<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/ / Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended May 31,1998
/ / Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
----------- ------------
Commission file number 0-13049
X-CEED, INC.
- -------------------------------------------------------------------------------
(Exact Name of registrant as specified in its charter)
NEW YORK 13-3006788
- ---------------------------------- ----------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
488 MADISON AVENUE, NEW YORK, NEW YORK 10022
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(212) 753-5511
- -------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
WATER-JEL TECHNOLOGIES, INC.
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 8,971,242 as of July 10,
1998
<PAGE>
X-CEED INC. AND SUBSIDIARIES
(Formerly Water-Jel Technologies, Inc. and Subsidiaries)
INDEX
PART I
ITEM 1. Financial Information Page No.
Consolidated balance sheets . . . . . . . . . . . . . . . 3
Consolidated statements of operations
Nine and Three Months Ended
May 31,1998 and 1997 . . . . . . . . . . . . . . . . . . 4
Consolidated statements of cash flows
Nine and Three Months Ended
May 31, 1998 and 1997 . . . . . . . . . . . . . . . . . 5
Notes to consolidated financial statements . . . . . . . . 6-8
ITEM 2. Management's Discussion and Analysis of
the Financial Condition and
Results of Operations . . . . . . . . . . . . . 9-10
PART II
Other Information . . . . . . . . . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . 12
2
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
(Formerly Water-Jel Technologies, Inc. and Subsidiaries)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS MAY 31, AUGUST 31,
1998 1997
-------- ----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $15,993,800 $7,230,314
Investment in marketable securities 208,790 758,373
Accounts receivable, net of allowance for
doubtful accounts of $154,000 9,776,409 3,713,709
Program costs and earnings in excess of customer billings 1,276,520 2,039,682
Inventories 1,060,210 1,364,510
Prepaid expenses and other current assets 669,213 334,589
------------------- -------------------
TOTAL CURRENT ASSETS 28,984,943 15,441,177
Property and equipment, net 1,326,407 1,354,070
Investment in X-Ceed Motivations Atlanta Inc. 714,321 355,394
Due from officer 1,222,483 1,222,483
Deferred income taxes 451,525 231,000
Other assets 424,650 195,956
------------------- -------------------
$33,124,330 $18,800,080
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $7,141,909 $4,041,907
Current portion of long-term debt 39,200 39,200
Income taxes payable, current 276,599 358,933
Customer billings in excess of program costs 5,253,430 914,561
Deferred income tax liability 131,950 44,500
------------------- -------------------
TOTAL CURRENT LIABILITIES 12,843,088 5,399,101
------------------- -------------------
LONG-TERM DEBT 22,100 51,500
------------------- -------------------
ACCRUED LEASE OBLIGATIONS 816,000 816,000
------------------- -------------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 30,000,000
shares; 8,938,943 and 7,043,180 shares issued and
outstanding, respectively 89,389 70,432
Preferred stock, $.05 par value; authorized 1,000,000
shares; -0- issued and outstanding - -
Net unrealized gain on marketable securities (232) 216,175
Additional paid-in capital 16,185,833 10,210,592
Unearned compensation (157,126) -
Retained earnings 3,380,908 2,091,910
------------------- -------------------
19,498,772 12,589,109
Treasury stock, 10,000 shares (55,630) (55,630)
------------------- -------------------
19,443,142 12,533,479
$33,124,330 $18,800,080
=================== ===================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
(Formerly Water-Jel Technologies, Inc. and Subsidiaries)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MAY 31, MAY 31,
----------------- ------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES, net $44,347,843 $45,406,465 $18,192,737 $13,651,194
------------------ ------------------ ----------------- ------------------
COST AND EXPENSES:
Cost of revenues 27,965,490 28,431,179 12,532,295 8,241,899
Selling, general and administrative 13,833,153 13,904,256 4,879,881 4,779,392
Research and development 532,472 - 68,889 -
------------------ ------------------ ----------------- ------------------
42,331,115 42,335,434 17,481,065 13,021,291
------------------ ------------------ ----------------- ------------------
OPERATING INCOME 2,016,728 3,071,031 711,672 629,903
------------------ ------------------ ----------------- ------------------
OTHER INCOME (EXPENSE):
Interest and dividend income 461,488 277,438 205,356 112,114
Interest expense (9,868) (11,463) (2,914) (3,367)
Gain on sale of investment in
marketable securities 359,444 11,948 1,200 (301)
Equity gain on investment 43,206 16,897 30,396 (14,651)
------------------ ------------------ ----------------- ------------------
854,270 294,820 234,038 93,795
------------------ ------------------ ----------------- ------------------
INCOME BEFORE INCOME TAXES 2,870,998 3,365,851 945,710 723,698
PROVISION FOR INCOME TAXES 1,582,000 1,741,000 493,000 333,000
------------------ ------------------ ----------------- ------------------
NET INCOME $1,288,998 $1,624,851 $452,710 $390,698
================== ================== ================= ==================
NET INCOME PER COMMON SHARE
Basic $0.18 $0.23 $0.06 $0.06
================== ================== ================= ==================
Diluted $0.16 $0.22 $0.05 $0.05
================== ================== ================= ==================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 7,279,691 7,021,145 7,743,798 7,021,145
================== ================== ================= ==================
Diluted 7,865,096 7,256,262 8,421,620 7,150,106
================== ================== ================= ==================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
(Formerly Water-Jel Technologies, Inc. and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,288,998 $1,624,851
------------------ -----------------
Adjustment to reconcile net income to net cash provided by operating
activities:
Gain on sale of marketable securities (359,444) (11,948)
Depreciation and amortization 478,308 362,427
Equity gain on investment (43,206) (16,897)
Deferred Income Taxes (53,808) 57,609
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (6,062,700) (2,463,739)
Inventories 304,300 (76,976)
Program costs and earnings in excess of billings 763,162 -
Prepaid expenses and other current assets (334,625) 37,902
Other assets (240,500) (59,966)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 3,100,002 1,217,554
Income taxes payable (82,334) 830,850
Customer billings in excess of program costs 4,338,869 1,967,077
Other Current liabilities - (12,511)
------------------ -----------------
Total adjustments 1,808,024 1,831,382
------------------ -----------------
Net cash provided by operating activities 3,097,022 3,456,233
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities (191,606) (23,296)
Proceeds from sale of marketable securities 804,958 21,999
Acquisition of property and equipment (333,965) (183,617)
------------------ -----------------
Net cash provided by (used in) investing activities 279,387 (184,914)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (29,400) (29,400)
Repayment of notes payable - (1,065,000)
Advances to affiliate (315,721) 665,987
Proceeds from excercise of warrants and options 5,732,198 3,000
------------------ -----------------
Net cash provided by (used in) financing activities 5,387,077 (425,413)
------------------ -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,763,486 2,845,906
CASH AND CASH EQUIVALENTS - beginning of period 7,230,314 7,333,168
------------------ -----------------
CASH AND CASH EQUIVALENTS - end of period $15,993,800 $10,179,074
================== =================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
(Formerly Water-Jel Technologies, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
May 31,1998
1. BASIS OF QUARTERLY PRESENTATION:
The accompanying quarterly financial statements have been prepared in
conformity with generally accepted accounting principles.
The financial statements of the Registrant included herein have been
prepared by the Registrant pursuant to the rules and regulations of
the Securities and Exchange Commission and, in the opinion of
management, reflect all adjustments which are necessary to present
fairly the results for the period ended May 31,1998.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations; however, management believes that the
disclosures are adequate to make the information presented not
misleading. This report should be read in conjunction with the
financial statements and footnotes therein included in the audited
annual report on Form 10-KSB as of August 31, 1997.
2. PRINCIPLE OF CONSOLIDATATION:
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Upon
consolidation, all significant intercompany accounts and transactions
are eliminated.
Investments in affiliates, representing 20% to 50% of the ownership of
such companies, are accounted for under the equity method. Under this
accounting, the investment is increased or decreased by the Company's
share of earnings or losses after dividends.
The Company has a 50% equity interest in X-Ceed Atlanta which
organizes and operates group incentive programs for major corporations
in the Atlanta, Georgia area.
3. INVENTORIES CONSISTED OF THE FOLLOWING:
May 31, 1998 August 31, 1997
------------ ---------------
(unaudited)
Raw Materials $ 678,614 $ 962,976
Finished goods 381,596 401,534
--------- ---------
$1,060,210 $1,364,510
========= =========
6
<PAGE>
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
In March 1998, the Company loaned $335,000 to a corporation affiliated
with two of the Company's directors/shareholders. This loan is
evidenced by a note, bearing interest at 1% above the Company's lead
bank prime rate, payable by November 2, 1998. The note is included in
prepaid expenses and other current assets at May 31, 1998. In
consideration for the loan, the Company was granted warrants to
purchase a minimum of 335,000 shares of common stock of the borrower
at an exercise price of $2.00 per warrant. The borrower has the right
to extend the loan until February 1, 1999. In the event the borrower
elects to extend the due date of the loan, the Company shall continue
to receive interest at the same stated rate and will be entitled to
additional warrants equivalent to 50% of the total dollars of the
loan. As additional consideration, the Company was granted a one-year
option to acquire a continuing license for a proprietary browser based
E-Mail technology for a licensing fee of $35,000. The Company believes
that the borrower's software can be of significant assistance with the
Company's Maestro software.
5. SUPPLEMENTARY INFORMATION - STATEMENTS OF CASH FLOW:
Nine Months Ended
May 31,
----------------------------
1998 1997
Interest paid.................. $ 9,868 $ 11,948
========== ========
Income taxes paid.............. $1,441,553 $686,138
========== ========
6. STOCKHOLDERS' EQUITY:
a. Common Stock
In February 1998 the stockholders voted to amend the Company's
certificate of incorporation to increase the authorized Common Stock
to 30,000,000 shares, par value $.01 per share, and the authorized
Preferred to 1,000,000 shares, par value $.05 per share. The
accompanying balance sheet for August 31, 1997 has been retroactively
restated to give effect to this change.
b. Warrants
During the three months ended May 31, 1998, the Company issued
1,816,654 shares of Common Stock and 1,816,654 Class B Warrants in
connection with the exercise of Class A Warrants.
During the first half of fiscal 1998, the Company entered into
consulting agreements with two financial advisors. Consideration under
these agreements included warrants to purchase an aggregate of 200,000
shares of common stock at exercise prices ranging from $2.00 - $2.19.
The fair value of the warrants ($262,000) is being
7
<PAGE>
charged to operations over the lives of the respective agreements.
7. EARNINGS PER SHARE:
During the current period the Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 128, "Earnings per share."
Basic earnings per common share is computed by dividing the net
earnings by the weighted average number of shares of common stock
outstanding during the period. Dilutive earnings per share gives
effect to stock using and warrants which are considered to be dilutive
common stock equivalents. Treasury shares have been excluded from the
weighted average number of shares. Earnings per share have been
retroactively restated to reflect FASB No. 128 for all prior periods
presented.
Net earnings for basic and dilutive computations were equivalent for
all periods presented. The following is a reconciliation of the
weighted average shares:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
May 31, May 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 7,279,691 7,021,145 7,743,798 7,021,145
effect of dilutive
securities 585,405 235,117 677,822 128,961
--------- --------- --------- ---------
Diluted 7,865,096 7,256,262 8,421,620 7,150,106
========= ========= ========= =========
</TABLE>
8. INCOME TAXES:
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
8
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
Net revenues for the nine months ended May 31, 1998 and 1997,
respectively, were $44,348,000 and $45,406,000, representing a 2% decrease.
During the first half of the fiscal year, the Company's X-Ceed Performance
Group division experienced decreased net revenues as a result of the absence of
specific merchandising programs. Net revenues for the three months ended May
31, 1998 and 1997, respectively, were approximately $18,193,000 and $13,651,000
representing a 33% increase. The increase in net revenue for the three months
ended May 31, 1998 derived primarily from growth in the Company's X-Ceed
Performance Group division.
Cost of revenues for nine months ended May 31, 1998 and 1997 were
$27,965,000 and $28,431,000, representing 63% of net revenues, respectively.
Cost of revenues for the three months ended May 31,1998 and 1997 were
$12,532,000 and $8,242,000, representing 69% and 60% of net revenues,
respectively. The increase in cost of revenues during the three months ended
May 31, 1998 derived from travel related incentive programs which traditionally
generate lower profit margins. Selling, general and administrative expenses for
the nine months ended May 31, 1998 and 1997 were $13,833,000 and $13,904,000,
representing 31% of net revenues, respectively. Selling, general and
administrative expenses for the three months ended May 31, 1998 and 1997 were
$4,880,000 and $4,779,000, representing 27% and 35% of net revenues,
respectively. Research and development expenses for the nine and three months
ended May 31, 1998 were $532,000 and $69,000, incurred in connection with the
continuing development of X-Ceed's Maestro software. Maestro is a proprietary
productivity enhancing software utilized for managing training, sales tracking
and reporting, awards and recognition programs, and product information for
sales forces.
Other income for the nine months ended May 31, 1998 was $854,000 as
compared to $295,000 for the corresponding prior period. Other income for the
three months ended May 31, 1998 and 1997 was $234,000 as compared to $94,000
for the corresponding prior period. The significant increase during the nine
and three months ended May 31, 1998 is a result of gains on sales of
investments of $359,000 as compared to $12,000 and increased interest and
dividend income resulting from greater investment balances.
Net income for the nine months ended May 31, 1998 and 1997 was
$1,289,000 as compared to $1,624,000, respectively. Net income for the three
months ended May 31, 1998 and 1997 was $453,000 and $391,000, respectively.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
At May 31, 1998, the Company had working capital of $16,142,000 as
compared to $10,042,000 at August 31, 1997. The significant increase in working
capital is derived principally from the exercise of Class A warrants prior to
their expiration on April 30, 1998. As a result, the Company received proceeds
of approximately $5,609,000. Also during the current period, the Company
received net proceeds of $805,000 from the sale of marketable securities.
The consolidated statement of cash flows for the nine months ended May
31, 1998 reflects net cash provided by operating activities of $3,097,000. This
resulted from net income of $1,289,000, an increase in accounts payable and
accrued expenses of $3,100,000 and an increase in customer billings in excess
of programs costs of $4,339,000 offset by an increase in accounts receivable of
$6,063,000. Cash provided by investing activities was $280,000, consisting
principally of proceeds from sale of marketable securities of $805,000 offset
by acquisitions of property and equipment of $334,000 and investments in
marketable securities of $192,000. Cash provided by financing activities
approximated $5,387,000 consisting primarily of proceeds from the exercise of
warrants and options of $5,732,000.
The Company believes that it has adequate working capital for at least
the next twelve months of operations at current levels. As of July 10, 1998 the
Company had approximately $15,260,000 in cash and cash equivalents.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
- ------ -----------------
There is no material litigation currently pending against the Company,
its officers or employees.
ITEM 2 - Changes in Securities
- ------ ---------------------
As a result of the expiration of the Class A Warrants during the
quarter ended May 31, 1998, most holders of the warrants elected to
exercise prior to the expiration on April 30, 1998. Upon the exercise
the holders received one share of common stock and one Class B
Warrant. As a result of these exercises, the Company issued 1,816,654
shares of Common Stock and 1,816,654 Class B Warrants.
ITEM 3 - Defaults on Senior Securities
- ------ -----------------------------
None
ITEM 4 - Submission to a Vote of Security Holders
- ------ ----------------------------------------
None
ITEM 5 - Other Information
- ------ -----------------
None
ITEM 6 - Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) None
(b) Report on Form 8-K as filed with the commission on
May 7, 1998 reporting the exercise of Class A
Warrants.
11
<PAGE>
X-CEED INC.
488 MADISON AVENUE
NEW YORK, N.Y. 10022
------------------------
FILE # 0-13049
------------------------
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BY: /s/ Werner Haase
----------------------------
WERNER HAASE,
CEO
DATE: July 14, 1998
---------------
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 15,993,800
<SECURITIES> 208,790
<RECEIVABLES> 9,930,409
<ALLOWANCES> 154,000
<INVENTORY> 1,060,210
<CURRENT-ASSETS> 28,984,943
<PP&E> 4,004,839
<DEPRECIATION> 2,678,432
<TOTAL-ASSETS> 33,124,330
<CURRENT-LIABILITIES> 12,843,088
<BONDS> 22,100
0
0
<COMMON> 89,389
<OTHER-SE> 19,353,753
<TOTAL-LIABILITY-AND-EQUITY> 33,124,330
<SALES> 44,347,843
<TOTAL-REVENUES> 44,347,843
<CGS> 27,965,490
<TOTAL-COSTS> 27,965,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,868
<INCOME-PRETAX> 2,870,998
<INCOME-TAX> 1,582,000
<INCOME-CONTINUING> 1,288,998
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,288,998
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.16
</TABLE>
