<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 February 28, 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)
- --------------------------------------------------------------------------------
(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: 16,031,060 as of April 7,
1999
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XCEED INC. AND SUBSIDIARIES
INDEX
PART I
ITEM 1. Financial Information Page No.
Consolidated balance sheets . . . . . . . . . . . . . . . 3
Consolidated statements of operations
Six and Three Months Ended
February 28, 1999 and 1998 . . . . . . . . . . . . . . . 4
Consolidated statements of cash flows
Six Months Ended February 28, 1999 and 1998 . . . . . . 5
Notes to consolidated financial statements . . . . . . . . 6-7
ITEM 2. Management's Discussion and Analysis of
the Financial Condition and
Results of Operations . . . . . . . . . . . . . 8-9
PART II
Other Information . . . . . . . . . . . . . . . . . . . . . 10
Signatures . . . . . . . . . . . . . . . . . . . . . . . 11
2
<PAGE>
XCEED INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS FEBRUARY 28, AUGUST 31,
1999 1998
(unaudited)
------------ ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $20,775 $13,789
Investment in marketable securities 201 97
Accounts receivable, net of allowance for doubtful
accounts of $154 at February 28, 1999 and August 31, 1998 11,411 5,325
Program costs and earnings in excess of customer billings 2,358 3,287
Inventories 906 1,022
Prepaid expenses and other current assets 939 861
Deferred income taxes 162 14
-------- --------
Total current assets 36,752 24,395
PROPERTY AND EQUIPMENT, net 2,986 1,533
DUE FROM OFFICER 1,223 1,223
GOODWILL, net 36,164 6,088
TRADEMARKS, net 3,120 -
DEFERRED INCOME TAXES 547 484
OTHER ASSETS 1,502 993
-------- --------
$82,294 $34,716
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $6,981 $5,793
Current portion of long-term debt 1,259 41
Income taxes payable, current - 219
Customer billings in excess of program costs 6,282 1,009
Notes payable 4,800 -
-------- --------
Total current liabilities 19,322 7,062
-------- --------
LONG-TERM DEBT 2,907 -
-------- --------
INCOME TAXES PAYABLE 750 -
-------- --------
ACCRUED LEASE OBLIGATIONS 875 875
-------- --------
DEFERRED REVENUES 541 587
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 30,000,000 shares;
15,866,693 and 10,277,053 shares issued and outstanding, respectively 159 103
Preferred stock, $.05 par value; authorized 1,000,000
shares; -0- issued and outstanding - -
Net unrealized gain on marketable securities (29) (27)
Additional paid-in capital 60,646 22,657
Unearned compensation (4,398) (112)
Retained earnings 2,357 3,642
-------- --------
58,735 26,263
Subscription receivable (765) -
Treasury stock, 15,000 and 15,000 shares respectively (71) (71)
-------- --------
57,899 26,192
-------- --------
$82,294 $34,716
======== ========
</TABLE>
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>
SIX MONTHS ENDED THREE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES, net $32,350 $26,155 $21,062 $15,873
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of revenues 19,871 15,433 13,786 10,218
Selling, general and administrative 11,860 8,651 6,212 4,428
Research and development 202 464 89 258
Depreciation and amortization 2,124 302 819 236
------------ ------------ ------------ ------------
34,057 24,850 20,906 15,140
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (1,707) 1,305 156 733
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and dividend income 219 256 111 135
Interest expense (327) (7) (178) (5)
(Loss) gain on sale of investment in
marketable securities (6) 358 (11) 12
Other (42) 14 (53) 57
------------ ------------ ------------ ------------
(156) 621 (131) 199
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (1,863) 1,926 25 932
INCOME TAX (BENEFIT) PROVISION (578) 1,059 8 513
------------ ------------ ------------ ------------
NET (LOSS) INCOME ($1,285) $867 $17 $419
============ ============ ============ ============
NET (LOSS) INCOME PER COMMON SHARE
Basic ($0.10) $0.12 $0.00 $0.06
============ ============ ============ ============
Diluted ($0.10) $0.11 $0.00 $0.06
------------ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 13,562,869 7,043,494 14,022,209 7,044,095
============ ============ ============ ============
Diluted 13,562,869 7,582,692 16,696,978 7,469,576
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
XCEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
February 28,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($1,285) $867
-------- --------
Adjustment to reconcile net (loss) income to net cash
provided by operating activities:
Loss (gain) on sale of marketable securities 6 (358)
Depreciation and amortization 2,124 302
Deferred tax benefit (148) (249)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (3,669) (2,253)
Inventories 116 239
Program costs and earnings in excess of billings 929 214
Prepaid expenses and other current assets 41 122
Other assets (467) (157)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (24) 1,586
Income taxes payable (219) 87
Customer billings in excess of program costs 5,273 2,505
Deferred revenues (76) -
-------- --------
Total adjustments 3,886 2,038
-------- --------
Net cash provided by operating activities 2,601 2,905
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities (285) (96)
Proceeds from sale of marketable securities 170 792
Business acquisitions, net of cash acquired (6,286) -
Acquisition of property and equipment (397) (297)
-------- --------
Net cash (used in) provided by investing activities (6,798) 399
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (156) (20)
Proceeds from long-term debt 179 -
Advances to affiliate - (305)
Proceeds from excercise of warrants and options 11,160 3
-------- --------
Net cash provided by (used in) financing activities 11,183 (322)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,986 2,982
CASH AND CASH EQUIVALENTS - beginning of period 13,789 7,230
-------- --------
CASH AND CASH EQUIVALENTS - end of period $20,775 $10,212
======== ========
</TABLE>
See notes to consolidated financial statements.
5
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XCEED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28,1999
(UNAUDITED)
(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 February 28, 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. Supplementary Information - Statements of Cash Flow:
Six Months Ended
February 28,
1999 1998
Interest paid.................. $ 327 $ 7
====== ======
Income taxes paid.............. $ 361 $ 945
====== ======
4. Stockholders' Equity:
a. Common Stock
During the six months ended February 28, 1999, the Company issued
3,332,057 shares of common stock in connection with the Mercury
Seven, Inc. and Zabit & Associates, Inc. mergers.
b. Warrants
On January 21, 1999, the Company's board of directors voted
6
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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 $10,872
and issued 1,811,923 shares of common stock.
c. 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
weighted 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>
Six Months Ended Three Months Ended
February 28, February 28,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 13,562,869 7,043,494 14,022,209 7,044,095
Effect of dilutive
securities - 539,198 2,674,769 425,481
---------- --------- ---------- ---------
Diluted 13,562,869 7,582,692 16,696,978 7,469,576
========== ========= ========== =========
</TABLE>
5. 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.
6. Amortization:
The amortization period of intangible assets is as follows:
Goodwill 15 to 25 years
Trademarks 3 years
Unearned Compensation 4 years
7
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
Net revenues for the six months ended February 28, 1999 and 1998,
respectively, were $32,350 and $26,155, representing a 24% increase in net
revenues. Net revenues for the three months ended February 28, 1999 and 1998,
respectively, were $21,062 and $15,873 representing a 33% increase in net
revenue. The increases in net revenues for the six and three months ended
February 28, 1999 are primarily attributable to the operations of the newly
acquired Technology divisions (Reset, Inc., Mercury Seven, Inc. and Zabit &
Associates, Inc.)
Cost of revenues for the six months ended February 28, 1999 and 1998
were $19,871 and $15,433, respectively, (representing 62% and 59% of net
revenues). Cost of revenues for the three months ended February 28, 1999 and
1998 were $13,786 and $10,218, respectively,(representing 66% and 64% of net
revenues). The increase in cost of revenues for the six and three months ended
February 28, 1999 are attributable to additional staffing requirements of the
Company's Technology divisions. Selling, general and administrative expenses for
the six months ended February 28, 1999 and 1998 were $11,860 and $8,651,
respectively, (representing 37% and 33% of net revenues). Selling, general and
administrative expenses for the three months ended February 28, 1999 and 1998
were $6,212 and $4,428, respectively, (representing 29% and 28% of net
revenues). The increases in selling, general and administrative expenses during
the six and three months ended February 28, 1999 are attributable to the
additional expenses borne by the Company as a result of its acquisitions.
Research and development expenses for the six and three months ended
February 28, 1999 were $202 and $89, incurred in connection with the continuing
development of E-Commerce ventures. Research and development expense for the six
and three months ended February 28, 1998 were $464 and $258 incurred in
connection with the development of the Performance Group's Maestro software.
Depreciation and amortization expense during the six and three months ended
February 28, 1999 was $2,124 and $819 primarily resulting from the goodwill and
unearned compensation related to the Company's acquired divisions which were not
present in the corresponding prior periods.
Other income (expense) for the six months ended February 28, 1999 was
($156) as compared to $620 for the corresponding prior period. Other income
(expense)for the three months ended February 28, 1999 was ($131)as compared to
$199 for the corresponding prior period. The increase in other income (expense)
during the current periods is a result of increased interest expense resulting
from debt incurred in connection with the Zabit & Associates, Inc.
8
<PAGE>
acquisition.
The Company's effective tax rate for the six months ended February 28,
1999 was (31%). This rate reflects the amortization of non-deductible goodwill
in connection with the acquisitions.
LIQUIDITY AND CAPITAL RESOURCES:
At February 28, 1999 the Company had working capital of $17,430 as
compared to $17,333 at August 31, 1998. In April 1999, the Company entered into
a $5,000 line of credit facility with a financial institution. Advances under
this facility, which expires in June 2000, bear interest at LIBOR plus 2%.
The consolidated statement of cash flows for the six months ended
February 28, 1999 reflects net cash provided by operating activities of $2,601
reflecting a net loss of $1,553 and increase in accounts receivable of $3,669
offset by a increase in customer billings in excess of program costs of $5,273.
Cash used in investing activities was $6,798, resulting from business
acquisitions of $6,286. Cash provided by financing activities was $11,183,
resulting primarily from the exercise of the Company's Class B Warrants and
employee stock options of $11,160.
The Company believes that it has adequate working capital for at least
the next twelve months of operations at current levels. As of April 9, 1999 the
Company had approximately $19,143 in cash and cash equivalents.
9
<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
- ------ ----------------------------------------
On February 12,1999 a notice of annual shareholders meeting and related
proxy materials were submitted to the Company's shareholders. The
annual meeting was held on March 12, 1999. The matters submitted to
vote were: (1) the election of the Company's directors, Scott Mednick
votes received for: 11,076,847 against 20,449, Werner Haase votes
received for: 11,076,844 against 20,449, William Zabit votes received
for: 11,076,844 against 20,449, Norman Doctoroff votes received for:
11,075,469 against 21,824, John Bermingham votes received for:
11,075,719 against 21,574, Terry Anderson votes received for:
11,035,094 against 62,199 (2) to approve the creation of a new 1999
Stock Option Plan, votes received for: 8,164,599, against 193,582 and
abstain 292,163 (3) to ratify the appointment of independent public
accountants for the current fiscal year, votes received for:
11,014,218, against 14,685 and abstain 68,390.
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) Reports 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.
10
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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: April 13,1999
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 20,775
<SECURITIES> 201
<RECEIVABLES> 11,565
<ALLOWANCES> 154
<INVENTORY> 906
<CURRENT-ASSETS> 36,752
<PP&E> 4,467
<DEPRECIATION> 1,481
<TOTAL-ASSETS> 82,294
<CURRENT-LIABILITIES> 19,322
<BONDS> 2,907
<COMMON> 159
0
0
<OTHER-SE> 57,740
<TOTAL-LIABILITY-AND-EQUITY> 82,294
<SALES> 32,350
<TOTAL-REVENUES> 32,350
<CGS> 19,871
<TOTAL-COSTS> 19,871
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327
<INCOME-PRETAX> (1,863)
<INCOME-TAX> 578
<INCOME-CONTINUING> (1,285)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,285)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
