114,801) 815,135
---------- ----------- ----------- ----------
NET INCOME (LOSS) $ (224,449) $ (349,944) $(2,068,081) $ (838,592)
========== =========== =========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $(0.07)
======
Diluted $(0.07)
======
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING:
Basic
Diluted 11,879,978
==========
11,879,978
==========
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
<PAGE>
X-CEED, INC. AND SUBSIDIARIES AND
RESET, INC. AND MERCURY SEVEN, INC.
AND ZABIT & ASSOCIATES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical
-----------------------------------------------
Mercury Zabit &
X-Ceed, Reset, Seven Associates,
Inc. Inc. Inc. Inc.
------------ ---------- -------- -----------
<S> <C> <C> <C> <C>
REVENUES, net $62,885,464 $ 686,259 $759,029 $ 7,186,832
----------- ---------- -------- -----------
COSTS AND EXPENSES:
Operating expenses 58,961,258 443,733 717,848 6,972,839
Amortization of intangibles - - - -
Non-cash compensation - 50,000 750 -
---------- ---------- -------- -----------
58,961,258 493,733 718,598 6,972,839
---------- ---------- -------- -----------
INCOME (LOSS) FROM OPERATIONS 3,924,206 192,526 40,431 213,993
OTHER INCOME (EXPENSE) 260,414 - - (71,172)
---------- ---------- -------- -----------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES 4,184,620 192,526 40,431 142,821
PROVISION (BENEFIT) FOR INCOME TAXES 2,308,000 77,000 23,987 61,413
---------- ---------- -------- -----------
NET INCOME (LOSS) $1,876,620 $ 115,526 $ 16,444 $ 81,408
========== ========== ======== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $0.27
=====
Diluted $0.26
=====
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING:
Basic 7,023,770
=========
Diluted 7,339,625
=========
<CAPTION>
<S>
Pro Forma Adjustments
--------------------------------------------------------------------------------------
Acquisition of Acquisition of
Acquisition of Mercury Zabit & Proforma
Reset, Inc. Seven Inc. Associates, Inc. Combined
------------------- ------------------- ---------------------- -----------
<S> <C> <C> <C> <C>
REVENUES, net $ - $ - $ - $71,517,584
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses - - - 67,095,678
Amortization of intangibles 2b(i) 299,266 2b(i) 416,592 2b(i) 1,200,728 1,916,586
Non-cash compensation - - 2b(i) 2,500,000 2,550,750
----------- ----------- ----------- -----------
299,266 416,592 3,700,728 71,563,014
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (299,266) (416,592) (3,700,728) (45,430)
OTHER INCOME (EXPENSE) - - 2b(ii) (543,115) (353,873)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (299,266) (416,592) (4,243,842) (399,302)
PROVISION (BENEFIT) FOR INCOME TAXES - - 2b(iii) (1,486,402) 983,998
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (299,266) $ (416,592) $(2,757,441) $(1,383,301)
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $(0.12)
======
Diluted $(0.12)
======
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING:
Basic 11,624,057
==========
Diluted 11,624,057
==========
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
<PAGE>
X-CEED, INC. AND SUBSIDIARIES AND
RESET, INC. AND MERCURY SEVEN INC.
AND ZABIT & ASSOCIATES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only, giving effect to the mergers of
X-Ceed, Inc. ("X-Ceed") with Reset, Inc. ("Reset"), Mercury Seven Inc.
("Mercury Seven") and Zabit & Associate, Inc. ("Zabit"). The mergers were
accounted for as purchase transactions. In accordance with Commission
reporting rules, the pro forma combined statements of operations, and the
historical statements from which they are derived, present only income from
continuing operations and, therefore, do not include discontinued operations,
extraordinary items, and the cumulative effects of accounting changes.
Reset, Mercury Seven and Zabit report on a calendar year basis. For
purposes of combining Reset's, Mercury Seven's and Zabit's historical
financial information with X-Ceed's historical financial information in the
pro forma condensed financial statements, the financial information of Reset
and Mercury Seven has been accumulated for the twelve month period ended
September 30, 1997 and the nine month period ended June 30, 1998 and the
financial information of Zabit has been accumulated for the twelve month
period ended November 30, 1997 and the nine month period ended August 31,
1998.
2. Pro Forma Adjustments:
a. Pro Forma Condensed Combined Balance Sheet
(i) Acquisition of Reset by X-Ceed
Reflects the estimated purchase price of $6,341,150 for the
merger of Reset with and into X-Ceed. Of such estimated purchase price,
$6,341,150 represents the issuance of 1,268,230 shares of X-Ceed $.01 par
value Common Stock. The 1,268,230 shares issued include 18,230 shares issued
to a third party as a finder?s fee. The foregoing, although not necessarily
indicative of future price levels, assumes a recent average market price of
X-Ceed Common Stock.
The preliminary allocation of the purchase price paid for
the net assets of Reset based upon the estimated fair values of such net
assets is as follows:
<TABLE>
<S> <C>
Estimated acquisition cost $ 6,341,150
Less: historical book value of net assets, which
approximate fair value, at May 31, 1998 (355,837)
-------------
Goodwill acquired (amortized over 20 years) $ 5,985,313
=============
</TABLE>
<PAGE>
2. Pro Forma Adjustments: (Cont'd)
a. Pro Forma Condensed Combined Balance Sheet (Cont'd)
(ii) Acquisition of Mercury Seven by X-Ceed
Reflects the estimated purchase price of $9,550,000 for the
merger of Mercury Seven with and into X-Ceed. Of such estimated purchase price,
$8,050,000 represents the issuance of 1,073,333 shares of X-Ceed $.01 par value
Common Stock with the balance of $1,500,000 paid in cash. The foregoing,
although not necessarily indicative of future price levels, assumes a recent
average market price of X-Ceed common stock.
The preliminary allocation of the purchase price paid for
the net assets of Reset based upon the estimated fair values of such net
assets is as follows:
<TABLE>
<S> <C>
Estimated acquisition cost $ 9,550,000
Less: historical book value of net assets, which
approximate fair value, at May 31, 1998 (218,167)
-------------
Intangible assets acquired $ 9,331,833
=============
Allocation of intangible assets acquired:
Trademarks (amortized over 20 years) $ 1,000,000
Goodwill (amortized over 20 years) 8,331,833
-------------
$ 9,331,833
=============
</TABLE>
(iii) Acquisition of Zabit by X-Ceed
Reflects the estimated purchase price of $30,000,000 for the
merger of Zabit with and into X-Ceed. Of such estimated purchase price,
$18,069,792 represents the issuance of 2,258,724 shares of X-Ceed $.01 par
value common stock with the balance of $11,930,208 paid in cash ($5,000,000)
and the issuance of notes ($6,730,208) to shareholders of Zabit. $5,000,000 of
the common stock consideration was issued to Zabit shareholders/employees in
connection with future services to be provided. The foregoing, although not
necessarily indicative of future price levels, assumes a recent average market
price of X-Ceed common stock.
The preliminary allocation of the purchase price paid for
the net assets of Zabit based upon the estimated fair values of such net
assets is as follows:
<TABLE>
<S> <C>
Estimated acquisition cost $ 30,000,000
Less: historical book value of net assets, which
approximate fair value, at May 31, 1998 (985,444)
--------------
Intangibles acquired $ 29,014,556
==============
Allocation of intangible assets acquired:
Trademark (amortized over 20 years) $ 3,200,000
Unearned compensation (amortized over 2 years) 5,000,000
Goodwill (amortized over 20 years) 20,814,556
--------------
Intangibles acquired $ 29,014,556
==============
</TABLE>
<PAGE>
2. Pro Forma Adjustments: (Cont'd)
b. Pro Forma Condensed Combined Statements of Operations
(i) Depreciation and Amortization
Reflects adjustment to depreciation and amortization based
on the preliminary purchase accounting allocations related to intangible
assets acquired in connection with the acquisitions of Reset and Mercury
Seven, as more fully described in Note 2a.
(ii) Interest Expense
Reflects adjustment to interest expense on notes payable
issued to shareholders of Zabit.
(iii) Income Taxes
Reflects recognition of income tax effect of pro forma
adjustments related to acquisition of Zabit.
(iv) Earnings Per Common Share
Pro forma weighted average number of common shares outstanding
for the nine months ended May 31, 1998 and the year ended August 31,
1997 are based upon X-Ceed's, Reset's, Mercury Seven's and Zabit's historical
weighted average shares, after adjustment for the estimated conversion of
Reset, Mercury Seven and Zabit shares to shares of X-Ceed common stock.
