<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): August 5, 1998 and
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 August 29, 1998, X-ceed completed the acquisition of Reset, Inc.
Attached hereto are the Audited Financial Statements of Reset, Inc. for the year
ended December 31, 1997 and unaudited statements for the six months ended June
30, 1998 and 1997. 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.
On September 9, 1998, X-ceed completed the acquisition of
Mercury Seven, Inc. Attached hereto are the Audited Financial Statements of
Mercury Seven, Inc. for the year ended December 31, 1997 and unaudited
statements for the six months ended June 30, 1998 and 1997.
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 and Reset, Inc. and Mercury Seven,
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 10, 1998
<PAGE>
RESET, INC.
REPORT ON AUDIT OF FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
CONTENTS
Page
----
Independent auditors' report F-1
Balance sheets F-2
Statements of earnings F-3
Statement of stockholders' equity F-4
Statements of cash flows F-5
Notes to financial statements F-6 - F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders
Reset, Inc.
New York, New York
We have audited the accompanying balance sheet of Reset, Inc. as of December
31, 1997 and the related statements of earnings, stockholders' equity and cash
flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reset, Inc. as of December
31, 1997, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/S/ HOLTZ RUBENSTEIN & CO., LLP
-------------------------------
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
October 9, 1998
F-1
<PAGE>
RESET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 998 $ 42,721
Accounts receivable, no allowance for doubtful accounts 239,342 611,201
Due from shareholders 52,916 64,916
----------- -----------
Total current assets 293,256 718,838
DEFERRED INCOME TAXES (Note 5) 22,000 22,000
PROPERTY AND EQUIPMENT, net (Note 3) 236,277 264,762
OTHER ASSETS 15,158 15,158
----------- -----------
$ 566,691 $ 1,020,758
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 53,615 $ 84,174
Deferred income taxes (Note 5) 85,000 242,000
Notes payable, shareholders (Note 4) 130,000 130,000
Income taxes payable (Note 5) 39,000 65,000
Note payable, other (Note 10) -- 96,247
----------- -----------
Total current liabilities 307,615 617,421
----------- -----------
ACCRUED LEASE OBLIGATION (Note 6) 47,500 47,500
----------- -----------
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY: (Note 10)
Common stock, no par value; authorized 1,000
shares; 111.11 issued, stated at 51,000 51,000
Retained earnings 160,576 414,837
----------- -----------
211,576 465,837
Less - treasury stock, at cost, 0 and 11.11 shares, respectively -- (110,000)
----------- -----------
211,576 355,837
----------- -----------
$ 566,691 $ 1,020,758
=========== ===========
</TABLE>
See notes to financial statements
F-2
<PAGE>
RESET, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, ---------------------------
1997 1998 1997
---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES (Note 7) $1,050,029 $1,249,455 $ 427,690
COST OF REVENUES 553,554 572,931 181,055
---------- ---------- ----------
GROSS PROFIT 496,475 676,524 246,635
---------- ---------- ----------
COSTS AND EXPENSES:
General and administrative expenses 216,285 222,515 83,505
Interest expense, net 9,614 5,748 3,467
---------- ---------- ----------
225,899 228,263 86,972
---------- ---------- ----------
INCOME BEFORE TAXES 270,576 448,261 159,663
INCOME TAX PROVISION (Note 5) 110,000 194,000 71,000
---------- ---------- ----------
NET INCOME $ 160,576 $ 254,261 $ 88,663
========== ========== ==========
NET INCOME PER COMMON SHARE:
(Note 10)
Basic $ 1,559 $ 2,376 $ 877
========== ========== ==========
Diluted $ 1,559 $ 2,376 $ 877
========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF SHARES:
Basic 103 107 100
========== ========== ==========
Diluted 103 107 100
========== ========== ==========
</TABLE>
See notes to financial statements
F-3
<PAGE>
RESET, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------
Number
of Dollar Retained Treasury
Shares Amount Earnings Stock Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 100.00 $ 1,000 $ -- $ -- $ 1,000
Issuance of stock for
services (Note 10) 11.11 50,000 -- -- 50,000
Net income -- -- 160,576 -- 160,576
--------- --------- --------- --------- ---------
Balance, December 31, 1997 111.11 51,000 160,576 -- 211,576
Purchase of treasury shares
(unaudited) (Note 10) -- -- -- (110,000) (110,000)
Net income (unaudited) -- -- 254,261 -- 254,261
--------- --------- --------- --------- ---------
Balance, June 30, 1998
(unaudited) 111.11 $ 51,000 $ 414,837 $(110,000) $ 355,837
========= ========= ========= ========= =========
</TABLE>
See notes to financial statements
F-4
<PAGE>
RESET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, ------------------------
1997 1998 1997
--------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 160,576 $ 254,261 $ 88,663
--------- --------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 36,248 35,670 11,248
Non-cash consideration 50,000 -- --
Deferred income taxes 71,000 157,000 48,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (239,342) (371,859) (129,883)
Increase (decrease) in assets:
Accounts payable 53,615 30,559 25,153
Other assets (15,158) -- (1,000)
Accrued lease obligation 39,500 -- 10,500
Income taxes payable 39,000 26,000 23,000
--------- --------- ---------
Total adjustments 34,863 (122,630) (12,982)
--------- --------- ---------
Net cash provided by operating activities 195,439 131,631 75,681
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of equipment (142,525) (64,156) (27,468)
--------- --------- ---------
Net cash used in investing activities (142,525) (64,156) (27,468)
--------- --------- ---------
FINANCING ACTIVITIES:
Due to shareholders (52,916) (12,000) (22,916)
Principal payments of long-term debt -- (13,752) --
--------- --------- ---------
Net cash used in financing activities (52,916) (25,752) (22,916)
--------- --------- ---------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (2) 41,723 25,297
CASH AND CASH EQUIVALENTS,
beginning of period 1,000 998 1,000
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 998 $ 42,721 $ 26,297
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest $ 8,700 $ -- $ --
========= ========= =========
Taxes $ -- $ 11,000 $ --
========= ========= =========
</TABLE>
See notes to financial statements
F-5
<PAGE>
RESET, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 AND
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
AND JUNE 30, 1997 (UNAUDITED)
1. Nature of Operations:
The Company was incorporated in June 1996 and commenced operations in
January 1997. The Company designs, developments, and maintains Internet web
sites.
2. Summary of Significant Accounting Policies:
a. Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
b. Revenue recognition
Revenues from the design and development of Internet web sites are
recognized using the percentage-of-completion method based on the ratio of
costs incurred to total estimated costs. To the extent costs incurred and
anticipated costs to complete projects in progress exceed anticipated
billings, a loss is recognized for the excess.
Revenue for subsequent maintenance of Internet web sites is
recognized over the period during which the maintenance is supplied.
c. Depreciation and amortization
Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the estimated
useful lives of the related assets or the remaining term of the lease,
whichever is shorter. Maintenance and repairs of property and equipment are
charged to operations and major improvements are capitalized. Upon retirement,
sale or other disposition of property and equipment, the cost and accumulated
depreciation are eliminated from the accounts and gain or loss is included in
operations. The estimated useful lives of equipment and furniture and fixtures
are as follows:
Years
-----
Equipment 5 to 7
Furniture and fixtures 7
F-6
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
d. Taxes on income
The Company accounts for income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109
requires the recognition of deferred tax assets and liabilities for the
expected future income tax consequences of events that have been recognized in
a company's financial statements or tax return. Deferred income taxes reflect
the net tax effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts for
income tax purposes using enacted tax rates in effect in the years in which
the temporary differences are expected to reverse.
e. 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 those estimates.
f. Interim financial statements
The unaudited financial statements for the six months ended June 30,
1998 and 1997 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.
g. Advertising costs
Advertising costs are charged to operations when incurred.
Advertising expense approximated $5,100 for the year ended December 31, 1997
and $69,000 and $0 for the six months ended June 30, 1998 and 1997,
respectively.
h. New accounting standards
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
The new standard is effective for periods beginning after December
15, 1997 and require comparative information for earlier years to be restated.
The implementation of the new standard will not affect the Company's results
of operations and financial position, but may have an impact on future
financial statements disclosures.
i. Long-lived assets
Long-lived assets are evaluated for impairment when events or
changes in circumstances indicate that the carrying amount of the assets may
not be recoverable through the estimated undiscounted future cash flows from
the use of these assets. When any such impairment exists, the related assets
will be written down to fair value. No impairment losses have been necessary
through December 31, 1997.
F-7
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
j. Stock-based compensation
The company accounts for its stock option awards 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 makes pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied as required by SFAS No. 123,
"Accounting for Stock-Based Compensation."
k. Net income per common share and per common and common equivalent
share
Net income per common share and per common equivalent share is based
upon weighted average common and common equivalent shares outstanding. Common
equivalent shares include the dilutive effect of stock options, if any.
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
simplifies the standards for computing earnings per share and replaces the
presentation of primary earnings per share with basic earnings per share. It
also requires dual presentation of basic and diluted earnings per share on the
face of the consolidated statement of operations for all entities with complex
capital structure and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and
denominator of the diluted EPS computation. For the year ended December 31,
1997 and the six months ended June 30, 1998 and 1997, basic and diluted
earnings per share are the same as there were no dilutive securities
outstanding.
3. Property and Equipment:
Property and equipment, at cost, consists of the following:
December 31, June 30,
1997 1998
-------- --------
(Unaudited)
Equipment $209,201 $261,906
Furniture and fixtures 500 500
Leasehold improvements 62,823 74,273
-------- --------
272,524 336,679
Less accumulated depreciation 36,247 71,917
-------- --------
$236,277 $264,762
======== ========
4. Notes Payable, Stockholders:
In 1997, the Company purchased equipment from two officers/shareholders
for $130,000. Consideration consisted of 8% notes, principal and interest
payable on April 1, 2001. The notes provide for accelerated payment in the
event of a change in ownership, as defined. A change in ownership occurred
subsequent to June 30, 1998, and accordingly, the obligations have been
classified as a current liability.
F-8
<PAGE>
5. Income Taxes:
Taxes on income consist of the following:
Six Months Ended
Year Ended June 30,
December 31, ------------------------
1997 1998 1997
-------- -------- --------
(Unaudited) (Unaudited)
Current:
Federal $ 20,000 $ 18,000 $ 13,000
State 19,000 19,000 10,000
-------- -------- --------
39,000 37,000 23,000
-------- -------- --------
Deferred:
Federal 44,000 95,000 30,000
State 27,000 62,000 18,000
-------- -------- --------
71,000 157,000 48,000
-------- -------- --------
$110,000 $194,000 $ 71,000
======== ======== ========
The difference between the Federal statutory tax rate and the effective
tax rate resulted from the following:
Six Months Ended
Year Ended June 30,
December 31, ---------------
1997 1998 1997
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State and local income taxes,
net of Federal tax benefit 11.2 11.9 11.6
Other items, net (4.5) (2.6) (1.1)
---- ---- ----
Effective tax rate 40.7% 43.3% 44.5%
==== ==== ====
Net deferred income tax asset (liability) is comprised of the following:
December 31, June 30,
1997 1998
--------- ---------
Accounts receivable $(110,000) $(281,000)
Accounts payable and accrued expenses 25,000 39,000
Accrued lease obligation 22,000 22,000
--------- ---------
$ (63,000) $(220,000)
========= =========
The Company files its federal and state income tax returns on a cash
basis.
6. Commitments:
The Company conducts its operations from leased space. The lease
(classified as an operating lease) expires in April of 2008. In addition, the
Company leases office space at another location which is partially sublet to a
third party. The lease expires in June 2004.
F-9
<PAGE>
6. Commitments: (Cont'd)
Future minimum rental commitments for the terms of the leases are as
follows:
Deduct
Years Ending Sublease
December 31, Commitments Rental Commitments
------------ ----------- ------ -----------
1998 $ 118,600 $ 18,000 $ 100,600
1999 122,600 18,000 104,600
2000 126,700 18,000 108,700
2001 130,900 18,000 112,900
2002 97,500 18,000 79,500
Thereafter 72,100 27,000 45,100
Rental expense approximated $60,000 for the year ended December 31, 1997
and $45,000 and $12,000 for the six months ended June 30, 1998 and 1997,
respectively.
The Company recognizes rent expense on its leases on a straight-line
basis. The excess of rent expense on a straight-line basis over the rental
payments made, is recorded as an accrued liability.
7. Major Customers:
Revenues from one customer approximated 37%, 11% and 75% of total
revenues for the year ended December 31, 1997 and the six months ended June
30, 1998 and 1997, respectively. Revenues from two other customers
approximated 12% and 10% of total revenues for the year ended December 31,
1997.
8. Fair Values of Financial Instruments:
The carrying amounts reported in the balance sheet for cash, accounts
receivable, and accounts and notes payable approximate fair value because of
the immediate or short-term maturity of these financial instruments.
9. Concentration of Credit Risk:
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivables. Cash
consists of deposits and money market funds placed with various high credit
quality financial institutions. Concentrations of credit risk with respect to
receivables are limited due to the geographically diverse customer base.
10. Stockholders' Equity:
The Company is authorized to issue 1,000 shares of common stock, no par
value.
In September 1997, the Company granted 11.11 shares of stock to an
employee. The value of these shares at the time of grant ($50,000) was charged
to operations in 1997. The grantee's employment terminated in January 1998. In
May 1998, the grantee sold these shares back to the Company for $110,000,
consideration consisting of an installment note. The principal balance of this
note outstanding at June 30, 1998 approximated $96,250, which was paid in full
in July 1998.
F-10
<PAGE>
MERCURY SEVEN, INC.
REPORT ON AUDIT OF FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
CONTENTS
Page
----
Independent auditors' report F-1
Balance sheets F-2
Statements of earnings F-3
Statement of stockholders' equity F-4
Statements of cash flows F-5
Notes to financial statements F-6 - F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Mercury Seven, Inc.
New York, New York
We have audited the accompanying balance sheet of Mercury Seven, Inc. as of
December 31, 1997 and the related statements of earnings, stockholders'
equity and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mercury Seven, Inc. as
of December 31, 1997, and the results of its operations and cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/S/ HOLTZ RUBENSTEIN & CO., LLP
-------------------------------
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
August 7, 1998
F-1
<PAGE>
MERCURY SEVEN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 6,243 $ 36,832
Accounts receivable 96,245 259,697
Prepaid expenses and other current assets -- 10,025
-------- --------
Total current assets 102,488 306,554
PROPERTY AND EQUIPMENT, net (Note 3) 44,618 99,903
OTHER ASSETS 1,000 42,334
-------- --------
$148,106 $448,791
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expense $ 39,096 $ 78,532
Deferred revenue -- 40,000
Income taxes payable 5,631 16,092
-------- --------
Total current liabilities 44,727 134,624
-------- --------
REVOLVING LINE OF CREDIT (Note 4) -- 96,000
-------- --------
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY: (Note 8)
Common stock, $.01 par value; authorized 3,000,000
shares; 1,550,000 issued 15,500 15,500
Additional paid-in capital 36,885 36,885
Retained earnings 50,994 165,782
-------- --------
103,379 218,167
-------- --------
$148,106 $448,791
======== ========
</TABLE>
See notes to financial statements
F-2
<PAGE>
MERCURY SEVEN, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, ---------------------------
1997 1998 1997
---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES (Note 6) $1,081,023 $1,183,147 $ 481,459
COST OF REVENUES 725,506 710,396 301,112
---------- ---------- ----------
GROSS PROFIT 355,517 472,751 180,347
OPERATING EXPENSES (Note 5) 274,880 345,963 164,316
---------- ---------- ----------
INCOME BEFORE TAXES 80,637 126,788 16,031
LOCAL INCOME TAX PROVISION 7,100 12,000 2,300
---------- ---------- ----------
NET EARNINGS $ 73,537 $ 114,788 $ 13,731
========== ========== ==========
PRO FORMA INFORMATION: (Note 9)
Historical income before taxes $ 80,637 $ 126,788 $ 16,031
Pro forma income taxes 24,100 50,000 6,600
---------- ---------- ----------
PRO FORMA NET EARNINGS $ 56,537 $ 76,788 $ 9,431
========== ========== ==========
PRO FORMA NET EARNINGS
PER COMMON SHARE $ .04 $ .05 $ .01
========== ========== ==========
</TABLE>
See notes to financial statements
F-3
<PAGE>
MERCURY SEVEN, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional Retained
Number of Dollar Paid-in Earnings
Shares Amount Capital (Deficit) Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 1,550,000 $ 15,500 $ -- $ (22,543) $ (7,043)
Issuance of securities for
services (Note 8) -- -- 1,000 -- 1,000
Capital contributions (Note 8) -- -- 35,885 -- 35,885
Net earnings, December 31, 1997 -- -- -- 73,537 73,537
--------- --------- --------- --------- ---------
Balance, January 1, 1998 1,550,000 15,500 36,885 50,994 103,379
Net earnings, June 30,
1998 (unaudited) -- -- -- 114,788 114,788
--------- --------- --------- --------- ---------
Balance, June 30, 1998
(unaudited) 1,550,000 $ 15,500 $ 36,885 $ 165,782 $ 218,167
========= ========= ========= ========= =========
</TABLE>
See notes to financial statements
F-4
<PAGE>
MERCURY SEVEN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, --------------------------
1997 1998 1997
--------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 73,537 $ 114,788 $ 13,731
--------- --------- ---------
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation expense 24,662 9,396 10,000
Non-cash compensation 1,000 -- 500
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Deferred tax benefit (1,000) -- --
Accounts receivable (96,245) (163,453) (69,354)
Prepaid expenses -- (10,025) (32,509)
Other assets -- (41,334) --
Increase (decrease) in liabilities:
Accounts payable 39,096 39,437 138,434
Deferred revenue (75,000) 40,000 (75,000)
Taxes payable 5,631 10,461 2,300
--------- --------- ---------
Total adjustments (102,856) (115,518) (25,629)
--------- --------- ---------
Net cash used in operating activities (29,319) (730) (11,898)
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (63,558) (64,681) (41,000)
--------- --------- ---------
Net cash used in investing activities (63,558) (64,681) (41,000)
--------- --------- ---------
FINANCING ACTIVITIES:
Net borrowings from revolving line of credit -- 96,000 --
Capital contributions 35,885 -- --
Repayment of stockholder loans 20,132 -- 20,132
--------- --------- ---------
Net cash provided by financing activities 56,017 96,000 20,132
--------- --------- ---------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (35,860) 30,589 (32,766)
CASH AND CASH EQUIVALENTS,
beginning of period 42,103 6,243 42,103
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 6,243 $ 36,832 $ 9,337
========= ========= =========
</TABLE>
See notes to financial statements
F-5
<PAGE>
MERCURY SEVEN, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Information with respect to the six months ended
June 30, 1998 and 1997 is unaudited)
1. Nature of Operations:
The Company, incorporated in November 1996, is a consultancy and
development company that specializes in advising and assisting clients in
building and developing Internet-based businesses. The Company is also the
creator and publisher of ChannelSeven.com ("ChannelSeven"), an online
network for Internet professionals worldwide. The network incorporates
cross-marketing navigational techniques and centralized media advertising
management to connect Internet professionals with valuable resources and
services. In addition to the online network, ChannelSeven provides its core
audience with printed publications, special industry events, a speaker's
bureau and a subscription based E-mail newsletter. ChannelSeven derives its
revenues from advertising and sponsorship.
2. Summary of Significant Accounting Policies:
a. Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalent.
b. Revenue recognition
For contracts, the percentage-of-completion method is used, whereby
revenue and related costs are recognized as work on the contracts
progresses.
c. Depreciation and amortization
Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the estimated
useful lives of the related assets or the remaining term of the lease,
whichever is shorter. Maintenance and repairs of property and equipment are
charged to operations and major improvements are capitalized. Upon
retirement, sale or other disposition of property and equipment, the cost
and accumulated depreciation are eliminated from the accounts and gain or
loss is included in operations. The estimated useful lives of property and
equipment are as follows:
Years
-----
Vehicle 5
Computer hardware 5
Furniture and fixtures 7
F-6
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
d. Income taxes
The shareholders of the Company elected to be taxed as a "Small
Business Corporation" for federal and state income tax purposes. As a result
of this election, the income of the Company will be taxed directly to the
individual shareholders. Accordingly, no provision for federal and state
income taxes is included in the financial statements of the Company.
The Company operates its business primarily in New York City (the
"City"). For income tax purposes, the City doesn't recognize the Company's
"Small Business Corporation" election. Accordingly, the Company has accrued
for the related income taxes.
e. 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 those estimates.
f. Interim financial statements
The unaudited financial statements for the six months ended June 30,
1998 and 1997 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.
g. Advertising costs
Advertising costs are charged to operations when the advertising first
takes place. Advertising expense approximated $1,200 for the year ended
December 31, 1997 and $32,000 and $0 for the six months ended June 30, 1998
and 1997, respectively.
h. New accounting standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and display of comprehensive income its components and
accumulated balances. Comprehensive income is defined to include all changes
in equity except those resulting from investments by owners and distribution
to owners. Among other disclosures, SFAS No. 130 requires that all items
that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which establishes
standards for reporting information about operating segments. It also
establishes standards for disclosure regarding products and services,
geographic areas and major customers.
These new standards are effective for periods beginning after December
15, 1997 and require comparative information for earlier years to be
restated. The implementation of these new standards will not affect the
Company's results of operations and financial position, but may have an
impact on future financial statements disclosures.
F-7
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
i. Long-lived assets
Long-lived assets, such as equipment, are evaluated for impairment when
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted future cash
flows from the use of these assets. When any such impairment exists, the
related assets will be written down to fair value. No impairment losses have
been necessary through December 31, 1997.
j. Stock-based compensation
The Company accounts for its stock option awards under the intrinsic
value based method of account, 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 makes
pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting had been applied as required by SFAS No.
123, "Accounting for Stock-Based Compensation."
k. Concentration of credit risk:
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivables. Cash
consists of deposits and money market funds placed with various high credit
quality financial institutions. Concentrations of credit risk with respect
to receivables are limited due to the geographically diverse customer base.
3. Property and Equipment:
Property and equipment, at cost, consists of the following:
December 31, June 30,
1997 1998
--------- -----------
(Unaudited)
Vehicle $ 7,500 $ 7,500
Computer hardware 56,023 98,020
Furniture and fixtures 5,756 22,891
Leasehold improvements - 5,549
--------- -----------
69,279 133,960
Less accumulated depreciation and amortization 24,661 34,057
--------- -----------
$ 44,618 $ 99,903
========= ===========
Depreciation expense approximated $24,700 for the year ended December
31, 1997 and $9,400 and $10,000 for the six months ended June 30, 1998 and
1997, respectively.
4. Revolving Line of Credit:
The Company maintains a line of credit with a bank. The line of credit
bears interest at 2.0% over the bank's prime rate (8.5% at December 31,
1997) and has a maximum borrowing limit of $200,000. The line is
collateralized by all the assets of the Company and guaranteed by the
stockholders of the Company.
F-8
<PAGE>
5. Commitments:
a. Lease commitment
The Company conducts its operations from leased space. The lease
(classified as an operating lease) expires in April of 2008. Minimal rental
commitments for the terms of the lease are as follows:
Years Ending
December 31,
------------
1998 $ 90,200
1999 122,600
2000 130,600
2001 135,600
2002 139,100
Thereafter 784,700
Rent expense approximated $33,000 for the year ended December 31, 1997
and $16,000 and $10,000 for the six months ended June 30, 1998 and 1997,
respectively.
b. Employment agreements
The Company is party to an employment agreement with one employee which
provides for an annual salary aggregating $105,000. Thereafter, the employee
shall be entitled to a minimum ten percent (10%) increase in base salary at
the commencement of the first and second anniversary during the employment
period.
6. Major Customers:
Revenues to one customer approximated 30% and 33% of total revenues for
the year ended December 31, 1997 and the six months ended June 30, 1997,
respectively. Revenues to another customer approximated 27% of total
revenues for the year ended December 31, 1997. Revenues to two customers
approximated 24%and 12% of total revenues for the six months ended June 30,
1998.
7. Fair Values of Financial Instruments:
The carrying amounts reported in the balance sheet for cash, accounts
receivable, and accounts and notes payable approximate fair value because of
the immediate or short-term maturity of these financial instruments.
8. Stockholders' Equity:
a. Initial capitalization
In 1996, the Company's founding shareholders (the "founders") were
issued 50,000 shares of common stock for consideration of $500. During the
year ended December 31, 1997, the founders contributed approximately $35,900
to the Company.
In March,1998, the Company authorized a 31-for-1 stock split of the
Company's common stock. As a result of the split, 1,500,000 additional
shares were issued, and retained earnings was reduced by $15,000. All
references in the accompanying financial statements to the number of common
shares and per share amounts for 1997 have been restated to reflect the
stock split.
F-9
<PAGE>
8. Stockholders' Equity: (Cont'd)
b. Stock options
In January 1997, the Company granted employees the right to receive
approximately 12,000 shares of common stock. The value of the shares
underlying the options ($1,000) was charged to operations in 1997.
In March 1998, the Company granted two employees options to acquire
approximately 200,000 shares of common stock. The exercise price of the
options ($100,000) approximated the value of the shares underlying the
options, and accordingly, there was no charge to operations. The fair value
of these options was immaterial.
9. Pro Forma Information (Unaudited):
a. Pro forma tax expense
Pursuant to an acquisition of Mercury Seven, Inc.'s stock, this entity
would become a taxable corporation 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 entity
been subject to federal and state taxes for the year ended December 31, 1997
and the six months ended June 30, 1998 and 1997.
b. Pro forma earnings per share
Earnings per share were computed by dividing earnings by the weighted
average number of shares of common stock outstanding during each period
presented. The weighted average number of shares is as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, --------------------------
1997 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Pro forma weighted shares outstanding 1,550,000 1,550,000 1,550,000
========= ========= =========
</TABLE>
Basic and diluted earnings per share amounts were equivalent for all
periods presented.
10. Supplemental Cash Flow Disclosure:
Cash paid during the years for:
Six Months Ended
Year Ended June 30,
December 31, ---------------------
1997 1998 1997
-------- ------ -------
Income taxes $ 2,469 $1,539 $ --
======== ====== =======
Interest $ -- $1,493 $ --
======== ====== =======
F-10
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
-----------------------------
AND
---
RESET, INC. AND MERCURY SEVEN, INC.
-----------------------------------
UNAUDITED PRO FORMA CONDENSED COMBINED
--------------------------------------
FINANCIAL STATEMENTS
--------------------
The following unaudited pro forma condensed combined financial
statements gives effect to the mergers (the "Mergers") of X-Ceed, Inc.
("X-Ceed") with Reset, Inc. ("Reset") and Mercury Seven Inc. ("Mercury Seven").
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. Pro forma condensed combined statements of income 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 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 income presented for the year
ended August 31, 1997 is derived from the separate historical consolidated
financial statements of X-Ceed, incorporated by reference, and Reset and Mercury
Seven 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. incorporated by
reference, and Reset and Mercury Seven, 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 and
Mercury Seven'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.
-----------------------------------
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
-------------------------------------------------
MAY 31, 1998
------------
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma Adjustments
------------------------------------------ ----------------------------------------------------
Mercury Acquisition of
X-Ceed, Reset, Seven Acquisition of Mercury Seven Pro Forma
ASSETS Inc. Inc. Inc. Reset, Inc. Inc. Combined
------ ----------- ---------- --------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,993,800 $ 42,721 $ 36,832 $ -- 2a(ii) $ (1,500,000) $ 14,573,353
Investment in marketable
securities 208,790 -- -- -- -- 208,790
Accounts receivable, net 9,776,409 611,201 259,697 -- -- 10,647,307
Costs in excess of
customer billings 1,276,520 -- -- -- -- 1,276,520
Inventories 1,060,210 -- -- -- -- 1,060,210
Prepaid expenses and
other current assets 669,214 64,916 10,025 -- -- 744,155
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 28,984,943 718,838 306,554 -- (1,500,000) 28,510,335
PROPERTY AND EQUIPMENT, net 1,326,407 264,762 99,903 -- -- 1,691,072
INTANGIBLE ASSETS, net -- -- -- 2a(i) 5,985,313 2a(ii) 9,331,833 15,317,146
INVESTMENTS AND ADVANCES
IN SUBSIDIARY 714,321 -- -- -- -- 714,321
DUE FROM OFFICER 1,222,483 -- -- -- -- 1,222,483
DEFERRED INCOME TAXES 451,525 22,000 -- -- -- 473,525
OTHER ASSETS 424,650 15,158 42,334 -- -- 482,142
------------ ------------ ------------ ------------ ------------ ------------
$ 33,124,329 $ 1,020,758 $ 448,791 $ 5,985,313 $ 7,831,833 $ 48,411,024
============ ============ ============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other
accrued expenses $ 7,141,909 $ 84,174 $ 78,532 $ -- $ -- $ 7,304,615
Income taxes payable,
current 276,599 65,000 16,092 -- -- 357,691
Current maturities of
long-term debt 39,200 226,247 -- -- -- 265,447
Customer billings in
excess of costs 5,253,429 -- -- -- -- 5,253,429
Deferred revenue -- -- 40,000 -- -- 40,000
Deferred income taxes 131,950 242,000 -- -- -- 373,950
------------ ------------ ------------ ------------ ------------ ------------
Total current
liabilities 12,843,087 617,421 134,624 -- -- 13,595,132
------------ ------------ ------------ ------------ ------------ ------------
LONG-TERM LIABILITIES:
Long-term debt 22,100 -- 96,000 -- -- 118,100
Accrued lease obligation 816,000 47,500 -- -- -- 863,500
------------ ------------ ------------ ------------ ------------ ------------
Total long-term
liabilities 838,100 47,500 96,000 -- -- 981,600
------------ ------------ ------------ ------------ ------------ ------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01
par value 89,389 51,000 15,500 2a(i) (38,318) 2a(ii) (4,767) 112,805
Preferred stock, $.05
par value -- -- -- -- -- --
Additional paid-in
capital 16,185,833 -- 36,885 2a(i) 6,328,468 2a(ii) 8,002,382 30,553,567
Unrealized gain (loss)
on investments (232) -- -- -- -- (232)
Unearned compensation (157,126) -- -- -- -- (157,126)
Retained earnings 3,380,908 414,837 165,782 2a(i) (414,837) 2a(ii) (165,782) 3,380,908
------------ ------------ ------------ ------------ ------------ ------------
19,498,772 465,837 218,167 5,875,313 7,831,833 33,889,922
Treasury stock (55,630) (110,000) -- 2a(i) 110,000 -- (55,630)
------------ ------------ ------------ ------------ ------------ ------------
19,443,142 355,837 218,167 5,985,313 7,831,833 33,834,292
------------ ------------ ------------ ------------ ------------ ------------
$ 33,124,329 $ 1,020,758 $ 448,791 $ 5,985,313 $ 7,831,833 $ 48,411,024
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
-----------------------------
AND
---
RESET, INC. AND MERCURY SEVEN, INC.
-----------------------------------
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
------------------------------------------------
NINE MONTHS ENDED MAY 31, 1998
------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma Adjustments
-------------------------------------- ------------------------------------------------
Mercury Acquisition of
X-Ceed, Reset, Seven Acquisition of Mercury Seven Pro Forma
Inc. Inc. Inc. Reset, Inc. Inc. Combined
----------- ----------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES, net $44,347,843 $1,613,225 $ 1,505,142 $ -- $ -- $47,466,210
OPERATING EXPENSES 42,331,115 1,071,552 1,345,691 2b(i) 224,449 2b(i) 349,944 45,322,751
----------- ----------- ----------- ----------- ----------- ------------
INCOME FROM OPERATIONS 2,016,728 541,673 159,451 (224,449) (349,944) 2,143,459
OTHER INCOME (EXPENSE) 854,270 (15,362) -- -- -- 838,908
----------- ----------- ----------- ----------- ----------- ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,870,998 526,311 159,451 (224,449) (349,944) 2,982,367
PROVISION FOR INCOME TAXES 1,582,000 227,000 50,113 -- -- 1,859,113
----------- ----------- ----------- ------------ ----------- ------------
NET INCOME $ 1,288,998 $ 299,311 $ 109,338 $ (224,449) $ (349,944) $ 1,123,254
=========== =========== =========== =========== =========== ============
NET INCOME PER COMMON SHARE:
Basic $ 0.18 $ 0.12
========== ============
Diluted $ 0.16 $ 0.11
========== ============
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING:
Basic 7,279,691 $ 9,621,254
========== ============
Diluted 7,865,096 $ 10,206,659
=========== ============
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
-----------------------------
AND
---
RESET, INC. AND MERCURY SEVEN, INC.
-----------------------------------
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
------------------------------------------------
YEAR ENDED AUGUST 31, 1997
--------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Historical Pro Forma Adjustments
---------------------------------- -----------------------------------------------
Mercury Acquisition of
X-Ceed, Reset, Seven Acquisition of Mercury Seven Pro Forma
Inc. Inc. Inc. Reset, Inc. Inc. Combined
----------- -------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES, net $62,885,464 $ 686,259 $759,029 $ - $ - $ 64,330,752
OPERATING EXPENSES 58,961,258 493,733 718,598 2b(i) 299,266 2b(i) 416,592 60,889,446
----------- -------- --------- ---------- ----------- ------------
INCOME FROM OPERATIONS 3,924,206 192,526 40,431 (299,266) (416,592) 3,441,306
OTHER INCOME (EXPENSE) 260,414 - - - - 260,414
----------- -------- --------- ---------- ----------- ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 4,184,620 192,526 40,431 (299,266) (416,592) 3,701,720
PROVISION FOR INCOME TAXES 2,308,000 77,000 23,987 - - 2,408,987
----------- -------- --------- ---------- ----------- ------------
NET INCOME $ 1,876,620 $115,526 $ 16,444 $ (299,266) $ (416,592) $ 1,292,733
=========== ======== ======== ========== ============= ============
NET INCOME PER COMMON SHARE:
Basic $0.27 $0.14
===== =====
Diluted $0.26 $0.13
===== =====
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING:
Basic 7,023,770 9,365,333
========= =========
Diluted 7,339,625 9,681,188
========= =========
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
-----------------------------
AND
---
RESET, INC. AND MERCURY SEVEN 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") and Mercury Seven Inc.
("Mercury Seven"). The mergers were accounted for as purchase transactions. In
accordance with Commission reporting rules, the pro forma combined statements
of income, 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 and Mercury Seven report on a calendar year basis. For purposes of
combining Reset's and Mercury Seven'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.
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:
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 $ 5,985,313
=============
<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 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:
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
=============
b. Pro Forma Condensed Combined Statements of Income
-------------------------------------------------
(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) 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 and Mercury Seven's historical weighted average
shares, after adjustment for the estimated conversion of Reset and Mercury
Seven shares to shares of X-Ceed common stock.
