<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended May 31,1999
/ / Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission file number 0-13049
XCEED 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) 419-1200
- --------------------------------------------------------------------------------
(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: 16,452,732 as of
July 12, 1999
<PAGE>
XCEED 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 31,1999 and 1998 . . . . . . . . . . . . . . . . . . 4
Consolidated statements of cash flows
Nine Months Ended
May 31, 1999 and 1998 . . . . . . . . . . . . . . . . . 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
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XCEED INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS MAY 31, AUGUST 31,
------- ----------
1999 1998
---- ----
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 23,292 $13,789
Investment in marketable securities 302 97
Accounts receivable, net of allowance
for doubtful accounts of $504 and $154
at May 31, 1999 and August 31, 1998,
respectively 13,171 5,325
Program costs and earnings in excess of
customer billings 2,601 3,287
Inventories 1,142 1,022
Prepaid expenses and other current assets 1,163 861
Deferred income taxes 442 14
---------- -------
Total current assets 42,113 24,395
PROPERTY AND EQUIPMENT, net 3,550 1,533
DUE FROM OFFICER 1,223 1,223
GOODWILL, net 37,463 6,088
TRADEMARKS, net 3,080 --
DEFERRED INCOME TAXES 606 484
OTHER ASSETS 1,093 993
---------- -------
$ 89,128 $34,716
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,786 $ 5,793
Current portion of long-term debt 1,526 41
Income taxes payable, current -- 219
Customer billings in excess of program
costs 5,055 1,009
---------- -------
Total current liabilities 16,367 7,062
---------- -------
LONG-TERM DEBT 2,954 --
---------- -------
OTHER LIABILITIES 1,365 --
---------- -------
INCOME TAXES PAYABLE 750 --
---------- -------
ACCRUED LEASE OBLIGATIONS 875 875
---------- -------
DEFERRED REVENUES 503 587
---------- -------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
authorized 30,000,000 shares;
16,941,099 and 10,277,053 shares
issued and outstanding, respectively 169 103
Preferred stock, $.05 par value;
authorized 1,000,000
shares; -0- issued and outstanding -- --
Net unrealized gain on marketable
securities (22) (27)
Additional paid-in capital 68,220 22,657
Unearned compensation (3,295) (112)
Retained earnings 1,313 3,642
---------- -------
66,385 26,263
Treasury stock, 15,000 and 15,000 shares,
respectively (71) (71)
---------- -------
66,314 26,192
---------- -------
$ 89,128 $34,716
========== =======
See notes to consolidated financial statements.
3
<PAGE>
XCEED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
MAY 31, MAY 31,
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES, net $55,690 $44,348 $23,340 $18,193
----------------- ------------------ ----------------- ---------------
COST AND EXPENSES:
Cost of revenues 33,957 27,825 14,086 12,484
Selling, general and administrative 21,305 13,496 9,445 4,752
Research and development 447 532 245 69
Depreciation and amortization 3,148 478 1,024 176
----------------- ------------------ ----------------- ---------------
58,857 42,331 24,800 17,481
----------------- ------------------ ----------------- ---------------
OPERATING (LOSS) INCOME (3,167) 2,017 (1,460) 712
----------------- ------------------ ----------------- ---------------
OTHER INCOME (EXPENSE):
Interest and dividend income 444 462 225 206
Interest expense (395) (10) (68) (3)
Gain on sale of investment in
marketable securities 11 359 17 1
Other 28 43 70 30
----------------- ------------------ ----------------- ---------------
88 854 244 234
----------------- ------------------ ----------------- ---------------
(LOSS) INCOME BEFORE INCOME TAXES (3,079) 2,871 (1,216) 946
INCOME TAX (BENEFIT) PROVISION (750) 1,582 (172) 493
----------------- ------------------ ----------------- ---------------
NET (LOSS) INCOME ($2,329) $1,289 ($1,044) $453
================= ================== ================= ===============
NET (LOSS) INCOME PER COMMON SHARES
Basic ($0.16) $0.18 ($0.06) $0.06
================= ================== ================= ===============
Diluted ($0.16) $0.16 ($0.06) $0.05
================= ================== ================= ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 14,466,202 7,279,691 16,136,296 7,743,798
================= ================== ================= ===============
Diluted 14,466,202 7,865,096 16,136,296 8,421,620
================= ================== ================= ===============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
XCEED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended
-----------------
May 31,
-------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($ 2,329) $ 1,289
-------- --------
Adjustment to reconcile net (loss) income to net cash
provided by operating activities:
Gain on sale of marketable securities (11) (359)
Depreciation and amortization 3,148 478
Allowances for doubtfull accounts 350 --
Equity gain on investment (28) (43)
Deferred tax benefit (550) (54)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (5,578) (6,063)
Inventories (120) 304
Program costs and earnings in excess of billings 686 763
Prepaid expenses and other current assets (175) (335)
Other assets 208 (239)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 2,490 3,100
Income taxes payable (219) (82)
Customer billings in excess of program costs 3,722 4,339
Deferred revenues (114) --
-------- --------
Total adjustments 3,809 1,809
-------- --------
Net cash provided by operating activities 1,480 3,098
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities (548) (192)
Proceeds from sale of marketable securities 359 805
Business acquisitions, net of cash acquired (5,261) --
Acquisition of property and equipment (1,556) (334)
-------- --------
Net cash (used in) provided by investing activities (7,006) 279
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (4,854) (29)
Proceeds from long-term debt 614 --
Advances to affiliate -- (316)
Proceeds from issuances of securities 19,269 5,732
-------- --------
Net cash provided by financing activities 15,029 5,387
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,503 8,764
CASH AND CASH EQUIVALENTS - beginning of period 13,789 7,230
-------- --------
CASH AND CASH EQUIVALENTS - end of period $ 23,292 $ 15,995
======== ========
See notes to consolidated financial statements.
5
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XCEED, INC. AND SUBSIDIARIES
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
-----------
May 31,1999
-----------
(in thousands, except share and per share data)
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 31,1999.
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-K as of August 31, 1998.
2. Principle of Consolidation:
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.
3. Supplemental Information - Statements of Cash Flow:
Nine Months Ended
May 31,
----------------------
1999 1998
Interest paid.................. $ 396 $ 10
======== =======
Income taxes paid.............. $ 413 $ 1,442
======== =======
4. Stockholders' Equity:
a. Common Stock
During the three months ended November 30, 1998, the Company issued
3,332,057 shares in connection with the Mercury Seven, Inc. and
Zabit & Associates, Inc. mergers.
During the three months ended May 31, 1999, the Company issued 210,000
shares of common stock in connection with the acquisition of Troon
Ltd.
6
<PAGE>
The Company entered into agreements to acquire the 50% interest in
Xceed Atlanta held by the minority stockholder for consideration of
$1,365 of the Company's common stock. Accordingly, effective April 1,
1999, the accounts of Xceed Atlanta have been consolidated with the
Company, and all significant intercompany accounts and transactions
have been eliminated.
During the three months ended May 31, 1999, the Company issued 537,109
shares of common stock in connection with a private placement with the
Deikel Group and received proceeds of $5,500. In June 1999 an
additional $4,500 was received from a second private placement with
this investor.
b. Warrants
On January 21, 1999, the Company's Board of directors voted
unanimously to redeem the Company's outstanding Redeemable Class B
warrants. A notice of redemption was sent to the holders on January
22, 1999. Under the terms, the warrant holders had until February 20,
1999 to exercise their warrants at an exercise price of $6 per share
and receive one share of common stock. In the event a holder elected
not to exercise, the Company would redeem the warrant by paying the
holder a price of $.40 per warrant. As a result, the Company received
$11,130 and issued 1,844,923 shares of common stock.
7. 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 options and warrants which are considered to be
dilutive common stock equivalents. Treasury shares have been excluded
from the weighed average number of shares.
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,
----------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 14,466,202 7,279,691 16,136,296 7,743,798
effect of dilutive
securities - 585,405 - 677,822
---------- --------- ---------- ---------
Diluted 14,466,202 7,865,096 16,136,296 8,421,620
========== ========= ========== =========
</TABLE>
7
<PAGE>
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.
9. Amortization:
The amortization period of intangible assets is as follows:
Goodwill 15 to 25 years
Trademarks 20 years
Unearned Compensation 4 years
8
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net revenues for the nine months ended May 31, 1999 and 1998,
respectively, were $55,690 and $44,348, representing a 26% increase. Net
revenues for the three months ended May 31, 1999 and 1998, respectively, were
approximately $23,340 and $18,193 representing a 28% increase. The increase in
net revenue for the nine and three months ended May 31, 1999 are primarily
attributable to the operations of the newly acquired Technology divisions
(Reset, Inc., Mercury Seven, Inc. and Zabit & Associates, Inc.) and the
consolidation of the Xceed Atlanta Division effective April 1, 1999.
Cost of revenues for nine months ended May 31, 1999 and 1998 were
$33,957 and $27,825, representing 61% and 63% of net revenues, respectively.
Cost of revenues for the three months ended May 31,1999 and 1998 were $14,086
and $12,484, representing 60% and 69% of net revenues, respectively. The
increase in cost of revenues during the nine and three months ended May 31, 1999
are attributable to additional staffing requirements of the Company's Technology
divisions. Selling, general and administrative expenses for the nine months
ended May 31, 1999 and 1998 were $21,305 and $13,496, representing 38% and 30%
of net revenues, respectively. Selling, general and administrative expenses for
the three months ended May 31, 1999 and 1998 were $9,445 and $4,752,
representing 40% and 26% of net revenues, respectively. The increase in selling,
general and administrative expenses during the nine and three months ended May
31, 1999 are attributable to the additional expenses borne by the Company as a
result of its acquisitions.
Research and development expenses for the nine and three months ended
May 31, 1999 were $447 and $245, incurred in connection with the continuing
development of E-Commerce ventures. Research and development expenses for the
nine and three months ended May 31, 1998 were $532 and $69, incurred in
connection with the development of the Performance Group's Maestro software.
Depreciation and amortization expense during the nine and three months ended May
31, 1999 was $3,148 and $1,024 primarily resulting from the goodwill and
unearned compensation related to the Company's acquired divisions which were not
present in the corresponding periods.
Other income for the nine months ended May 31, 1999 was $88 as compared
to $854 for the corresponding prior period. Other income for the three months
ended May 31, 1999 was $244 as compared to $234 for the corresponding prior
period. The significant decrease during the nine months ended May 31, 1999 is a
result of increased interest expense resulting from debt incurred in connection
with the Zabit & Associates, Inc. acquisition.
9
<PAGE>
The Company's effective tax rate for the nine months ended May 31, 1999
was (24)%. This rate reflects the amortization of non-deductible goodwill in
connection with the acquisitions.
LIQUIDITY AND CAPITAL RESOURCES:
At May 31, 1999, the Company had working capital of $25,746 as compared
to $17,333 at August 31, 1998. The significant increase in working capital is
derived primarily from the receipt of proceeds of $11,130 as result of the
exercise of the Company's outstanding Class B warrants. In addition, the
Company received $5,500 upon closing of the first of two trenches of a private
offering of securities commenced by the Company during the third quarter.
Subsequently, during the fourth quarter, the Company received proceeds of $4,500
upon closing of the second and final trench of the private offering.
The consolidated statement of cash flows for the nine months ended May
31, 1999 reflects net cash provided by operating activities of $1,480. This
resulted from net loss of $2,329, an increase in accounts payable and accrued
expenses of $2,490 and an increase in customer billings in excess of programs
costs of $3,722 offset by an increase in accounts receivable of $5,578. Cash
provided by investing activities was $7,006, consisting principally of net cash
used in business acquisitions of $5,261 and acquisitions of property and
equipment of $1,556 and investments in marketable securities of $548. Cash
provided by financing activities approximated $15,029 consisting primarily of
proceeds from the issuance of securities of $19,269, offset by the net payments
of debt of $4,240.
During the nine months ended May 31, 1999, the Company entered into
agreements to acquire Troon, Ltd. and the 50% interest in Xceed Atlanta held by
the minority shareholder. Consideration for these acquisitions include $1,605 of
the Company's common stock and $30 cash.
The Company believes that it has adequate working capital for at least
the next twelve months of operations at current levels. As of July 8, 1999 the
Company had approximately $24,258 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
None
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) Exhibits
(20) (g) Notice of redemption of the Company's Class B
Warrants as incorporated by reference on Form 8-K (1)
(b) Report on Form 8-K
(1) The Company's Current Report on Form 8-K, as filed with
the Commission January 28, 1999 referencing the merger of
Reset, Inc. and Mercury Seven, Inc., wholly owned
subsidiaries of the Company, into the Company and further
referencing the issuance of a Notice of Redemption of the
Company's Class B Warrants.
11
<PAGE>
XCEED 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 15, 1999
-------------
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 23,292
<SECURITIES> 302
<RECEIVABLES> 13,675
<ALLOWANCES> 504
<INVENTORY> 1,142
<CURRENT-ASSETS> 42,113
<PP&E> 7,451
<DEPRECIATION> 3,901
<TOTAL-ASSETS> 89,128
<CURRENT-LIABILITIES> 16,367
<BONDS> 2,954
<COMMON> 169
0
0
<OTHER-SE> 66,145
<TOTAL-LIABILITY-AND-EQUITY> 89,128
<SALES> 55,690
<TOTAL-REVENUES> 55,690
<CGS> 33,957
<TOTAL-COSTS> 33,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 395
<INCOME-PRETAX> (3,079)
<INCOME-TAX> (750)
<INCOME-CONTINUING> (2,339)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,339)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
