SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [ X ] Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14A-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
Xceed Inc. (formerly X-ceed, Inc.)
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies: N/A
2) Aggregate number of securities to which transaction applies: N/A
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined): N/A
4) Proposed maximum aggregate value of transaction: N/A
5) Total fee paid: N/A
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid: N/A
2) Form, Schedule or Registration Statement No.: N/A
3) Filing Party: N/A
4) Date Filed: N/A
<PAGE>
XCEED INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Notice is hereby given that the Annual Meeting of Stockholders of XCEED
INC. (the 'Company') will be held at the Loews New York Hotel, 569 Lexington
Avenue (at 51st Street), New York, NY 10022, on March 12, 1999 at 10:00 A.M. for
the following purposes as set forth in the accompanying Proxy Statement:
1. To elect six directors to serve for a term of one year;
2. To approve the adoption of the XCEED 1999 Long-Term Incentive Plan
authorizing the Company to issue options to directors, officers and
employees to acquire up to 3,000,000 shares of the Company's Common Stock.
3. To ratify the selection and appointment by the Company's Board of
Directors of Holtz Rubenstein & Co. LLP, independent certified public
accountants, as auditors for the Company for the fiscal year ending August
31, 1999; and
4. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Holders of record of the Company's Common Stock at the close of business on
February 1, 1999, will be entitled to vote at the meeting.
By Order of the Board of Directors
SCOTT MEDNICK
Chairman
Dated: February 11, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT IN THE ENVELOPE PROVIDED. ANY PERSON GIVING A PROXY
HAS THE POWER TO REVOKE IT AT ANY TIME PRIOR TO ITS EXERCISE AND IF PRESENT AT
THE MEETING MAY WITHDRAW IT AND VOTE IN PERSON. ATTENDANCE AT THE MEETING IS
LIMITED TO STOCKHOLDERS, THEIR PROXIES AND INVITED GUESTS OF THE COMPANY.
<PAGE>
XCEED INC.
488 MADISON AVENUE
NEW YORK, NEW YORK 10022
------------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 12, 1999
------------------------
PROXY STATEMENT
------------------------
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of proxies to be voted at the Annual Meeting of
Stockholders of the Company to be held at the Loews New York Hotel, 569
Lexington Avenue (at 51st Street), New York, NY 10022 at 10:00 A.M. on March 12,
1999 and at any adjournments thereof.
The shares represented by proxies that are received in the enclosed form
and properly filled out will be voted in accordance with the specifications made
thereon. In the absence of specific instructions, proxies will be voted in
accordance with the recommendations made herein with respect to the proposals
described in this Proxy Statement. Proxies may be revoked by stockholders by
written notice received by the Secretary of the Company at the address set forth
above, at any time prior to the exercise thereof. Stockholders of record at the
close of business on February 1, 1999 are entitled to notice of and to vote at
the Annual Meeting or any adjournments thereof. The Company's only class of
voting securities is its Common Stock, par value $.01 per share, of which
13,950,092 shares were outstanding as of January 20, 1999.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
It is the intention of the persons named in the enclosed form of proxy,
unless such proxy specifies otherwise, to nominate and to vote the shares
represented by such proxy for the election of the nominees listed below to hold
office until the next Annual Meeting of Stockholders or until their respective
successors shall have been duly elected and qualified. Messrs. Scott Mednick,
Werner Haase, William Zabit, Norman Doctoroff and John A. Bermingham are
presently directors of the Company. Mr. Terry Anderson is being nominated for
the first time. The Company has no reason to believe that any of the nominees
will become unavailable to serve as directors for any reason before the Annual
Meeting. However, in the event that any of them shall become unavailable, the
person designated as proxy reserves the right to substitute another person of
his choice when voting at the Annual Meeting.
Certain information regarding each nominee is set forth in the table and
text below. The number of shares beneficially owned by each nominee is listed
below under 'Principal Stockholders and Share Ownership of Directors and
Officers.'
Werner Haase, the Company's Co-Chairman and Chief Executive Officer, and
Nurit Kahane Haase, Senior Vice President, are married. There are no other
family relationships among directors, nominees or executive officers nor is
there any arrangement or understanding between any such director or nominee and
any other person pursuant to which any director or nominee was selected as such.
<PAGE>
The following table sets forth the name, age and term of office as director
for each nominee for election as director and his present position(s) with the
Company:
<TABLE>
<CAPTION>
NOMINEE FOR ELECTION DIRECTOR SINCE POSITION(S) AGE
- ---------------------------------------- -------------- ---------------------------------------- ---
<S> <C> <C> <C>
Scott Mednick........................... 1998 Chairman and Chief Strategic Officer 42
William Zabit........................... 1998 President and Director 50
Werner G. Haase......................... 1987 Co-Chairman and Chief Executive Officer 61
Norman Doctoroff........................ 1996 Director 65
John A. Bermingham...................... 1997 Director 55
Terry Anderson.......................... Director 51
</TABLE>
Directors are elected to serve until the next annual meeting of
stockholders of the Company or until their successors are elected and qualified.
The Board of Directors held at least ten meetings in the fiscal year ended
August 31, 1998 and also met informally and acted by written consents during the
year. Officers serve at the discretion of the Board of Directors subject to any
contracts of employment.
The Board of Directors has the following committees: an Audit Committee,
which monitors the activities of its independent auditors and makes
recommendations to the Board of Directors, and a Compensation Committee which
reviews compensation of executives and makes recommendations to the Directors.
In addition, the Compensation Committee administers the various stock option
plans.
Messrs. Doctoroff and Bermingham serve on the Audit Committee, and Messrs.
Haase, Doctoroff and Bermingham serve on the Compensation Committee. The Audit
Committee has held two committee meetings during the fiscal year, and the
Compensation Committee has held four meetings during the fiscal year.
EXECUTIVE OFFICERS
The following table sets forth the name, position and age of the executive
officers of the company:
<TABLE>
<CAPTION>
NAME POSITION(S) AGE
- ---------------------------------------- ---------------------------------------------- ---
<S> <C> <C>
Scott Mednick........................... Chairman and Chief Strategic Officer 42
Werner G. Haase......................... Co-Chairman and Chief Executive Officer 61
William Zabit........................... President 50
Scott Mednick........................... Chief Strategic Officer 42
Nurit Kahane Haase...................... Senior Vice President 48
Bradley K. Nelson....................... President of Zabit Division 41
Wolf Boehme............................. Chief Operating Officer 37
</TABLE>
The following is a brief discussion of each officer's and director's
background:
SCOTT MEDNICK entered into an employment agreement with the Company as of
July 17, 1998 at which time he was appointed Chairman of the Board and was also
named as Chief Strategic Officer. Pursuant to terms of the employment agreement,
the Company has agreed to nominate Mr. Mednick as Chairman during the term of
this employment, which expires on July 17, 2003 unless Mr Mednick elects earlier
termination on July 17, 2001. In 1982 Mr. Mednick established the Mednick Group,
Inc., a company engaged in graphic design and strategic planning. In 1996 The
Mednick Group, Inc. became Think New Ideas, Inc. ('Think') and in that year
completed a public offering of its stock. Mr. Mednick served as chairman and
chief executive officer of Think until May 1998 when he resigned. Under Mr.
Mednick's direction, Think, which provides technology and interactive business
solutions to major corporate clients was named as one of the top interactive
agencies by both Adweek and The Advertising Club of New York. Mr. Mednick is
regarded as a highly respected marketing strategist and graphic designer.
WERNER G. HAASE has served as a Director of the Company since September
1987 and became Chairman and Chief Executive Officer in July, 1996 following the
acquisition of Journeycraft, Inc. ('Journeycraft') and TheraCom Integrated
Medical Communications, Inc. ('TheraCom') which was
2
<PAGE>
owned by Nurit Kahane Haase and Mr. Haase. For more than the past five years,
Mr. Haase has been a Director and Chief Executive Officer of Journeycraft.
WILLIAM ZABIT became president and a director of the Company on September
14, 1998, when the Company acquired Zabit and Associates, Inc. and entered into
a four-year employment agreement with Mr. Zabit. Mr. Zabit founded Zabit and
Associates, Inc. in 1993 and served as its Chief Executive Officer until the
acquisition by the Company. Under Mr. Zabit's direction, Zabit and Associates,
Inc. has won over 150 awards for communication excellence. Mr. Zabit is regarded
as a highly respected consultant in the area of strategic corporate
communications.
NURIT KAHANE HAASE became Senior Vice President of the Company in July 1996
following the acquisition of Journeycraft and TheraCom. For more than the past
five years, Mrs. Haase has been President of Journeycraft.
BRADLEY K. NELSON became the president of the Company's Zabit and
Associates division on September 14, 1998, when Zabit and Associates, Inc. was
acquired by the Company. Previously and from June 1, 1998, he had been a senior
executive officer of Zabit and Associates. From June 1, 1996 until June 1998,
Mr. Nelson was a principal of Paradigm Consulting Group, a company engaged in
consulting on corporate communication matters and advising clients on business
performance improvement. From August 1984 to June 1996, Mr. Nelson was
associated with Towers Perrin, a leading human resources consulting firm. In
December 1996 he became a principal of that company.
WOLF BOEHME joined the Company on November 19, 1998 as the Company's Chief
Operations Officer. Prior to joining the Company and from 1986, he served as an
executive with Bloomberg Financial Markets. As such he was responsible for
several operating areas including designing, procuring and implementing systems
for the various product lines offered by Bloomberg Financial Markets.
NORMAN DOCTOROFF was elected a Director of the Company in May 1996. Until
1995, he was President of Gemini Industries, a company engaged in the production
of consumer electronics accessories. Since then he has served as an independent
management consultant to Gemini Industries and other companies.
JOHN A. BERMINGHAM was appointed a director of the Company in November 1997
and also served as a consultant to the Company during 1997. Mr. Bermingham is
currently the chief executive officer of Smith Corona Corporation. Mr.
Bermingham formerly served as president and chief executive officer of Rolodex
Corporation during 1996 and through April 1997. From 1993 to 1996, Mr.
Bermingham was employed by AT&T. He held the position of president and chief
executive officer of AT&T Smart Cards Systems and Solutions, a division of AT&T.
From 1982 through 1993, Mr. Bermingham held various senior executive officer
positions with Sony Corporation of America.
TERRY ANDERSON is a journalist, teacher, writer and nationally known
speaker. He is currently Visiting Professor at Ohio University's Scripps School
of Journalism and previously taught at Columbia University Graduate School of
Journalism. Mr. Anderson is the author of the national best-seller Den of Lions,
which chronicles Mr. Anderson's captivity for seven years as a hostage in
Lebanon. Mr. Anderson also currently writes a weekly opinion column on
political, social and international affairs for King Feature Syndicate.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation
paid by the Company for the services to the Company for three years ended August
31, 1998 to the Company's Chief Executive Officer and three other officers who
received compensation in excess of $100,000.
3
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ---------- -------------------
(a) (b) (c) (d) (e) (f) (g) (h)
- ---------------------------------------- ---- -------- -------- ------------ ---------- ---------- -------
SECURITIES
RESTRICTED UNDERLYING
NAME AND OTHER ANNUAL STOCK OPTIONS/ LTIP
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDED SARS (#) PAYOUTS
- ---------------------------------------- ---- -------- -------- ------------ ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott Mednick(1) ....................... 1998 $ 43,750 $ 80,000 $ 0 $0 -0- $ 0
Chairman and Chief Strategic Officer 1997
1996
Werner Haase(2)(3)(4) .................. 1998 500,000 300,000 80,859 0 -0- 0
Co-Chairman and CEO 1997 500,000 300,000 82,152 0 -0- 0
1996 10,500 22,250 0 0 -0- 0
Nurit Haase(2) ......................... 1998 250,000 0 0 0 -0- 0
Sr. Vice President 1997 250,000 0 0 0 -0- 0
1996 10,500 63,900 0 0 -0- 0
Yitz Grossman(5)(7) .................... 1998 150,000 0 0 0 100,000 0
Former Chairman and Secretary 1997
1996
Peter Cohen(6)(7) ...................... 1998 111,000 0 0 0 100,000 0
Former President 1997
1996
<CAPTION>
(a) (i)
- ---------------------------------------- ------------
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION
- ---------------------------------------- ------------
<S> <C>
Scott Mednick(1) ....................... $0
Chairman and Chief Strategic Officer
Werner Haase(2)(3)(4) .................. 0
Co-Chairman and CEO 0
0
Nurit Haase(2) ......................... 0
Sr. Vice President 0
0
Yitz Grossman(5)(7) .................... 0
Former Chairman and Secretary
Peter Cohen(6)(7) ...................... 0
Former President
<FN>
- ------------
(1) Mr. Mednick joined the Company on July 17, 1998. Under the terms of Mr.
Mednick's employment agreement, he received a signing bonus of $960,000
payable in monthly installments. In addition, Mr. Mednick receives an annual
base salary of $350,000. The salary paid to Mr. Mednick is for the period
from July 17 until August 31, 1998. The bonus payment represents one
installment of the signing bonus.
(2) Werner Haase and Mr. Haase's wife, Nurit Kahane Haase, assumed their current
positions with the Company on July 2, 1996 following the acquisition of
Journeycraft and TheraCom. Information is given only for periods subsequent
to July 2, 1996.
(3) During Fiscal 1998, the Board of Directors, Mr. Haase abstaining, awarded a
bonus of $300,000 to Mr. Haase based on the Company's performance for fiscal
1997.
(4) Represents premiums for life insurance policies paid by the Company on
behalf of Mr. Haase.
(5) Mr. Grossman resigned from his position with the Company effective December
12, 1996.
(6) Mr. Cohen resigned as President, Chief Executive Officer and Treasurer of
the Company effective July 2, 1996. He continues to serve as Managing
Director of the first aid division, which is not an executive officer
position.
(7) During fiscal 1996, the Company transferred certain life insurance policies
to Messrs. Grossman and Cohen which are included in 'Other Annual
Compensation.'
</FN>
</TABLE>
------------------------
The aggregate amount of personal benefits cannot be specifically or
precisely ascertained and do not, in any event, exceed $50,000 or 10% of
compensation as to any person. The Company offers health insurance to all of its
employees. At present time the Company does not have any retirement, pension,
profit sharing, or other similar programs or benefits for its executive
officers.
The Company has not paid cash remuneration for or on account of services
rendered by a director in such capacity. However, during Fiscal 1998, Norman
Doctoroff and Steven Bermingham each received a grant of 50,000 stock options
entitling them to purchase the Company's Common Stock at an exercise price of
$3.44 a share, the closing bid price on the date of grant.
4
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/ APPRECIATION FOR OPTION
UNDERLYING SARS GRANTED TERM
OPTIONS/SARS TO EMPLOYEES EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
- --------------------------------- ------------ -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Scott Mednick(1) ................ 1,000,000 49.6% $ 6.00 7/11/08 $3,373,368 $9,562,455
Chairman and Chief Strategic
Officer
Werner Haase(2) ................. 500,000 24.8 4.40 6/5/01 173,388 364,000
Co-Chairman and CEO
<FN>
- ------------
(1) Mr. Mednick joined the Company on July 17, 1998. As part of his employment
agreement and with the approval of the Board of Directors, Mr. Mednick was
granted 1,000,000 options to purchase the Company's Common Stock at $6.00
per share. However, and in the event of exercise of the options, Mr. Mednick
may only sell 500,000 of the 1,000,000 shares in increments of 100,000
shares each when the market price of the Common Stock attains certain price
levels ranging from $12.00 a share to $24.00 a share. The foregoing
restrictions on the sales are for a period of 48 months. The Option
Agreement also provides for Mr. Mednick to render limited consulting
services to the Company for a period of five (5) years after the expiration
of his term of employment provided that Mr. Mednick then holds any
unexercised options and provided such consulting duties do not conflict with
any contractual obligation that Mr. Mednick may then have with any third
party or entity.
(2) Mr. Haase was granted 500,000 options on June 5, 1998: only 250,000 options
vested immediately; 125,000 will only vest if the price of the Company's
Common Stock trades at an average price of $8.125 for 30 consecutive trading
days, which has already occurred; and the balance will only vest if the
Company's Common Stock trades at an average price of $10.125 for 30
consecutive days. Mr. Haase's options were granted pursuant to the 1998
Stock Option Plan.
</FN>
</TABLE>
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-ENDED OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END (#) AT FY-END ($)
SHARES ACQUIRED VALUED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------------- --------------- ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Scott Mednick(1) ............................. -0- -0- 1,000,000(1) $ 0
Chairman and Chief Strategic Officer (Exercisable)
Werner Haase(2) .............................. -0- -0- 493,750(2) $1,430,750
Co-Chairman and CEO (Exercisable)
250,000 0
(Unexercisable)
<FN>
- ------------
(1) As of the end of the Company's fiscal year, none of Mr. Mednick's options
were 'in-the-money.'
(2) The above figure represents options which have vested and are currently
exercisable: 143,750 options at an exercise price of $1.52; 100,000 options
at an exercise price of $2.19; and 250,000 options at an exercise price of
$4.40.
</FN>
</TABLE>
5
<PAGE>
EMPLOYMENT AGREEMENTS
In July 1996, the Company entered into a five-year employment agreement
with Nurit Kahane Haase effective as of July 1, 1996. The agreement provides for
annual compensation of $250,000 per year. In the event of a change in control of
the Company, Mrs. Haase is entitled to receive a one-time payment equal to three
times her then current annual compensation. A change of control includes the
acquisition of over 30% of the Company's stock, the sale or transfer of over 50%
of the Company's assets, or certain mergers or other combinations.
In December 1996, the Company entered into a five-year employment agreement
with Werner Haase effective as of January 1, 1997. The agreement provides for
annual compensation of $500,000 per year as well as the maintenance of various
insurance policies. In the event of a change in control of the Company, Mr.
Haase is entitled to receive a one-time payment equal to three times his then
current annual compensation. A change of control includes the acquisition of
over 30% of the Company's stock, the sale or transfer of over 50% of the
Company's assets, or certain mergers or other combinations. Mr. Haase's
agreement also entitles him to receive bonuses at the discretion of the Board of
Directors.
On July 17, 1998, the Company entered into a four-year employment agreement
with Scott Mednick. The agreement provides that Mr. Mednick is to receive a
signing bonus of $960,000 payable in twelve (12) equal installments. In
addition, Mr. Mednick is to receive an annual salary of $350,000 together with
bonuses not to exceed $100,000 a year. The granting of said bonus is subject to
the Company's future performance as well as Mr. Mednick's performance. The
agreement also provides for the granting of 1,000,000 options exercisable at
$6.00 per share. While Mr. Mednick may exercise all of the options at any time,
he may only sell 500,000 of the 1,000,000 underlying shares in increments of
100,000 shares each when the trading price of the Company's Common Stock attains
certain price levels ranging from $12.00 per share to $24.00 per share. The
foregoing restrictions on the sales are for a period of 48 months. Mr. Mednick
is to serve as Chairman of the Board of Directors during the term of his
employment subject to shareholder approval at each annual meeting. Mr. Mednick
is also employed by the Company as its Chief Strategic Officer. Mr. Mednick has
also agreed to provide limited consulting services to the Company for a period
of five (5) years after the term of his employment, provided he still retains
any unexercised options.
STOCK OPTION PLANS
The Company has adopted four stock option plans. The Non-Qualified Stock
Option Plan ( the 'NQSO Plan') which expired on April 6, 1994 covering 187,500
shares of the Company's Common Stock, $.08 par value, pursuant to which officers
and employees of the Company were eligible to receive non-qualified stock
options. As of November 15, 1998, options to acquire 71,875 shares had been
granted under the NQSO Plan at exercise prices of $1.52 per share. All options
granted under the NQSO Plan have been at exercise prices at least equal to the
fair market value of the Common Stock on the date of grant.
Under the 1990 Stock Option Plan (the '1990 Plan') the Company may grant to
its officers, key employees and others who render services to the Company,
options to purchase up to 187,500 shares of the Company's Common Stock at a
price which may not be less than the fair market value per share in the case of
incentive stock options or 85% of fair market value in the case of non-qualified
options for such stock. As of November 15, 1998, options to acquire a total of
113,750 shares have been granted under the 1990 Plan at exercise prices ranging
from $1.52 to $2.00 per share.
The 1995 Stock Option Plan (the '1995 Plan') operates on substantially the
same terms as the 1990 Plan except that it includes option to purchase up to
500,000 shares of the Company's Common Stock. Any options granted under the plan
expire ten years from the date of grant. The plan expires March 1, 2005. As of
November 15, 1998 all available options had been granted under the 1995 Plan and
options to acquire a total of 420,000 shares remain outstanding at an exercise
price of $2.19 per share.
At the annual meeting of shareholders on February 20, 1998, shareholders
approved the adoption of the 1998 Stock Option Plan (the '1998 Plan') which
provides for the issuance of up to 2,000,000 options for the purchase of up to
2,000,000 shares of Xceed Common Stock. The 1998 Plan authorizes the issuance of
incentive stock options which qualify under Section 422A of the Internal Revenue
Code
6
<PAGE>
as well as the issuance of non-statutory options. The 1998 Plan authorizes the
issuance of options to employees, officers and employee-directors. Non-statutory
options may also be issued to others who render services to the Company. Any
options granted under the 1998 Plan, unless specifically designated otherwise,
expire on March 1, 2008. As of November 15, 1998, there were 1,041,500 options
outstanding. All of the Plans are administered by the compensation committee
consisting of Werner Haase, Norman Doctoroff and John Bermingham.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 1998 by: (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock; (ii) each of the Company's officers and directors; and
(iii) all officers and directors of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP PERCENTAGE
- ---------------------------------------------------------------------- -------------------- ----------
<S> <C> <C>
Werner G. Haase(1) ................................................... 2,812,375 19.8%
488 Madison Avenue
New York, NY 10022
Nurit Kahane Haase(1) ................................................ 2,812,375 19.8%
488 Madison Avenue
New York, NY 10022
Scott Mednick(2) ..................................................... 1,000,000 6.8%
7927 Mulholland Drive
Los Angeles, CA 90046
William Zabit(3) ..................................................... 1,048,675 7.7%
565 Bridgeway
Sausalito, CA 94965
Norman Doctoroff(4) .................................................. 75,000 --
81 Two Bridges Road
Fairfield, NJ
John Bermingham(5) ................................................... 50,000 --
6 Round Hill Road
Kinnelon, NJ 07405
All officers and directors as a group (6 persons)..................... 3,368,050 32.6%
<FN>
- ------------
(1) Consists of 1,169,875 shares of Common Stock held in Mr. Haase's name,
1,112,000 shares of Common Stock owned by Mrs. Haase and 37,500 shares held
jointly by Mr. and Mrs. Haase. In addition, the above figure includes
493,000 options awarded to Mr. Haase to purchase 493,000 shares of Common
Stock. The above figure does not include an additional 250,000 options which
as of the end of the fiscal year had not vested. See 'Executive Compensation
-- Options/SAR Grants in Last Fiscal Year.'
(2) Represents 1,000,000 options granted to Mr. Mednick as an inducement to
become employed with the Company. In the event Mr. Mednick exercises all of
the options, he may only sell 500,000 shares in increments of 100,000 shares
each when the market price of the Common Stock attains certain price levels
ranging from $12.00 a share to $24.00 a share. See 'Executive Compensation
-- Options/SAR Grants in Last Fiscal Year.'
(3) Mr. Zabit acquired these shares after the end of the Company's fiscal year
in exchange for his shares of Zabit & Associates.
(4) Represents shares issuable on exercise of options to purchase 25,000 shares
at an exercise price of $2.00 per share, which Mr. Doctoroff received in
1996 as director's compensation, and 50,000 options at an exercise price of
$3.44 a share, which Mr. Doctoroff received during the fiscal year as
director's compensation. The exercise price was the closing bid price on the
date of grant.
(footnotes continued on next page)
7
<PAGE>
(footnotes continued from previous page)
(5) Represents shares issuable upon the exercise of options at an exercise price
of $3.44 a share, which Mr. Bermingham received during the fiscal year as
director's compensation. The exercise price was the closing bid price on the
date of grant.
</FN>
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1996, the Company entered into a four-year consulting agreement
with Target Capital Corp. and Yitz Grossman, which went into effect on September
1, 1996 and terminates on May 16, 2000. Mr. Grossman was Chairman and Secretary
of the Company at the time the agreement was entered into. Mr. Grossman resigned
as an officer and director of the Company in December 1996. The agreement
provides for annual compensation of $150,000 per year and an annual bonus of
$30,000. Mr. Grossman is not required to devote his full time to the Company. In
the event of a change of control of the Company, the agreement provides for a
one-time payment equal to three times the then current annual compensation. A
change of control includes the acquisition of over 30% of the Company's stock,
the sale or transfers of over 50% of the Company's assets, or certain mergers or
other combinations.
Prior to July 1996, Werner Haase had borrowed funds from Journeycraft
which, at the time of the acquisition of Journeycraft by the Company, amounted
to $1,000,000. As a result of the acquisition, the loan was transferred to the
Company. The loan bears interest at 7% and is payable in annual installments of
$100,000 which amount is first applied to interest and the balance to reduce
principal. The remaining balance and any accrued interest is due in full in
December 2016. As of August 31, 1998, $1,223,000 was due from Mr. Haase.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
THE ELECTION OF SCOTT MEDNICK, WERNER HAASE, WILLIAM ZABIT,
NORMAN DOCTOROFF, JOHN BERMINGHAM AND TERRY ANDERSON.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
TOTAL RETURN TO SHAREHOLDERS*
(DIVIDENDS REINVESTED MONTHLY)
ANNUAL RETURN PERCENTAGE
<TABLE>
<CAPTION>
YEARS ENDING
-----------------------------------------------------
COMPANY/INDEX AUG 94 AUG 95 AUG 96 AUG 97 AUG 98
- -------------------------------------------------------- ---------- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
XCEED INC. ............................................. - 33.45% 12.77% 48.19% 30.00% 84.62%
NASDAQ (US)............................................. 4.10% 34.69% 12.74% 39.52% - 4.91%
</TABLE>
INDEXED RETURNS
<TABLE>
<CAPTION>
BASE YEARS ENDING
PERIOD ---------------------------------------------------
COMPANY/INDEX AUG 93 AUG 94 AUG 95 AUG 96 AUG 97 AUG 98
- --------------------------------------- ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
XCEED INC. ............................ $100 $ 66.55 $ 75.04 $111.21 $144.57 $266.90
NASDAQ (US)............................ $100 $104.10 $140.21 $158.07 $220.54 $209.71
</TABLE>
[GRAPH indicating total return to Shareholders]
- ------------
* The foregoing figures and graph were furnished by Standard & Poor's Compustat,
a division of the McGraw-Hill Companies.
9
<PAGE>
PROPOSAL NO. 2
ADOPTION OF THE XCEED INC. 1999 LONG-TERM INCENTIVE PLAN
The Board of Directors has approved the adoption of the Xceed Inc. 1999
Executive Long-Term Incentive Plan (the 'Plan'), which will become effective
upon approval by the shareholders. The following is a summary of the material
features of the Plan and is qualified in its entirety by reference to the Plan.
PURPOSE OF THE PLAN
The purpose of the Plan is to promote the success and enhance the value of
the Company by linking the personal interests of participants to those of the
Company's shareholders and customers. The Plan is further intended to provide
flexibility to the Company in its ability to motivate, attract and retain the
services of participants upon whose judgment, interest and special effort the
successful conduct of its operations is largely dependent.
EFFECTIVE DATE AND DURATION
The Plan will become effective upon approval by the shareholders and shall
remain in effect, subject to the right of the Board of Directors to terminate
the Plan at any time, until all shares subject to the Plan shall have been
purchased or acquired.
AMENDMENTS
The Board may, at any time and from time to time, alter, amend, suspend or
terminate the Plan in whole or in part.
ADMINISTRATION OF THE PLAN
The Plan will be administered by a committee of the Board consisting solely
of two or more members of the Board (the 'Committee')
SHARES SUBJECT TO THE PLAN
The Plan authorizes the grant of up to 3,000,000 shares of Xceed Inc.
Common Stock. Shares underlying awards that lapse or are forfeited or awards
that are not paid in shares may be reused for subsequent awards. Only the number
of shares issued net of shares tendered for exercise shall be deemed issued
under the Plan. Shares may be authorized but unissued shares of Common Stock,
treasury shares or shares purchased on the open market.
If any corporate transaction occurs that causes a change in the
capitalization of the Company, the Committee shall make such adjustments to the
outstanding awards and the shares of stock that may be delivered under the Plan
as it deems appropriate and equitable to prevent dilution or enlargement of
rights.
ELIGIBILITY AND PARTICIPATION
Employees eligible to participate in the Plan include all officers and
employees of the Company and its subsidiaries, as determined by the Committee,
including employees who are members of the Board of Directors, but excluding
directors who are not employees.
GRANTS UNDER THE PLAN
The Plan permits the grant of Nonqualified Stock Options (NQSO), Incentive
Stock Options (ISO), Stock Appreciation Rights (SAR), Restricted Stock,
Restricted Stock Units, Performance Units, Performance Shares and other awards.
10
<PAGE>
CHANGE IN CONTROL
Upon a change in control, as defined in the Plan,
(a) Any and all options and SARs granted under the Plan shall become
immediately exercisable;
(b) Restricted stock shall become immediately vested in full and restricted
stock units shall be paid out in cash; and
(c) The target payout opportunity attainable under all outstanding awards
of performance units and performance shares shall be deemed to have
fully earned for the entire performance period(s) ; performance shares
shall be paid out in shares and performance units in cash.
AWARD INFORMATION
It is not possible at this time to determine awards that will be made
pursuant to the Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief description of the federal tax consequences
related to options to be awarded under the Plan.
1. Consequences to the Optionholder
Grant. There are no federal income tax consequences to the optionholder
solely by reason of the grant of ISOs or NQSOs under the Plan.
Exercise. The exercise of an ISO is not a taxable event for regular federal
income tax purposes if certain requirements are satisfied, including the
restriction providing that the optionholder generally must exercise the option
no later than three months following the termination of employment. However,
such exercise may give rise to an alternative minimum tax liability (see
'Alternative Minimum Tax' below).
Upon the exercise of a NQSO, the optionholder will generally recognize
ordinary income in an amount equal to the excess of the fair market value of the
shares of Company Common Stock at the time of exercise over the amount paid as
the exercise price. The ordinary income recognized in connection with the
exercise by an optionholder of a NQSO will be subject to both wage and
employment tax withholding.
The optionholder's tax basis in the shares acquired pursuant to the
exercise of an option will be the amount paid upon exercise plus, in the case of
a NQSO, the amount of ordinary income recognized by the optionholder upon
exercise.
Qualifying Disposition. If an optionholder disposes of shares of Company
Common Stock acquired upon exercise of an ISO in a taxable transaction, and such
disposition occurs more than two years from the date on which the option is
granted and more than one year after the date on which the shares are
transferred to the optionholder pursuant to the exercise of the ISO, the
optionholder will recognize long-term capital gain or loss equal to the
difference between the amount realized upon such disposition and the
optionholder's adjusted basis in such shares (generally the option exercise
price)
Disqualifying Disposition. If the optionholder disposes of shares of the
Company Common Stock acquired upon the exercise of an ISO (other than in certain
tax-free transactions) within two years from the date on which the ISO is
granted or within one year after the transfer of shares to the optionholder
pursuant to the exercise of the ISO, then at the time of disposition the
optionholder will generally recognize ordinary income equal to the lesser of (i)
the excess of such share's fair market value on the date of exercise over the
exercise price paid by the optionholder or (ii) the optionholder's actual gain
(i.e., the excess, if any, of the amount realized on the disposition over the
exercise price paid by the optionholder). If the total amount realized on a
taxable disposition (including return of capital and capital gain) exceeds the
fair market value on the date of exercise, then the optionholder will recognize
a capital gain in the amount of such excess. If the optionholder incurs a loss
on the disposition (i.e., if the total amount realized is less than the exercise
price paid by the optionholder), then the loss will be a capital loss.
11
<PAGE>
Other Disposition. If an optionholder disposes of shares of Company Common
Stock acquired upon exercise of a NQSO in a taxable transaction, the
optionholder will recognize capital gain or loss in an amount equal to the
difference between his basis (as discussed above) in the shares sold and the
total amount realized upon disposition. Any such capital gain or loss (and any
capital gain or loss recognized on a disqualifying disposition of shares of
Company Common Stock acquired upon exercise of ISOs as discussed above) will be
long-term depending on whether the shares of Company Common Stock were held for
more than one year from the date such shares were transferred to the
optionholder.
Alternative Minimum Tax Considerations. Alternative minimum tax ('AMT') is
payable if and to the extent it exceeds the taxpayer's regular tax liability,
and any AMT paid generally may be credited against future regular tax liability
(but not future AMT liability). AMT applies to alternative minimum taxable
income; generally regular taxable income as adjusted for tax preferences and
other items are treated differently under the AMT.
For AMT purposes, the spread upon exercise of an ISO (but not a NQSO) will
be included in alternative minimum taxable income, and the taxpayer will receive
a tax basis equal to the fair market value of the shares at such time for
subsequent AMT purposes. However, if the optionee disposes of the ISO shares in
the year of exercise, the AMT income cannot exceed the gain recognized for
regular tax purposes, provided that the disposition meets certain third-party
requirements for limiting the gain on a disqualifying disposition. If there is a
disqualifying disposition in a year other than the year of exercise, the income
on the disqualifying disposition is not considered alternative minimum taxable
income.
2. Consequences to the Company
There are no federal income tax consequences to the Company by reason of
the grant of ISOs or NQSOs or the exercise of ISOs (other than disqualifying
dispositions)
At the time the optionholder recognizes ordinary income from the exercise
of a NQSO, the Company will be entitled to a federal income tax deduction in the
amount of the ordinary income so recognized (as described above), provided that
the Company satisfies its withholding obligations described below. To the extent
the optionholder recognizes ordinary income by reason of a disqualifying
disposition of the stock acquired upon exercise of ISOs, the Company will be
entitled to a corresponding deduction in the year in which the disposition
occurs.
The Company will be required to report to the Internal Revenue Service any
ordinary income recognized by any optionholder by reason of the exercise of a
NQSO. The Company will be required to withhold income and employment taxes (and
pay the employer's shares of employment taxes) with respect to ordinary income
recognized by the optionholder upon the exercise of NQSOs.
3. Other Tax Consequences
The foregoing discussion is not a complete description of the federal
income tax aspects of ISOs and NQSOs under the Plan. In addition, administrative
and judicial interpretations of the application of the federal income tax laws
are subject to change. Furthermore, the foregoing discussion does not address
state or local tax consequences.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THE APPROVAL OF
THE XCEED INC. 1999 LONG-TERM INCENTIVE PLAN.
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
Subject to approval by the stockholders, the Board of Directors has
appointed Holtz Rubenstein & Co. LLP as the independent public accountants to
audit the financial statements of the Company for the fiscal year ending August
31, 1999. Holtz Rubenstein & Co. LLP also served as the Company's auditors for
the fiscal years ended August 31, 1995, 1996, 1997 and 1998. A representative of
Holtz Rubenstein & Co. LLP will be present at the Annual Meeting.
12
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR RATIFICATION OF
THE APPOINTMENT OF HOLTZ RUBENSTEIN & CO., LLP
AS INDEPENDENT ACCOUNTANTS.
VOTE REQUIRED
Under Delaware law, a majority of the shares of the Company's Common Stock
entitled to vote, present in person or represented by proxy, shall constitute a
quorum at the annual meeting. The affirmative vote of a plurality of the votes
cast at the Annual Meeting is required to elect directors. The affirmative vote
of a majority of the shares present in person or represented by proxy at the
Annual Meeting is required for approval of the 1999 Stock Option Plan and the
selection of auditors.
EXPENSE OF SOLICITATION
The cost of soliciting proxies, which also includes the preparation,
printing and mailing of this Proxy Statement, will be borne by the Company.
Solicitation will be made by the Company primarily through the mail. The Company
may also retain the services of a proxy solicitation firm. The Company has not
made any arrangements to do so as of the date of this Proxy Statement, and does
not presently have estimates as to the cost of such services. Directors,
officers and regular employees of the Company may solicit proxies personally, by
telephone or telegram. The Company will request brokers and nominees to obtain
voting instructions of beneficial owners of stock registered in their names and
will reimburse them for any expenses incurred in connection therewith.
PROPOSALS OF STOCKHOLDERS
Stockholders of the Company who intend to present a proposal for action at
the 2000 Annual Meeting of Stockholders of the Company must notify the Company's
management of such intention by notice received at the Company's principal
executive offices not later than September 1, 1999, for such proposal to be
included in the Company's proxy statement and form of proxy relating to such
Meeting.
ANNUAL REPORT TO STOCKHOLDERS
The Company's Annual Report on Form 10-K for the year ended August 31,1998
as filed with the Securities and Exchange Commission is being delivered with
this Proxy Statement to the Company's stockholders. Additionally, the Company's
Quarterly Report for the first quarter ended November 30, 1998 is available from
the Company upon request. All requests should be directed to Alex Alaminos,
Shareholder Relations, at 201-507-8320. In addition, the Quarterly Report as
well as additional filings with the Securities and Exchange Commission are
available through the Company's website at www.xceed.com.
OTHER MATTERS
The Board of Directors knows of no matters that are expected to be
presented for consideration at the Annual Meeting which are not described
herein. However, if other matters properly come before the Meeting, it is
intended that the persons named in the accompanying proxy will vote thereon in
accordance with their best judgment.
PLEASE DATE, SIGN AND RETURN THE PROXY CARD AT YOUR EARLIEST CONVENIENCE IN
THE ENCLOSED RETURN ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES. A PROMPT RETURN OF YOUR PROXY CARD WILL BE APPRECIATED AS IT WILL SAVE
THE EXPENSE OF FURTHER MAILINGS.
By Order of the Board of Directors
SCOTT MEDNICK
Chairman
13
<PAGE>
XCEED INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
March 12, 1999 10:00 a.m.
The undersigned hereby appoints Scott Mednick and Werner G. Haase, and each
of them jointly and severally, proxies with full power of substitution and
revocation, to vote on behalf of the undersigned all shares of Common Stock of
Xceed Inc. which the undersigned is entitled to vote at the Annual Meeting of
Stockholders to be held March 12, 1999 or any adjournments thereof.
1. ELECTION OF DIRECTORS.
FOR all the nominees listed below ()
WITHHOLD AUTHORITY to vote for all nominees listed below ()
(INSTRUCTION: To withhold authority to vote for any individual
nominee, mark the box next to the nominee's name below.)
Scott Mednick () Werner Haase () William Zabit ()
Norman Doctoroff () John A. Bermingham () Terry Anderson ()
2. PROPOSAL TO APPROVE THE CREATION OF THE XCEED INC. 1999 LONG- TERM
INCENTIVE PLAN AUTHORIZING THE COMPANY TO ISSUE OPTIONS TO OFFICERS,
DIRECTORS AND EMPLOYEES TO ACQUIRE UP TO 3,000,000 SHARES OF COMMON
STOCK. FOR () AGAINST () ABSTAIN ()
3. PROPOSAL TO RATIFY APPOINTMENT OF HOLTZ RUBENSTEIN & CO., LLP, AS THE
INDEPENDENT PUBLIC ACCOUNTANTS OF THE COMPANY FOR THE 1999 FISCAL YEAR.
FOR () AGAINST () ABSTAIN ()
In his discretion, the proxy is authorized to vote upon such other
business as may properly come before the meeting or any adjournment(s) thereof.
(Continued and to be signed on reverse side.)
<PAGE>
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED TO
ELECT MESSRS. MEDNICK, HAASE, ZABIT, DOCTOROFF, BERMINGHAM AND ANDERSON AS
DIRECTORS, TO APPROVE A NEW 1999 STOCK OPTION PLAN AND TO APPROVE THE
APPOINTMENT OF HOLTZ RUBENSTEIN & CO., LLP AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS FOR THE FISCAL YEAR ENDING AUGUST 31,1999.
Dated:_______________________________
------------------------------------
Signature
------------------------------------
Signature if held jointly
(Please sign exactly as ownership appears on this proxy.
Where stock is held by joint tenants, both should sign. When
signing as attorney, executor, administrator, trustee or
guardian, please give full title as such. If a corporation,
please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in
partnership name by authorized person.)
Please mark, date, sign and
return Proxy in the enclosed envelope.
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934 For the fiscal year ended August 31, 1998
[ ] Transition report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
__________
Commission file number 0-13049
X-CEED, INC. (formerly WATER-JEL TECHNOLOGIES, INC.)
----------------------------------------------------
(Name of Issuer 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) (Zip Code)
(212) 753-5511
--------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock
------------
(Title of Class)
B Warrant
---------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting equity
held by non-affiliates of the registrants, computed by reference to the price at
which the common equity was sold, or the average bid and asked prices of such
common equity, as of a specified date within 60 days prior to the date of
filing. $50,058,442 (as of November 30, 1998)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 13,608,521 shares
outstanding as of November 19, 1998
Documents Incorporated by Reference: See Footnotes to "Exhibits"
<PAGE>
PART I
ITEM 1. BUSINESS
BACKGROUND
X-ceed, Inc. ("X-ceed" or the "Company"), formerly known as Water-Jel
Technologies, Inc., was established in 1979 and until July 1996 was primarily
engaged in the development, manufacturing and marketing of emergency first aid
products for burn injuries for industrial use as well as in the manufacturing
and marketing of a line of generic ointments and creams. In July 1996 the
Company acquired all of the outstanding stock of Journeycraft, Inc.
("Journeycraft") and TheraCom Medical Communications, Inc. ("TheraCom").
Journeycraft consists of two divisions: (i) X-ceed Performance Group ("The
Performance Group"), which provides, among other things performance improvement
services, Internet-based performance improvement programs and communications
services that impact people, enhance performance, and assist in increasing
revenues and earnings of corporate clients, and (ii) Journeycorp, which provides
travel management for corporate clients. The TheraCom subsidiary is engaged in
training and communications in the health care industry and provides patient
education in the area of women's health care, and various aspects of
prescription drugs.
During fiscal 1998, Company management decided on strategic
acquisitions designed to let the Company evolve as a fully integrated marketing
and communications company with Internet and interactive services at its core.
The acquired companies were selected to be compatible with and complementary to
the Company's primary existing operations, specifically The Performance Group
and TheraCom, as well as with each other, thus affording the Company the
opportunity to participate in the rapidly expanding Internet and interactive
business sector.
The first of these acquisitions occurred just prior to the end of the
fiscal year, when the Company acquired Reset, Inc. ("Reset"). On September 9,
1998, the Company acquired Mercury Seven, Inc. ("Mercury Seven"), and
subsequently on September 14, 1998, the Company acquired Zabit & Associates,
Inc. ("Zabit & Associates"). All of these acquisitions were by way of a
merger. Zabit & Associates was merged into the Company, and Reset and Mercury
Seven were merged into newly created subsidiaries.
OPERATIONS
As presently constituted, the Company has two main divisions, Zabit &
Associates and Water-Jel, and four subsidiaries, Journeycraft (consisting of The
Performance Group and Journeycorp divisions), TheraCom, Reset and Mercury Seven.
Set forth below is a description of each of the subsidiaries and divisions.
Journeycraft Subsidiary - The Performance Group Division
Business
While award programs have historically been used to increase sales,
more and more corporations now also utilize such programs to achieve quality
assurance, motivate personnel in areas other than sales, as well as to foster
consumer loyalty. Corporations have now come to recognize that award programs
can reduce operating costs by maximizing employee attendance, increasing safety
on the job, generating ideas, enhance internal communications and reducing
training costs.
1
<PAGE>
The Performance Group offers a full-service approach to its corporate
clients for the establishment of specially designed performance improvement
programs. This full-service approach consists of identifying the client's
business objectives and budget parameters, as well as analyzing the demographics
of the program's participants to arrive at the optimal type and mix of awards.
As part of its services, The Performance Group offers a specially designed
Internet technology, "Maestro" (discussed below), to communicate the business
objectives and contest rules to participants as well as to maintain the
excitement and enthusiasm for the program's objectives throughout the life of a
program, which can range from three months to one year. Ongoing communication to
the program participants of their ranking in the program and feed-back from the
participants to management are the key factors by which a program sponsor
achieves possible results and, ultimately, a measurable return on investment.
In 1997, The Performance Group introduced "Maestro," an Internet and
intranet software technology which integrates the key functions of training,
communication, sales tracking, reporting, recognition and awards delivery in one
comprehensive system. The technology enables instant monitoring and measuring of
performance by management and also provides the participants with immediate
information regarding their performance within a given program. Maestro is
offered to individual clients under a licensing agreement. The fee is subject to
numerous factors such as a client's usage of the Maestro features and
customization to a client's specific needs. Clients do not receive the actual
Maestro software, but rather are only granted a license to utilize the software
which is maintained at all times by The Performance Group. The client and user,
i.e., participants in the performance program, are required to update sales and
marketing information on a real-time basis. The software assimilates this
information and then enables the client and the participants to generate reports
and use the e-commerce function of Maestro to select and order awards.
The Company believes that Maestro has the potential to significantly
increase the Company's market share of performance improvement services;
however, there can be no assurance that Maestro will serve to attract additional
clients. In addition, competitors may adopt similar type programs.
See "Risk Factors."
The Performance Group derives its revenues from service fees from
clients for designing, executing and monitoring performance improvement programs
and fees from Maestro, as well as from mark-ups on the merchandise and/or
services provided as awards. In this connection, and with respect to travel
related awards programs and packages, The Performance Group sources services
such as hotel accommodations, food and beverage, entertainment and
transportation. These services form the integral components of a group
recognition travel program. Such group travel program components are purchased
at net rates and marked up by The Performance Group. With respect to non-travel
based performance improvement programs involving awards for merchandise and/or
gift certificates, these items are purchased by The Performance Group from
manufacturers and/or manufacturers' representatives at discounted prices and are
subject to contractually agreed mark-ups.
The Performance Group provides services to numerous corporate customers
in various industries such as telecommunications, office equipment,
pharmaceuticals, insurance and electronics. A majority of its corporate
customers are repeat customers.
For the fiscal year ended August 31, 1998 ("fiscal 1998") the division
had revenues of approximately $35,206,000, accounting for approximately 60% of
the Company's total revenues. See "Item 6: Management's Discussion of Financial
Condition and Results of Operations." The Performance Group markets its services
through direct contacts by its sales representatives with corporate sales,
marketing and human resource executives. The division has 50 employees with
offices in Atlanta and Los Angeles as well as its office at the New York City
Headquarters.
2
<PAGE>
Four clients of The Performance Group each account for more than ten
percent (10%) of the division's total revenues, and one client, Pfizer
Pharmaceutical, accounted for 35%. A loss of any one of these customers or a
reduction in fees paid by any one of these customers could have a material
effect on The Performance Group's revenues in the future. See "Risk Factors."
The Performance Group is concentrating on building a wider client base, but
there can be no assurance that these efforts will be successful. See "Risk
Factors." The Company believes that the recently acquired companies may be able
to introduce The Performance Group services to their respective corporate
clients, which could possibly result in an expansion of the client base.
The Company considers The Performance Group's Internet technologies to
be proprietary and protects its proprietary information with standard secrecy
agreements. The Company does not have, but intends to apply for, copyright
protection for certain of its proprietary Intranet software. The Company may
have limited legal recourse should this proprietary information be disclosed
publicly or to competitors.
Competition
Numerous companies provide incentive or performance improvement
services, some of which are significantly larger and have access to more
extensive resources than The Performance Group. These include Maritz, Inc.,
Carlson Marketing Group, and BI Performance Services. In addition, new
competitors are entering the Internet arena. The Performance Group competes on
the basis of innovative programs, price and the quality of services.
TheraCom Subsidiary
The TheraCom subsidiary is a medical communications agency. It offers
continuing educational and training programs to doctors, pharmacists, nurses and
other health care professionals. TheraCom's major clients are pharmaceutical
companies, hospitals and managed care organizations which sponsor such programs.
TheraCom provides all of the necessary services to organize such medical
seminars including agenda preparation, procurement of faculty to lecture,
publicity and travel and meeting place arrangements. TheraCom also provides to
its clients ongoing data flow and feedback related to its activities.
TheraCom has expanded into providing health care education beyond the
traditional channels. The most important of these new areas is patient
education. With increasing competition and rising costs, the health care
industry has come to recognize that communicating directly to patients reduces
usage of medical services and creates an awareness on the part of the patients.
TheraCom has prepared, in conjunction with medical professionals, programs for
patients in such areas as menopause, compliance with drug regimens, and
psycho-social aspects of medicine.
TheraCom's current clients include Pfizer, Inc., Merck and Co.,
SmithKline Beecham, Schering-Plough Corp. and Novartis Pharmaceutical Corp.
For fiscal 1998, TheraCom had revenues of $7,063,085. Pfizer, Inc. accounted
for more than 85% of those revenues.
Competition
TheraCom competes with many consultants who provide similar services
to the health care industry. Many of these consultants are better established
than TheraCom, have broader client bases than TheraCom and have greater
financial resources. See "Risk Factors."
Journeycraft Subsidiary - Journeycorp Division
3
<PAGE>
Business
The Journeycorp division provides comprehensive travel services
primarily for business travel by corporate clients. Travel services include trip
planning, reservations, ticketing, and other incidental services. In addition,
the division acts as a consultant regarding corporate travel policy and travel
budgeting. For these purposes, the division has created a management system
which analyzes a corporation's historical travel expenses data in order to
develop a definitive corporate travel policy and to enable the client to budget
on an ongoing basis. The system also captures travel expense data and provides
the client with a program to plan, account for and control travel and
entertainment expenses. Like The Performance Group division, Journeycorp uses
Internet technology and software to facilitate direct booking through the
Internet, to access current data via e-mail and to quickly create travel expense
reports and analyses.
The basic services, such as trip planning and reservations, are
delivered through a variety of service configurations. Customers are serviced
out of a Reservations Center or via a dedicated group of travel counselors
located on a customer's premises ("on-site"). Journeycorp maintains Reservations
Centers in New York City (2), Chicago (1), New Jersey (1) and Los Angeles (1),
and ten (10) on-sites. These services are supported by management functions such
as customer service, MIS (Management Information Systems) and technology from
the headquarters location in New York City. Journeycorp currently has 125
employees.
Journeycorp derives its revenues primarily from commissions from
suppliers and fees from customers generated by travel bookings. In addition, a
portion of its revenues are derived from management or consulting fees charged
to certain selected accounts.
An industry journal, Travel Weekly, estimated that as of July 1998, out
of 30,000 travel agencies, Journeycorp's corporate travel business ranked
between 35th and 40th in size in the United States, with a higher ranking
position in the New York metropolitan area. While Journeycorp does not
concentrate in any particular industries, its client base predominantly consists
of companies in financial services, entertainment and retail marketing, most of
which tend to be located in New York and California. Journeycorp currently has
several hundred clients. Its larger corporate clients include Bloomberg
Financial Services, Inc., Schroeder & Co., Tiffany's, Phillips Van Heusen and
Sony Music Corporation. No one client accounts for more than ten percent (10%)
of Journeycorp's revenues. Journeycorp normally formalizes its working
relationship with clients through agreements which can range from one to three
years and which are normally cancelable by either party upon 60 to 90 days'
notice.
In fiscal 1998, Journeycorp had revenues of $10,988,000, accounting for
approximately 18.6% of the Company's total revenues. Journeycorp markets its
services through direct contacts by its sales representative with clients,
targeted direct mailings, and participation in trade shows.
Competition
Journeycorp faces intensive competition, since there are more than
30,000 travel agencies in the United States which are capable of providing
business travel services. In addition, the ongoing consolidation in the travel
industry has created mega-agencies, national and global in scope, which have
resulted in an escalation of competition in this industry. See "Risk Factors."
Water-Jel Division
Water-Jel's business comprised the Company's principal business prior
to the acquisition of Journeycraft and TheraCom as wholly owned subsidiaries in
July, 1996. Water-Jel currently
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manufactures and markets two product lines: the "Water-Jel" first aid product
line for burns, and the "WJ" generic creams and ointments.
The "Water-Jel" first aid product line consists of a line of emergency
first aid and fire blankets and burn dressings primarily marketed to industry.
Water-Jel also offers two of its products, "Water-Jel Burn Dressing" and the
"Water-Jel Burn Jel" on a limited basis to the consumer marketplace. The fire
blankets provide emergency first aid to burn victims and help trapped
individuals escape a fire. "Water-Jel" sterile burn dressings provide emergency
first aid for victims who have small area body burns. "Water-Jel Burn Jel" is a
topical gel designed for minor spot burns and "Water-Jel UnBurn" is a topical
gel designed specifically for sunburns. "Water-Jel Cool-Jel" is a moisturizing
topical cooling gel which can be used for relief of minor burns, cuts and
scrapes.
The "WJ" brand generic creams and ointments line consists of first aid
cream, maximum strength hydrocortisone cream and a triple antibiotic ointment.
Water-Jel also provides private label packing to some of its customers.
Water-Jel markets its products to the domestic and international
industrial market and on a limited basis to the consumer marketplace. Its
distribution is comprised of customers who are well established in the first aid
and safety markets. Water-Jel promotes its product lines through advertising in
trade journals and representation in major trade shows.
For fiscal 1998, Water-Jel's sales were approximately $5,940,000,
accounting for approximately 10% of the Company's total revenues. Water-Jel
employs 25 people, and operates its manufacturing and warehousing from its
17,700 square foot facility located in Carlstadt, New Jersey. The division also
maintains an additional 9,600 square feet of warehouse space available near its
main facility.
In the opinion of Water-Jel's management, Water-Jel's burn first aid
products are superior to the dry "fire" blankets and antiseptic sprays,
combination of salve covered with sterile gauze and sterile pre-wetted dressing
of its competitors. Water-Jel products cool the wound by removing excess heat
and loosen burned-on clothing. While dry "fire" blankets extinguish a fire by
oxygen deprivation or smothering, Water-Jel Fire Blankets also remove excess
heat from the victim's body and clothing by wetting and cooling, thereby
reducing the possibility of re-combusting. Also, Water-Jel Burn Dressings come
in a single unit and maintain their moistness longer than dressings pre-wetted
only with water.
Government Regulation
Water-Jel's products and manufacturing practices are subject to
regulation by the Food and Drug Administration ("FDA") as well as by similar
foreign authorities. FDA requirements include adherence to good manufacturing
practices, proper labeling, and either premarket notification or premarket
approval (depending on the category of product) prior to commercial marketing in
the United States.
The Water-Jel Fire Blanket and Burn Dressings are medical devices
subject to regulation by the FDA. Water-Jel has effective filings of premarket
notification for these products under Section 510(k) of the Medical Device
Amendments to the Federal Food, Drug, and Cosmetic Act. Water-Jel's generic
creams and ointment, "Burn Jel" and "UnBurn" line are classified as over the
counter ("OTC") drugs. Water-Jel has the necessary good manufacturing practice
and quality controls to manufacture such over-the-counter drugs in its facility.
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Water-Jel is also subject to periodic inspections by the FDA relating
to good manufacturing practices. The FDA has the authority to require a
suspension of manufacturing operations if it finds serious deficiencies.
Additional regulation may, in the future, be imposed by Federal, state or local
authorities, particularly the FDA. Any new products will also be subject to
review of various regulatory authorities in virtually every foreign country in
which such products are offered for sale.
Patents and Trademarks
As a result of research and development efforts in modifying and
improving the Water-Jel line and in January 1995, Water-Jel was granted a patent
for a synthetic fabric containing a therapeutic, non-toxic, water-soluble and
bio-degradable gel used in the burn dressing product line. In September 1996,
Water-Jel was granted a patent for a water-based formulation which can be used
for the treatment of sunburns. This product is marketed under the name "UnBurn."
Water-Jel has obtained United States and foreign registrations for several
trademarks for use on its products. These marks and logos are used on the
packaging of Water-Jel's products.
Competition
The market in which Water-Jel currently operates is characterized by
competition and rapid technological change. Other firms, including Spenco
Medical Corporation, C.R. Bard, Inc. and Johnson & Johnson Products, Inc.,
manufacture and market fire blankets, burn dressings and related fire safety
products and have been in business for a longer period of time, are better
established, have financial resources substantially greater, and have more
extensive facilities than those which now, or in the foreseeable future, may be
available to Water-Jel. See "Risk Factors." While some segments of the market
are dominated by large manufacturers, other segments of the market are
characterized by intense competition among independent product manufacturers.
One manufacturer, Nortrade International Inc. ("Nortrade") offers a burn product
line similar to that of Water-Jel's. Management believes that Nortrade does not
pose any significant competition.
RECENT DEVELOPMENTS
As noted previously, just prior to the end of the Company's fiscal
year, the Company commenced a series of acquisitions in line with its strategy
for a new business model as a fully integrated marketing and communications
company with Internet and interactive services at its core.
Reset Subsidiary
The first of the Company's acquisitions occurred on August 29, 1998,
when the Company completed a merger of Reset, Inc. ("Reset") into a newly
created Company subsidiary, X-ceed Acquisitions, Inc., which name was then
changed to Reset, Inc. upon the completion of the merger. The Company issued
1,250,000 restricted shares of Common Stock having a market value of $6,250,000
in exchange for all of the issued and outstanding shares of Reset owned by three
principal shareholders of Reset. The issuance of the Company's Common Stock was
in reliance upon the exemption pursuant to Section 4(2) of the Securities Act of
1933. In addition the transaction was subject to receipt by the Company's Board
of Directors of a fairness opinion from an investment banking firm that the
transaction was fair to the Company and stockholders.
The Company also entered into three-year employment agreements with the
three principals of Reset. The agreement provided for a base salary and a
two-year earn-out bonus based on the growth both in revenues and profits of
Reset. Under the terms of the agreement, the three principals of Reset manage
the day-to-day operations of the subsidiary.
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Reset was established in 1996 and is engaged in creating Internet-based
business solutions for corporate clients through Internet consulting,
interactive marketing strategies and e-commerce development. At the present
time, Reset derives 70% of its revenues by providing these services to the
entertainment industry. Reset's current clients include, among others, Home Box
Office, MCA, Inc., New Line Cinema, Warner Bros. Online, Consolidated Edison,
Inc., and The Wall Street Journal. One client, Home Box Office, accounts for
approximately 17% of its gross revenues. Reset maintains an office in New York
City and employs 17 full-time employees and approximately 7 part-time employees.
Mercury Seven Subsidiary
On September 9, 1998 the Company completed the acquisition of Mercury
Seven, Inc. ("Mercury Seven") by way of merger into a newly created Company
subsidiary, X-ceed Merger Inc., which name was then changed to Mercury Seven,
Inc. on completion of the merger. In consideration for all of the issued and
outstanding stock of Mercury Seven owned by the four principals, the Company
issued 1,073,333 shares of Restricted Common Stock having a market value of
$8,050,000 and paid a cash consideration of $1,500,000. The Company relied upon
the exemption provided by Section 4(2) of the Act for the issuance and delivery
of the share consideration. The transaction was subject to the receipt by the
Board of Directors of a fairness opinion from an investment banking firm stating
that the transaction was fair to the Company and the stockholders.
The Company has entered into three-year employment agreements with the
four principals of Mercury Seven, which agreements provide for a base salary and
a two-year earn-out bonus on the future profitability of Mercury Seven. The four
principals manage the day-to-day operations of the subsidiary.
Mercury Seven was established in late 1996. The company is engaged in
creating Internet-based business solutions for corporate clients through
Internet consulting, interactive marketing strategies and e-commerce
development. Mercury Seven's current clients include, among others, Spree.com,
WorldNow/Gannaway, AnotherUniverse.com, Ericsson, Men's Health, the New York
Rangers, and Madison Square Garden. Spree.com and Men's Health each account for
approximately 10% of Mercury Seven's total revenues.
Mercury Seven is also the publisher and creator of ChannelSeven.com, an
online network for Internet professionals worldwide. The network incorporates
cross-marketing navigational techniques and centralized rich 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 sponsorships. The present advertisers and sponsors include,
among others, Intel, Microsoft, DoubleClick, Ericsson and Cyberlabs, Inc.
The subsidiary employs 31 people and has an office located in New York
City.
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Zabit & Associates Division
On September 14, 1998 the Company completed a Plan of Merger with Zabit
& Associates, Inc. ("Zabit & Associates"), by which Zabit & Associates merged
into the Company. The transaction was subject to the receipt by the Company of
an opinion by an investment banking firm that the terms of the transaction were
fair to the stockholders of X-ceed. The Company paid a total consideration
consisting of 2,258,724 shares of restricted Common Stock and the issuance of
four notes to the two principal shareholders of Zabit & Associates: two notes
totaling $4.8 million with interest at the prime rate per annum are due on or
before March 15, 1999, and two notes totaling $1,930,208 together with interest
at 7% per annum are due on or before September 14, 2002. The Company relied upon
the exemption provided by Section 4(2) for the issuance and delivery of the
Company's Common Stock.
In separate transactions, the Company paid a cash consideration of $2
million for all of the issued and outstanding stock of Water Street Design
Group, Inc. ("Water Street"), a company affiliated with Zabit & Associates and
engaged in design and production of brochures, pamphlets and manuals. In another
separate transaction, the Company purchased the trade name and trademarks of
Zabit & Associates for $3,200,000. The Company also entered into employment
agreements with William A. Zabit, the president and founder of Zabit &
Associates, and Bradley K. Nelson, a senior executive with Zabit & Associates.
See "Executive Compensation --Employment Agreements." Upon completion of the
merger, Mr. Zabit was named President of X-ceed and was appointed as a director
to serve on the Board until the next annual election. Mr. Nelson was named
president of the Zabit & Associates division. Zabit & Associates now operates as
a separate division of X-ceed.
Zabit & Associates was established in 1993. Since its formation, the
company has been engaged in advising organizations, primarily publicly held
companies, in developing strategic communication solutions in connection with
the dissemination of information to their employees, shareholders, customers and
general public. At the current time approximately sixty (60%) percent of the
division's revenues are derived from work performed in connection with the
dissemination of information to employees regarding human resource programs,
including compensation plans, 401(k) programs, health programs, stock option
plans and other employee-related programs. The remaining forty (40%) percent of
the division's revenues are derived from services for general employee
communication, marketing communication and public relations services.
Currently, the division maintains an ongoing client relationship with
Aetna Life Insurance, Pitney Bowes, Dell Computer, McKesson Corp., Transamerica
Corp., Oracle, and Fireman's Fund. Each of these clients has paid fees to Zabit
& Associates in amounts exceeding $200,000 for services. In addition, Zabit &
Associates has other ongoing clients such as Kaiser Permanente, Inc., Promus and
Indiana Power and Light. Fireman's Fund presently accounts for more than fifteen
(15%) percent of Zabit & Associates' total revenues. To date, Zabit & Associates
has also generated fees of less than $200,000 from the following clients:
Starbucks, Applied Materials, United Airlines, Sears, Bechtel and Shell/Texaco.
Zabit & Associates has also entered into a strategic alliance with
Fidelity Employers Services Company, a division of Fidelity Investments,
("Fidelity") whereby Fidelity introduces and recommends that its clients utilize
Zabit & Associates' services in connection with corporate communications
matters.
At the present time, Zabit & Associates maintains its executive office
and the Zabit Western Regional Office in Sausalito, CA, and also maintains
offices in New York, Norwalk, CT, and
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Chicago, IL. The division employs a total of sixty -two employees, and its
affiliated company, Water Street, employs eight persons.
Competition
The Zabit & Associates division competes with several companies,
including Andersen Consulting, Towers and Perrin, William M. Mercer & Company,
Watson Wyatt Worldwide and a variety of communication and public relations
agencies. Zabit & Associates' competitors for the most part have longer
operating histories, longer client relationships, greater financial resources
and greater technological resources than Zabit & Associates. See "Risk Factors."
While Zabit & Associates believes it can effectively compete and it has within
the last five years developed a sound client base, there can be no assurances
that Zabit & Associates can retain this client base or attract new clients. If
Zabit & Associates cannot compete or attract new clients, this could have a
significant impact on the Company's future operating results.
The mergers of Reset, Mercury Seven and Zabit & Associates have been
accounted for by the purchase method of accounting. As a result of these
transactions, X-ceed's future financial statements will reflect good will and
other intangibles of approximately $41 million.
OTHER SIGNIFICANT DEVELOPMENTS
Just prior to the end of the Company's fiscal year and in light of
the prospective acquisition of Reset and possible acquisitions of Mercury
Seven and Zabit & Associates, the Company entered into a four-year employment
agreement with Scott Mednick who was the founder and past Chairman and Chief
Executive Officer of Think New Ideas, Inc. ("Think"). Mr Mednick has
pioneering experience in the Internet and interactive fields. Mr Mednick was
named Chairman of the Company's Board of Directors until the next annual
meeting of shareholders. In addition Mr. Mednick now serves as the Company's
Chief Strategic Officer. See "Directors and Executive Officers of the
Registrant" and "Executive Compensation--Employment Agreements."
On November 19, 1998, Mr. Wolf Boehme joined the Company as its Chief
Operations Officer. Prior to joining the Company and since 1986, Mr. Boehme
served as Operations Controller for Bloomberg Financial Markets. See
"Executive Compensation--Employment Agreements."
RISK FACTORS
Because of the recent acquisitions and the new direction that the
Company is pursuing, this Annual Report on Form 10-K includes risk factors
relating to its operations prior to the acquisition of the three new companies
as well as after the acquisition. Prospective purchasers as well as its present
shareholders should carefully consider the following risk factors as well as the
other information contained in this Annual Report on Form 10-K and the Exhibits
incorporated by reference herein.
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Competition Faced by the Company
Mercury Seven and Reset, the Company's Internet and interactive
subsidiaries, provide services in a highly competitive market. These two
subsidiaries compete with local, national and global web consultancy, web
development and interactive companies as well as national and global advertising
and communications companies which have begun to develop or acquire these
capabilities. Some of Mercury Seven's and Reset's competitors have longer
operating histories, longer client relationships and greater financial and
technological resources. There can be no assurance that existing or future
competitors will not develop superior Internet technologies, develop greater
expertise in interactive marketing strategies or take smarter e-commerce
solutions to market, including pricing advantages, all of which could have a
material adverse effect on the financial condition and operating results of the
Company.
The Performance Group division offers performance improvement and
communications services to corporate clients in a highly competitive
marketplace. Well-established companies such as Maritz, Inc., Carlson Marketing
Group, Inc. and B.I. Performance Group, Inc. have greater name recognition and a
much broader customer base and generate revenues far in excess of The
Performance Group. In addition, The Performance Group competes with numerous
smaller incentive marketing companies and consultants, and, at times, has to
compete with corporations' in-house staff which designs and executes performance
improvement and communications programs. Only recently, The Performance Group
introduced "Maestro," a proprietary Inter- and intranet software applying
net-based technology to the performance improvement sector. While The
Performance Group believes that this technology is unique, competitors may
develop their own software and compete against The Performance Group in the
market.
The Zabit & Associates division competes with several companies,
including Andersen Consulting, Towers and Perrin, William M. Mercer & Company
and Watson Wyatt Worldwide. Zabit & Associates' competitors for the most part
have longer operating histories, longer client relationships, greater financial
resources and greater technological resources than Zabit & Associates. While
Zabit & Associates believes it can effectively compete and has within the last
five years developed a significant client base, there can be no assurances that
Zabit & Associates will be able to keep the present client base or attract new
clients. In the event Zabit & Associates cannot compete effectively , this could
have a material effect on the financial condition and operating results of the
Company.
The TheraCom subsidiary, which provides integrated training,
communications and data to the health care industry, competes with many
consultants who provide similar services to the health care industry. TheraCom
competes on the basis of price and quality of its services. To date, TheraCom
has only one significant customer, Pfizer, Inc. TheraCom is attempting to
broaden its client base, and no assurances can be made that it will be able to
effectively compete.
The Journeycorp division, which provides comprehensive travel services
for business travel, faces intense competition, since there are more than 30,000
travel agents in the United States which are capable of providing business
travel services. In addition, the ongoing consolidation in the travel industry
has created mega-agencies, national and global in scope, which have resulted in
an escalation of competition in this industry.
The Water-Jel division manufactures and markets a line of first aid
products for burns and a line of generic creams and ointments. There are other
companies, such as Spenco Medical Corporation, C.R. Bard, Inc. and Johnson &
Johnson, which manufacture similar first aid products for burns. These
companies have been established for a longer period of time, are better
established and have financial resources and facilities which are greater than
the division's. While
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some segments of the burn first aid market are dominated by large manufacturers,
other segments of the market are characterized by intense competition among
smaller manufacturers such as Water-Jel.
Market and Technological Change Affecting Journeycorp and The Performance Group
Several of the markets in which the Company's products and services are
offered are undergoing technological advances and other changes. In particular,
and with respect to Journeycorp, the airlines have lowered the commissions they
are willing to pay travel agents. As a result, the corporate travel business is
changing from commission paid by suppliers to fee-based services in which
corporate travel service providers such as Journeycorp are paid fixed fees by
their clients in lieu of commissions based upon the volume of travel services
purchased. These developments have tended to reduce the revenues available to
travel service providers such as Journeycorp. Also, the corporate travel
business is experiencing technological changes such as "ticketless" air travel
and Internet-based reservation systems which tends to reduce the need for
outside travel agents. These changes are further accelerating the trend for
travel service businesses to act as consultants working for fixed fees rather
than commission-based booking agencies. With respect to The Performance Group, a
significant amount of its business is based upon the development of innovative
technologies for delivering incentive programs using the Internet. The Internet
is characterized by rapid technological advances which may render The
Performance Group's technologies out-of-date or obsolete. There is no assurance
that The Performance Group will be in a position to adapt to such technological
advances and market changes.
Risks of Integration
In light of the recent acquisitions of Reset, Mercury Seven and Zabit &
Associates, the Company's success will depend in part on its ability to manage
the combined operations of those companies and to integrate the operations of
these companies along with its other subsidiaries and divisions into a single
organizational structure. There can be no assurance that the Company will be
able to effectively integrate the operations of its subsidiaries and divisions
into a single organizational structure. Integration of these operations could
also place additional pressures on management as well as on the key technical
resources of the Company. The failure to successfully manage this integration
could have an adverse material effect on the Company. Finally, while it is
management's belief that the newly acquired entities can market these services
to the Company's existing clients as well as market the Company's established
businesses to existing clients of the newly acquired companies, there can be no
assurance that the cross-marketing will be achieved or sustained.
Future Capital Requirements
The acquisitions of Mercury Seven and Zabit & Associates required the
Company at closing to pay cash as part of the consideration: $1.5 million in the
case of Mercury Seven and $5.2 million in the case of Zabit & Associates, which
includes Water Street Design, Inc. The Zabit & Associates transaction also
requires the Company to pay an additional $4.8 million in March 1999 and $1.9
million on or before September 14, 2002, together with interest. While the
Company believes that its present cash position and cash flow from operations
will be sufficient to fund its operations and provide for further expansion, the
Company may require additional financing to sustain further growth and expand
its business. There can be no assurance that the Company will be able to
successfully negotiate or obtain additional financing or that such financing
will be on terms favorable or acceptable to the Company. The failure to secure
necessary financing could have a material adverse impact on the Company.
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Dependence on the Internet's Developing Market
The Company's ability, primarily through Reset and Mercury Seven, to
derive revenues by providing marketing solutions through the use of the Internet
will depend in part upon a robust industry and the infrastructure for providing
Internet access and the management of Internet traffic. While the Internet has
made significant improvements in both accessing and managing traffic, there can
be no assurance that as more demand is made upon the Internet technological
improvements will keep pace. Additionally, critical issues concerning the use of
the Internet, including security, reliability, cost, ease of use and access and
quality of service still remain to be resolved, and as such the Internet could
prove not to be a commercially viable marketplace. This could result in
impacting the Company's future operating results.
Rapid Technological Changes in Interactive Marketing Services
The market for such interactive marketing services as the Company
provides through its Reset and Mercury Seven subsidiaries is characterized by
rapid changes in technology. As such it will require the Company to maintain its
technical competence to effectively compete with other integrated marketing
service providers as well as traditional advertising agencies. There can be no
assurance that the Company will be successful in providing competitive solutions
to its clients. Failure to do so could result in the loss of existing customers
or the inability to attract and retain new customers, and as a result, this
could have a material adverse effect on the business, financial condition and
operating results of the Company.
Project Profit Exposures; Need to Develop Recurring Revenue
Zabit & Associates, Mercury Seven and Reset normally generate a
substantial majority of their revenue through project fees on fixed
fee-for-service basis. Zabit & Associates, Mercury Seven and Reset assume
greater financial risk on fixed-price type contracts than on either time- and
material- or cost-reimbursable contract. Failure to anticipate technical
problems, estimate costs accurately or control costs during performance of a
fixed-price contract may reduce Zabit & Associates, Mercury Seven and Reset's
profit or cause a loss. Although the majority of Zabit & Associates, Mercury
Seven and Reset's projects typically last six to twelve weeks and therefore each
individual short-term project creates less exposure than a long-term fixed-price
contract, in the event Zabit & Associates, Mercury Seven and Reset do not
accurately anticipate the progress of a number of significant revenue-generating
projects, it could have a material adverse effect on Zabit & Associates, Mercury
Seven and Reset's operating results. Zabit & Associates, Mercury Seven and
Reset's future success will depend in part on their ability to convert their
project-by-project relationships to continuing relationships characterized by
recurring revenue. There can be no assurance that Zabit & Associates', Mercury
Seven's and Reset's efforts will be successful.
Dependence on Few Customers
At the present time, approximately 85% of TheraCom's services are
supplied to one customer, Pfizer, Inc. ("Pfizer"). Of the revenues from The
Performance Group's business, for the fiscal year ended August 31, 1998, 60% was
derived from two clients, Pfizer and MCI Communications, Inc., which represent
45% of revenues and 15% of The Performance Group's revenues, respectively. The
loss of either of these clients or a reduction in the amount of business
generated from these two clients could materially adversely affect the Company's
future business and prospects.
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No Contracts with Customers
The Company does not have written agreements with all of its customers
or clients, or such agreements are terminable at will upon relatively short
notice. Unexpected or other termination of relations with significant customers
could adversely affect the Company's business and prospects. See "Competition"
and "Dependence on Few Customers."
Fluctuations in Revenues
For the six months ended February 28, 1998 ("Fiscal 1998"), the
Company's revenues declined by approximately $5,600,000 as compared with the
revenues for the six-month period ended February 28, 1997 ("Fiscal 1997"). A
major portion of this decline was due to a refinement of revenue recognition by
the TheraCom subsidiary. In 1997, the Company's TheraCom division, which
provides integrated training, communication and data to the health care
industry, refined its method of revenue recognition. Previously, the division
recognized the revenues generated from its calendar year programs at the end of
the program. In 1997, based upon its improved accounting information systems and
controls, it was determined that the division recognize revenue and costs on
certain calendar year programs ratably as certain performance criteria occurred.
Revenues recorded by TheraCom approximated $4,187,000 and $5,717,000 for the six
months ended February 28, 1998 and 1997, respectively. The decline in the
Company's revenues for the six months ended February 28, 1997 was also due in
part to the types of award programs required by the clients of The Performance
Group division. Because that division is primarily dependent on business from
two major clients, any curtailment or change in the award programs can result in
material fluctuations during quarterly periods. Investors should therefore be
cautioned that because of the dependence on a limited number of clients, the
Company may experience fluctuating revenues and earnings in varying periods.
Market Acceptance for Company's Products and Services
The Company believes that its ability to market its products and
services requires educating potential users as to their benefits and
applications. This is particularly true for the Internet technologies developed
by The Performance Group and the first aid product line for burns manufactured
by the Water-Jel division. No assurance can be given that the Company will be
able to successfully increase the market for its products and services.
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Limited Patents and Proprietary Information
The Performance Group
The Performance Group division has developed a proprietary software,
"Maestro," which is designed to enable clients to communicate business
objectives, track and report sales and deliver awards over the Internet. The
clients who elect to utilize Maestro do not receive the software, but rather are
only granted a license to utilize the software, which is at all times maintained
at the Company's offices. The clients feed information to the "Maestro" program
over the Internet by using a sign-on identification and password. The clients
can thereafter gain access with the proper password to Maestro to enable them to
evaluate the progress of their awards program. The Company does not presently
hold a copyright to the Maestro software but intends to apply with the US Patent
and Trademark office for protection as well as a trademark on the name
"Maestro." The actual software is retained under stringent controls at the
Company's offices and only four people within the Company and under
confidentiality agreements have access to the software and code. Should the
Company's Maestro software and other proprietary technology be disclosed
publicly, the business and prospects of The Performance Group could be adversely
affected. Likewise, and if there was public disclosure of the software and
codes, the Company at the present time may have no or very limited legal
recourse, unless the Company could demonstrate that the codes and software were
illegally converted or taken or that the clients violated their licence
agreements with the Company.
Water-Jel
The design of Water-Jel's Fire Blanket products was protected by United
States and foreign patents which were assigned to Water-Jel in 1979 and 1985.
The United States patent which protected a substantial portion of Water-Jel's
technology expired in 1992. New competitors may now enter Water-Jel's markets.
Water-Jel may be materially and adversely affected if Water-Jel should fail to
establish a secure market base before the entrance of significant new
competitors now that the original United States patent has expired. See
"Competition." Further, in January 1995, Water-Jel was granted a patent for a
synthetic fabric containing a therapeutic, non-toxic, water-soluble and
bio-degradable gel used in Water-Jel's Burn Dressing product line. This patent
expires in April 2014. However, no assurance can be given that this patent will
prove enforceable or prevent others from marketing products similar to, or which
perform comparable functions as Water-Jel's products at the current time, the
Water-Jel burn dressing products covered by this patent account for
approximately thirty percent (30%) of Water-Jel's revenues.
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Government Regulation by the Food and Drug Administration
Water-Jel's emergency first aid products and manufacturing practices
are subject to regulation by the Food and Drug Administration ("FDA") as well as
by similar foreign authorities. The Water-Jel Fire Blanket and Burn Dressing are
medical devices subject to regulation by the FDA. Water-Jel's generic creams and
ointment, Burn Jel and UnBurn line are classified as over-the-counter drugs. FDA
requirements include adherence to good manufacturing practices, proper labeling,
and either premarket notification under section 510(k) of the Medical Device
Amendments to the Federal Food, Drug and Cosmetics Act or premarket approval
(depending on the category of product) prior to commercial marketing in the
United States. Water-Jel is also subject to periodic inspections by the FDA
relating to good manufacturing practices. The FDA has the authority to require a
suspension of manufacturing operations if it finds serious deficiencies.
Additional regulation may, in the future, be imposed by Federal, state or local
authorities, particularly the FDA. Any new products will also be subject to
review of various regulatory authorities in virtually every foreign country in
which such products are offered for sale. To the extent that any new products
which Water-Jel may develop are deemed to be new pharmaceutical or new medical
devices, such products will require FDA and other regulatory clearance and/or
approvals prior to marketing. Such governmental regulation may prevent or
substantially delay the marketing of any products developed by Water-Jel, cause
Water-Jel to undertake costly procedures, and furnish a competitive advantage to
the more substantially capitalized companies which compete with Water-Jel. There
can be no assurance that Water-Jel will have the requisite financial resources
to complete the regulatory approval process with respect to any new products
which may be developed.
Product Liability
To date, there have been no material claims on threatened claims
against the Company by users of its products, particularly the Water-Jel
products, based on a failure to perform as specified. In the event that any
claims for substantial amounts were to be asserted against the Company, they
could have a materially adverse effect on the Company's financial condition and
its ability to distribute its products. The Company maintains $11,000,000 of
general product liability insurance. There is no assurance that this amount will
be sufficient to cover potential claims or that the present amount of insurance
can be maintained at the present level of cost.
Dependence on Management
The Company is significantly dependent upon the continued availability
of Werner Haase, its Co-Chairman and CEO, William Zabit, who became President
upon the acquisition of Zabit & Associates, and Scott Mednick, Chairman and
Chief Strategic Officer. Mr. Haase is under an employment agreement with the
Company which terminates in May 2001, and both Mr. Zabit and Mr. Mednick are
under employment agreements with the Company until December 2002. The loss or
unavailability of Mr. Haase or Mr. Zabit or Mr. Mednick to the Company for an
extended period of time would have a material adverse effect on the Company's
business operations and prospects. To the extent that Mr. Haase's, Mr. Zabit's
or Mr. Mednick's services would be unavailable to the Company for any reason,
the Company would be required to procure other personnel to manage and operate
the Company. There can be no assurance that the Company would be able to locate
or employ such qualified personnel on acceptable terms. At the present time, the
Company does not have "key man" life insurance covering any of the principal
officers of the Company.
15
<PAGE>
Control
Werner Haase, the Chairman and CEO of the Company, and his wife Nurit
Kahane, who is a Senior Vice President of the Company, own together a total of
2,319,374 shares of the Company's Common Stock, and Mr. Zabit owns 1,048,675
shares, which together represent approximately 27% of the total shares
outstanding. Under Delaware law, a simple majority of stockholders may
constitute a quorum for a meeting of stockholders and may effect any action
requiring a vote of stockholders. There are no requirements for supermajority
votes on any matter, nor is there any cumulative voting for directors.
Therefore, Mr. Haase, his wife and Mr. Zabit jointly will be in a position to
substantially influence the election of directors and the conduct of the
Company's affairs.
Maintenance Criteria for NASDAQ Securities; Penny Stock Rules
The Company's Common Stock is currently quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") for the
SmallCap Market. To maintain its listing on the NASDAQ SmallCap Market, the
Company must continue to be registered under Section 12(g) of the Securities
Exchange Act of 1934 (the AExchange Act") and have total assets of at least
$2,000,000, total stockholders' equity of at least $1,000,000, a public float of
at least 100,000 shares with a market value of at least $1,000,000, at least 300
holders, a minimum bid price of $1.00 per share and at least two market makers.
In addition, NASDAQ has proposed increasing the requirements for maintaining a
NASDAQ SmallCap listing to require either: (1) net tangible assets of at least
$2,000,000 or $1,000,000, (2) a market capitalization of $35,000,000 or (3) net
income in at least two of the last three years of $500,000 and a public float of
at least 500,000 shares with a market value of at least $1,000,000. The Company
currently meets all the proposed requirements for maintenance of its listing on
the NASDAQ SmallCap Market. There can be no assurance that the Company in the
future will be able to meet the requirements for continued listing on the NASDAQ
SmallCap Market with respect to the Common Stock. If the Company's securities
fail to maintain NASDAQ SmallCap Market listing, the market value of the Common
Stock likely would decline and purchasers likely would find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Common Stock.
In addition, if the Company fails to maintain NASDAQ SmallCap Market
listing for its securities, and no other exclusion from the definition of a
"penny stock" under the Exchange Act is available, then any broker engaging in a
transaction in the Company's securities would be required to provide any
customer with a risk disclosure document, disclosure of market quotations, if
any, disclosure of the compensation of the broker-dealer and its salesperson in
the transaction and monthly account statements showing the market values of the
Company's securities held in the customer's account. The bid and offer quotation
and compensation information must be provided prior to effecting the transaction
and must be contained on the customer's confirmation. If brokers become subject
to the "penny stock" rules when engaging in transactions in the Company's
securities, they would become less willing to engage in transactions, thereby
making it more difficult for purchasers in this Offering to dispose of their
shares. At the present time, the Company has an application pending with NASDAQ
for listing on the NASDAQ National Market.
16
<PAGE>
Future Sales of Common Stock
As of the current time, there are presently 13,608,521 shares of the
Common Stock outstanding. Approximately 6,863,932 of the outstanding shares are
deemed to be "restricted securities" ("Restricted Securities") within the
meaning of Rule 144 promulgated under the Securities Act of 1933 (the AAct") by
virtue of the fact that they are held by "affiliates" of the Company. Of the
Restricted Securities, approximately 2,319,375 are currently eligible for public
sale in accordance with Rule 144. Sales made pursuant to Rule 144 could have an
adverse effect on the price of the Common Stock.
No Dividends
The Company has not paid any cash dividends upon its Common Stock since
its inception and, by reason of its present financial status and its
contemplated financial requirements, does not anticipate paying any cash
dividends in the foreseeable future. It is anticipated that earnings, if any,
which may be generated from operations will be used to finance the operations of
the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a variety of offices and facilities for its
operations as summarized below. The Company maintains its executive offices at
488 Madison Avenue, New York, NY 10022 and has five other branch offices. Zabit
& Associates maintains its executive offices and the Zabit Western Regional
Office at 565 Bridgeway Boulevard, Sausalito, CA. Zabit & Associates also has
three other regional offices. Reset and Mercury Seven each maintain one office
in New York City. Set forth below is a description of the rental property and
the square footage:
<TABLE>
<CAPTION>
Lease Annual
Location Size and Nature of Facility Expires Rent
- -------- --------------------------- ------- ----
<S> <C> <C> <C>
New York, NY Office, 22,300 sq.ft. (X-ceed) 2008 $ 473,000
Office, 1,100 sq.ft. (Journeycorp) 1999 $ 30,000
Office, 3,157 sq.ft. (Zabit & Assoc.) 1999 $ 82,788
Office, 2,500 sq.ft. (Reset) 2002 $ 77,000
Office, 6,400 sq. ft. (Mercury Seven) 2008 $ 102,700
Sausalito, CA Office, 800 sq.ft. (Water Street) 2000 $ 14,400
Office, 4,836 sq.ft. (Zabit & Assoc.) 1999 $ 142,176
Office, 1,637 sq.ft. (Zabit & Assoc.) 2002 $ 50,705
Norwalk, CT Office, 1,200 sq.ft. (Zabit & Assoc.) 2001 $ 28,000
Carlstadt, NJ Office, Factory 17,700 sq.ft. (Water-Jel) 2003 $ 120,000
Warehouse, 9,600 sq.ft. (Water-Jel) 1999 $ 48,000
Los Angeles, CA Office, 2,800 sq.ft. (Journeycorp) 1999 $ 54,700
Office, 2,100 sq.ft.(X-ceed) 2000 $ 45,570
Atlanta, GA Office, 2,700 sq.ft. (X-ceed) 2000 $ 37,500
Chicago, IL Office, 3,000 sq.ft. (Journeycorp) 1999 $ 54,700
Office, 4,161 sq.ft. (Zabit & Assoc.) 2003 $ 109,595
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Lease Annual
Location Size and Nature of Facility Expires Rent
- -------- --------------------------- ------- ----
<S> <C> <C> <C>
Glen Rock, NJ Office, 2,800 sq.ft. (TheraCom) 2001 $ 44,600
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation currently pending against the Company,
its officers or employees.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matter were submitted to shareholder vote in the fiscal quarter
ended August 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ Small Cap Market
under the symbol "XCED." Until April 1998, the Company's Class A Warrants also
traded on the NASDAQ Small Cap Market under the symbol "XCEDZ." The Class A
Warrants by their terms expired on April 30, 1998 and entitled the holder there
of to purchase one share of the Company's Common Stock at an exercise price of
$3.00 per share. Upon the exercise, the holder thereof was also entitled to
receive one Class B Warrant. Just prior to the expiration date of the Class A
Warrant, holders exercised approximately 1,868,000. Class A Warrants and the
Company issued 1,868,000 shares of Common Stock and 1,868,000 Class B Warrants.
The Company's Class B Warrants were delisted from the NASDAQ Small Cap
Market on March 23, 1995. They are currently listed on the "Bulletin Board" (the
"Pink Sheets") under the symbol "XCEDW." The Class B Warrant entitles the holder
to purchase one share of the Company's Common Stock at an exercise price of
$6.00 per share. The Company may redeem the Class B Warrants providing the
closing bid price of the Common Stock in the over-the-counter market or the last
sale price for 20 consecutive business days ending within 15 days of the notice
of redemption averages in excess of $9.00.
Based on reports from the Company's transfer agent, there are
approximately 4,000 shareholders consisting of direct ownership by shareholders
and stock held by brokers for the accounts of shareholders.
The Company presently has an application pending with NASDAQ for
listing of its Common Stock on the NASDAQ National Market. The Company believes
it currently meets all of the qualifications.
The following table sets forth the high and low bid prices for the
Company's Common Stock and Class B Warrants for the periods indicated. Since the
Class A Warrants expired on April 30, 1998 the high and low bid prices have been
omitted. Information for all the periods is as reported
18
<PAGE>
by the NASDAQ Small Cap Market. The figures shown represent interdealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
High Bid Low Bid
-------- -------
Common Stock
Fiscal Year Ended August 31, 1998
1st. Quarter Ended November 30, 1997 3 1/2 2 14/16
2nd Quarter ended February 28, 1998 4 19/32 2 1/16
3rd Quarter ended May 31, 1998 4 1/2 3 21/32
4th Quarter ended August 31, 1998 9 3/4 4
Fiscal year ended August 31, 1997
1st. Quarter Ended November 30, 1996 4 3/8 2 3/8
2nd Quarter ended February 28, 1997 3 3/8 1 3/4
3rd Quarter ended May 31, 1997 2 1/4 1 1/2
4th Quarter ended August 31, 1997 4 3/16 2 13/16
High Bid Low Bid
-------- -------
Class B Warrants
Fiscal Year Ended August 31, 1998
1st. Quarter Ended November 30, 1997 1/16 1/16
2nd Quarter ended February 28, 1998 1/16 1/16
3rd Quarter ended May 31, 1998 15/32 1/8
4th Quarter ended August 31, 1998 3 3/4 7/16
Fiscal year ended August 31, 1997
1st. Quarter Ended November 30, 1996 3/32 1/16
2nd Quarter ended February 28, 1997 1/16 1/16
3rd Quarter ended May 31, 1997 1/16 1/16
4th Quarter ended August 31, 1997 1/16 1/16
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the years
ended August 31, 1998, 1997, 1996, 1995 and 1994 were derived from the audited
consolidated financial statements of the Company. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes.
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net Revenues $ 59,198 $ 62,885 $ 54,864 $ 43,515 $ 41,333
Operating income (loss) $ 1,600 $ 3,924 $ 1,219 $ 2,770 $ (302)
Net income $ 1,550 $ 1,877 $ 632 $ 2,131 $ (1,353)
Net income (loss) per
common share
-Basic $ 0.20 $ 0.27 $ 0.09 $ 0.30 $ (0.20)
-Diluted $ 0.18 $ 0.26 $ 0.09 $ 0.30 $ (0.20)
Weighted average number
of shares outstanding
-Basic 7,755,795 7,023,770 7,001,295 6,999,180 6,738,327
-Diluted 8,607,636 7,339,625 7,394,012 7,079,388 6,790,310
Balance Sheet Data:
Working capital $ 17,333 $ 10,042 $ 7,964 $ 5,199 $ 3,854
Total assets $ 34,716 $ 18,800 $ 17,383 $ 17,475 $ 13,143
Long-term debt -0- $ 52 $ 91 $ 130 $ 18
Cash Dividends -0- -0- -0- -0- -0-
</TABLE>
ITEM 7. MANAGEMENT's DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net revenue for the twelve months ended August 31, 1998 and 1997,
respectively, were $59,198,000 and $62,885,00, representing a 6% decrease in net
revenues. The decreases in revenue were primarily attributable to three factors.
The Company's 1997 change in revenue recognition with respect to the TheraCom
division, which provides integrated training, communication, and data to the
health care industry. The revenue for the TheraCom division was changed from the
completed contract to the recognition of revenue ratably over the life of the
program event. While this change did not have a material effect on reported net
earnings it did result in the recognition of an additional 8 months of gross
revenues in fiscal 1997. Gross revenues for this division were $9,200,000 in
1997 versus $7,063,085 in 1998. The Performance Group division for the year
ending August 31, 1998 and 1997 respectively reflected $35,206,368 and
$36,846,028 representing a 4% decrease in revenue. This decrease is attributable
to the temporary discontinuance of certain of X-ceed's services as related to an
incentive marketing and communication program. As of September 1, 1998, the
company was re-awarded this contract and revenues and gross profits will be
favorably affected in the company's second and third quarter.
20
<PAGE>
In addition, the Journeycorp division experienced lower than expected
revenue as a result of increased downward pressure by the airline industry
regarding commissions paid on ticketed transactions. The revenue for the years
ending August 31, 1998 and 1997 respectively were $10,988,348 and $11,581,312, a
5% decrease. In February 1998, the company instituted a management fee program,
which helped to significantly offset a major part of the revenue loss. The
Company's Water-Jel division experienced an increase in its revenue by $644,273
or 12%.
Cost of revenue for the years ending August 31, 1998 and 1997 were $37,
926,000 and $40,095,000, respectively, (representing 64% and 63.8% of net
revenues). Selling, general and administrative expenses for the year ended
August 31, 1998 and 1997 was $18,799,000 and $18,420,000 which reflect an
increase in personnel cost by The Performance Group division as well as portions
of compensation expenses regarding company officers. Selling, general and
administrative expenses increased as a percentage of net revenue as a result of
the decrease revenues.
Research and Product Development expenses for the year ended August 31,
1998 and 1997 was $873,000 and $446,000, representing a 95.7% increase which
were incurred in connection with the company's continuing development of
X-CEED's Maestro software. Maestro is a proprietary productivity enhancing
Internet software utilized for managing training, sales tracking and reporting,
awards and recognition programs, and product information for sales forces.
Other Income for the year ending August 31, 1998 was $1,239,000 as
compared to $261,000 last year. The increase during the 1998 fiscal year
reflects a gain on sales of investments of $ 522,000 and interest earnings of
$691,000 as compared to a loss of $20,000 and interest income of $451,000 for
the corresponding prior period.
Net Income for the year ending August 31, 1998 and 1997 was $1,550,000
as compared to $1,877,000 respectively, representing a 17% decrease. Part of
this difference was offset by a lower tax yield of 45% as compared to 55% in the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1998 the Company had working capital of $17,333,000 as
compared to $10,042,000 at August 31, 1997. During the year ending August 31,
1998, the company received net proceed of $1,527,000 from the sales of
marketable securities.
The consolidated statement of cash flows for the year ended August 31,
1998 reflects net cash provided by operating activities of $475,000 resulting
from net income of $1,550,000, an increase in accounts payable and accrued
expenses of $1,435,000 less an increase in program costs in excess of billings
and accounts receivable of $1,248,000 and $1,166,000. Cash provided from
investing activities was $633,000 consisting principally of proceeds from sale
of marketable securities of $1,527,000 less marketable security investment and
property and equipment acquisition of $741,000 and $207,000. Cash used in
financing activities approximated $5,451,000, which was primarily attributable
to the proceeds from the exercise of warrants and options.
The company believes that it has adequate working capital for a least the next
twelve months of operations at current levels.
FORWARD-LOOKING STATEMENTS
21
<PAGE>
All statements other than statements of historical fact included in
this Annual Report on Form 10-K regarding the Company's financial position,
business strategy and plans and objectives of management of the Company for
future operations, are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. When used in this Annual Report, words such as "anticipate," "believe,"
"estimate," "expect," "intend" and similar expressions, as they relate to the
Company or its management, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of certain factors
such as those disclosed under "Risk Factors," including but not limited to,
competitive factors and pricing pressures, loss of major customers,
technological change or difficulties, product development risks,
commercialization and trade difficulties and general economic conditions. Such
statements reflect the current views of the Company with respect to future
events and are subject to these and other risks, uncertainties and assumptions
relating to the operations, results of operations, growth strategy and liquidity
of the Company. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on behalf are expressly qualified
in their entirety by this paragraph.
YEAR 2000 COMPLIANCE
The Company has taken remedial steps to ensure that its computer
systems are compliant with the Year 2000 ("Y2K"). In this regard, The
Performance Group has purchased for internal operations new personal computers
(PCs) which have been tested by the National Software Testing Laboratories
(NSTL) and have been certified as Y2K compliant. With respect to client support,
the division has upgraded its software at no extra cost and is compliant with
Y2K. With respect to the Company's internal software affecting accounting
systems and telecommunications, the Company estimates that it will be required
to purchase additional equipment for $15,000 in order to achieve Y2K compliance
in this area. With respect to the Journeycorp division reservation systems, the
division utilizes PC hardware provided by the Sabre Group, the American Airlines
reservations system. American Airlines has given the Company assurances that
their reservations system will be Y2K compliant. Since airline reservations can
be made within a year before the actual flight, American Airlines has until
December 31, 1999 to achieve Y2K compliance. In the event American Airlines
fails to achieve compliance in a timely manner, this could result in material
adverse consequences to Journeycorp's operations and would affect its ability to
provide reservations and ticketing for its clients.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements commence on Page F-1.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
22
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The executive officer and directors of the Company are as follows:
Name Age Position
---- --- --------
Scott Mednick 42 Chairman and Chief Strategic Officer
Werner Haase 61 Co-Chairman and CEO
William Zabit 50 President and Director
Wolf Boehme 37 Chief Operating Officer
Nurit Kahane Haase 48 Senior VP and Secretary
Bradley K. Nelson 41 President of the Zabit Division
Norman Doctoroff 65 Director
John Bermingham 59 Director
Directors are elected to serve until the next annual meeting of
shareholders of the Company or until their successors are elected and qualified.
The Board of Directors held nine (9) meetings in the fiscal year ended August
31, 1998 and also met informally and acted by written consents during the year.
Officers serve at the discretion of the Board of Directors subject to any
contracts of employment. Only two directors, Mr. John Bermingham and Mr. Norman
Doctoroff, received compensation for serving as directors of the Company for
fiscal 1997. Their compensation was in the form of options granted in Fiscal
1998. See "Compensation."
Werner Haase has served as a director of the Company since September
1987 and became Chairman and Chief Executive Officer in July 1996 following the
acquisition of Journeycraft and TheraCom by the Company. For at least five years
prior to the acquisitions of the foregoing companies, Mr. Haase had been a
director and chief executive officer of Journeycraft. As a result of Mr.
Mednick's and Mr. Zabit's contracts with the Company, Mr. Haase now serves as
Co-Chairman and Chief Executive Officer. Mr. Haase is also a director of
Multi-Media Tutorial Services, Inc., a company engaged in the production and
marketing of educational videos.
Scott Mednick entered into an employment agreement with the Company
effective as of July 17, 1998. Pursuant to the terms of the agreement, Mr.
Mednick was appointed Chairman until the next annual shareholders' meeting and
was also named as Chief Strategic Officer. The Company has agreed to nominate
Mr. Mednick as Chairman at the next annual shareholders' meeting. In 1982, Mr.
Mednick established the Mednick Group, a company engaged in graphic design. In
1996, the Mednick Group became THINK New Ideas, Inc., ("THINK") and during the
same year completed a public offering. Mr. Mednick served as chairman and chief
executive officer of THINK until May 1998, when he resigned. Under Mr. Mednick's
direction, THINK, which provides marketing technology and interactive business
solutions to Fortune 500 and other corporate clients, was named as one of the
top interactive agencies of the year (1995) by both Adweek and the Advertising
Club of New York. Mr. Mednick is regarded as a highly respected marketing
strategist and graphic designer. He has four graphic design works in the
permanent collection of the Library of Congress and has been published in most
major design publications.
William Zabit became President and a director of the Company on September
14, 1998, when the Company acquired Zabit & Associates, Inc. and entered into an
employment agreement with Mr. Zabit. Mr. Zabit founded Zabit & Associates, Inc.
and has served as its chief executive officer until the acquisition. Under Mr.
Zabit's direction, Zabit & Associates, Inc. has won over 150 international
awards for communication excellence. Mr. Zabit has participated in advising the
White House on communications strategy. Prior to forming Zabit & Associates,
Inc., he served in an
23
<PAGE>
executive position at William M. Mercer, Inc., where he was responsible for
Mercer's western US and national communication practices.
Wolf Boehme joined the Company on November 19, 1998 as the Company's
Chief Operations Officer. Prior to joining the Company and from 1986, he served
as operations controller for Bloomberg Financial Markets. As such he was
responsible for several operating areas including designing, procuring and
implementing systems for the various product lines offered by Bloomberg
Financial Markets.
Nurit Kahane Haase, wife of Werner Haase, became Senior Vice President
and Secretary of the Company in July 1996 following the acquisition of
Journeycraft and TheraCom. For more than the past five years, Mrs. Haase has
been president of Journeycraft.
Bradley K. Nelson became the president of the Zabit & Associates
division on September 14, 1998, when Zabit was acquired by the Company.
Previously and since June 1, 1998, he had been a senior executive officer of
Zabit & Associates. From June 1, 1996 until June 1998, Mr. Nelson was a
principal of Paradigm Consulting Group, a company engaged in consulting on
corporate communication matters and advising clients on business performance
improvement. From August 1984 to June 1996, Mr. Nelson was associated with
Towers Perrin, a leading human resources consulting firm. In December 1996 he
became a principal of that company. Mr. Nelson holds a BS degree in journalism
from the Medill School of Journalism at Northwestern University.
Norman Doctoroff was elected a director of the Company in May 1996.
Until 1995, he was president of Gemini Industries, a company engaged in the
production of consumer electronics accessories. Since then he has served as an
independent management consultant to Gemini Industries and other companies.
John Bermingham was appointed a director of the Company in November
1997 and served as a consultant to the Company during 1997. Mr. Bermingham is
currently the Chief Executive Officer of Smith Corona Corporation. Mr.
Bermingham formerly served as president and chief executive officer of Rolodex
Corporation during 1996 and through April 1997. From 1993 to 1996, Mr.
Bermingham was employed by AT&T. He held the position of president and chief
executive officer of AT&T Smart Cards Systems and Solutions, a division of AT&T.
From 1982 through 1993, Mr. Bermingham held various senior executive officer
positions with Sony Corporation of America.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the fiscal year ended August 31, 1998, all Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were complied with.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation ----------------------
------------------- Awards Payouts
------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Re- Securities
Annual stricted Underlying LTIP All Other
Name and Compen- Stock Options/ Pay- Compen-
Principal Position Year Salary Bonus sation Awarded SARs(#) outs sation
- ------------------ ---- ------ ----- ------ ------- ------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Scott Mednick (1) 1998 $ 43,750 $ 80,000 $ 0 $0 -0- $0 $0
Chairman and 1997
Chief Strategic Officer 1996
Werner Haase (2)(3)(4) 1998 $500,000 $300,000 $80,859 $0 -0- $0 $0
Co-Chairman and CEO 1997 $500,000 $300,000 $82,152 $0 -0- $0 $0
1996 $ 10,500 $ 22,250 $ 0 $0 -0- $0 $0
Nurit Haase (2) 1998 $250,000 $ 0 $ 0 $0 -0- $0 $0
Sr. Vice President 1997 $250,000 $ 0 $ 0 $0 -0- $0 $0
1996 $ 10,500 $ 63,900 $ 0 $0 -0- $0 $0
Yitz Grossman (5)(7) 1998
Former Chairman and 1997
Secretary 1996 $150,000 $ 0 $ 0 $0 100,000 $0 $0
Peter Cohen (6)(7) 1998
Former President 1997
1996 $111,000 $ 0 $ 0 $0 100,000 $0 $0
</TABLE>
- ---------
(1) Mr. Mednick joined the Company on July 17, 1998. The bonus payment
represents one installment of the signing bonus the Company agreed to pay Mr.
Mednick for his joining the Company.
(2) Werner Haase and Mr. Haase's wife, Nurit Kahane Haase, assumed their current
positions with the Company on July 2, 1996 following the acquisition of
Journeycraft and TheraCom. Information is given only for periods subsequent to
July 2, 1996.
(3) On November 13, 1998, the Board of Directors, Mr. Haase abstaining, awarded
a bonus of $300,000 to Mr. Haase based on the Company's performance for fiscal
1997.
(4) Represents premiums for life insurance policies paid by the Company on
behalf of Mr. Haase.
(5) Mr. Grossman resigned from his positions with the Company effective December
12, 1996.
(6) Mr. Cohen resigned as President, Chief Executive Officer and Treasurer of
the Company effective July 2, 1996. He continues to serve as Managing Director
of the first aid division, which is not an executive officer position.
(7) During fiscal 1996, the Company transferred certain life insurance policies
to Messrs. Grossman and Cohen which are included in "Other Annual Compensation."
The aggregate amount of personal benefits cannot be specifically or
precisely ascertained and do not, in any event, exceed $50,000 or 10% of
compensation as to any person. The Company offers health insurance to all of its
employees. At present time the Company does not have any retirement, pension,
profit sharing, or other similar programs or benefits for its executive
officers.
The Company has not paid cash remuneration for or on account of
services rendered by a director in such capacity. However, during Fiscal 1998,
Norman Doctoroff and Steven Bermingham each received a grant of 50,000 options.
25
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term
----------------- ----------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/ SARs
Underlying Granted to
Options/SARs Employees in Exercise Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ----------- ----------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Scott Mednick (1) 1,000,000 49.6% $6.00 7/11/08 $3,373,368 $9,562,455
Chairman and Chief
Strategic Officer
Werner Haase (2) 500,000 24.8% $4.40 6/5/01 $ 173,388 $ 364,000
Co-Chairman and CEO
</TABLE>
- ---------------
(1) Mr. Mednick joined the Company on July 17, 1998. As part of his employment
agreement and with the approval of the Board of Directors, Mr. Mednick was
granted 1,000,000 options to purchase the Company's Common Stock at $6.00 per
share. However, and in the event of exercise of the options, Mr. Mednick may
only sell 500,000 of the 1,000,000 shares in increments of 100,000 shares each
when the market price of the Common Stock attains certain price levels ranging
from $12.00 a share to $24.00 a share. The foregoing restrictions on the sales
are for a period of 48 months. Mr. Mednick's options have not as yet been issued
by the Company.
(2) Mr. Haase was granted 500,000 options on June 5, 1998: only 250,000 options
vested immediately; 125,000 will only vest if the price of the Company's Common
Stock trades at an average price of $8.125 for 30 consecutive trading days; and
the balance will only vest if the Company's Common Stock trades at an average
price of $10.125 for 30 consecutive days. Mr. Haase's options were granted
pursuant to the 1998 Stock Option Plan.
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-ENDED OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ------------ ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
Scott Mednick (1) -0- -0- 1,000,000 (1) $0
Chairman and Chief Strategic Officer (Exercisable)
Werner Haase (2) -0- -0- 493,750 (2) $1,430,750
Co-Chairman and CEO (Exercisable)
250,000 $0
(Unexercisable)
</TABLE>
(1) As of the end of the Company's fiscal year, none of Mr. Mednick's options
were "in-the-money."
(2) The above figure represents options which have vested and are currently
exercisable: 143,750 options at an exercise price of $1.52; 100,000 option
at an exercise price of $2.19 and 250,000 options at an exercise price of
$4.40.
26
<PAGE>
Employment Agreements
In July 1996, the Company entered into a five-year employment agreement
with Nurit Kahane Haase effective as of July 1, 1996. The agreement provides for
annual compensation of $250,000 per year. In the event of a change in control of
the Company, Mrs. Haase is entitled to receive a one-time payment equal to three
times her then current annual compensation. A change of control includes the
acquisition of over 30% of the Company's stock, the sale or transfer of over 50%
of the Company's assets, or certain mergers or other combinations.
In December 1996, the Company entered into a five-year employment
agreement with Werner Haase effective as of January 1, 1997. The agreement
provides for annual compensation of $500,000 per year as well as the maintenance
of various insurance policies. In the event of a change in control of the
Company, Mr. Haase is entitled to receive a one-time payment equal to three
times his then current annual compensation. A change of control includes the
acquisition of over 30% of the Company's stock, the sale or transfer of over 50%
of the Company's assets, or certain mergers or other combinations. Mr. Haase's
agreement also entitles him to receive bonuses at the discretion of the Board of
Directors.
On July 17, 1998, the Company entered into a four-year employment
agreement with Scott Mednick. The agreement provides that Mr. Mednick is to
receive a signing bonus of $960,000 payable in twelve (12) equal installments.
In addition, Mr. Mednick is to receive an annual salary of $350,000 together
with bonuses not to exceed $100,000 a year. The granting of said bonus is
subject to the Company's future performance as well as Mr. Mednick's
performance. The agreement also provides for the granting of 1,000,000 options
exercisable at $6.00 per share. While Mr. Mednick may exercise all of the
options at any time, he may only sell 500,000 of the 1,000,000 underlying shares
in increments of 100,000 shares each when the trading price of the Company's
Common Stock attains certain price levels ranging from $12.00 per share to
$24.00 per share. The foregoing restrictions on the sales are for a period of 48
months. Mr. Mednick is to serve as Chairman of the Board of Directors subject to
shareholder approval at each annual meeting. Mr. Mednick is also employed by the
Company as its Chief Strategic Officer.
Employment Agreements Entered into after Fiscal Year Ended August 31, 1998
On September 14, 1998, after the end of the Company's fiscal year, and
in connection with the acquisition of Zabit & Associates, the Company entered
into an employment agreement with William Zabit. Mr. Zabit is employed for a
term of four years as President of the Company and receives an annual salary of
$400,000 together with bonuses at the discretion of the Board of Directors. The
agreement also provides that Mr. Zabit is to serve as a director subject to the
approval of shareholders at each annual meeting.
In connection with the acquisition of Zabit & Associates on September
14, 1998, the Company also entered into an employment agreement with Bradley K.
Nelson, who is to serve as president of the Zabit & Associates division. The
agreement is for a term of four years and provides for an annual salary of
$300,000 together with bonuses not to exceed 40% of the base salary. The
granting of any bonus is at the discretion of the Board of Directors.
On November 19, 1998, Wolf B. Boehme entered into an employment
agreement with the Company for a term of three years. The agreement provides for
an annual salary of $225,000 and bonuses, the terms of which are still under
negotiation. In addition, and as an inducement to Mr.
27
<PAGE>
Boehme to join X-ceed, he received 250,000 stock options valued at the closing
bid price on November 19, 1998. One-third of the options will vest after 12
months; one-third will vest after 24 months; and one-third will vest after 36
months.
Stock Option Plans
The Company has adopted four stock option plans. The Non-Qualified Stock
Option Plan ( the ANQSO Plan") which expired on April 6, 1994 covering 187,500
shares of the Company's Common Stock, $.08 par value, pursuant to which officers
and employees of the Company were eligible to receive non-qualified stock
options. As of November 15, 1998, options to acquire 71,875 shares have been
granted under the NQSO Plan at exercise prices of $1.52 per share. All options
granted under the NQSO Plan have been at exercise prices at least equal to the
fair market value of the Common Stock on the date of grant.
Under the 1990 Stock Option Plan (the A1990 Plan") the Company may
grant to its officers, key employees and others who render services to the
Company, options to purchase up to 187,500 shares of the Company's Common Stock
at a price which may not be less than the fair market value per share in the
case of incentive stock options or 85% of fair market value in the case of
non-qualified options for such stock. As of November 15, 1998, options to
acquire a total of 113,750 shares have been granted under the 1990 Plan at
exercise prices ranging from $1.52 to $2.00 per share.
The 1995 Stock Option Plan (the "1995 Plan") operates on substantially
the same terms as the 1990 Plan except that it includes option to purchase up to
500,000 shares of the Company's Common Stock. Any options granted under the plan
expire ten years from the date of grant. The plan expires March 1, 2005. As of
November 15, 1998 all available options had been granted under the 1995 Plan and
options to acquire a total of 420,000 shares remain outstanding at an exercise
price of $2.19 per share.
At the annual meeting of shareholders on February 20, 1998, shareholders
approved the adoption of the 1998 Stock Option Plan (the A1998 Plan") which
provides for the issuance of up to 2,000,000 options for the purchase of up to
2,000,000 shares of X-ceed Common Stock. The 1998 Plan authorizes the issuance
of incentive stock options which qualify under Section 422A of the Internal
Revenue Code as well as the issuance of non-statutory options. The 1998 Plan
authorizes the issuance of options to employees, officers and
employee-directors. Non-statutory options may also be issued to others who
render services to the Company. Any options granted under the 1998 Plan, unless
specifically designated otherwise, expire on March 1, 2008. As of November 15,
1998, there were 1,041,500 options outstanding. The 1998 Plan is administered by
an option committee consisting of Werner Haase, Norman Doctoroff and John
Bermingham.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of November 1998 by: (i)
each person who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock; (ii) each of the Company's officers and
directors; and (iii) all officers and directors of the Company as a group:
28
<PAGE>
Amount and Nature of
Name and Address Beneficial Ownership Percentage
- ---------------- -------------------- ----------
Werner G. Haase (1) 2,812,375 19.8%
488 Madison Avenue
New York, NY 10022
Nurit Kahane Haase (1) 2,812,375 19.8%
488 Madison Avenue
New York, NY 10022
Scott Mednick (2) 1,000,000 6.8%
7927 Mulholland Drive
Los Angeles, CA 90046
William Zabit (3) 1,048,675 7.7%
565 Bridgeway
Sausalito, CA 94965
Norman Doctoroff (4) 75,000 ---
81 Two Bridges Road
Fairfield, NJ
John Bermingham (5) 50,000 ---
6 Round Hill Road
Kinnelon, NJ 07405
All officers and directors 3,368,050 32.6%
as a group (6 persons)
- --------------------
(1) Consists of 1,169,875 shares of Common Stock held in Mr. Haase's
name, 1,112,000 shares of Common Stock owned by Mrs. Haase and 37,500 shares
held jointly by Mr. and Mrs. Haase. In addition, the above figure includes
493,000 options awarded to Mr. Haase to purchase 493,000 shares of Common Stock.
The above figure does not include an additional 250,000 options which as of the
end of the fiscal year had not vested. See "Executive Compensation B Options/SAR
Grants in Last Fiscal Year."
(2) Represents options granted to Mr. Mednick. Of the 1,000,000
options, Mr. Mednick is restricted to the sale of 500,000 of these options,
which may only be sold in increments of 100,000 shares each when the market
price of the Common Stock attains certain price levels ranging from $12.00 a
share to $24.00 a share. The restrictions are for a period of 48 months. See
"Executive Compensation B Options/SAR Grants in Last Fiscal Year."
(3) Mr. Zabit received these shares in exchange for his shares of Zabit
& Associates.
(4) Represents shares issuable on exercise of options to purchase
25,000 shares at an exercise price of $2.00 per share, which Mr. Doctoroff
received in 1996 as director's compensation, and 50,000 options at an exercise
price of $3.44 a share, which Mr. Doctoroff received during the fiscal year as
director's compensation. The exercise price was the closing bid price on the
date of grant.
(5) Represents shares issuable upon the exercise of options at an
exercise price of $3.44 a share, which Mr. Bermingham received during the fiscal
year as director's compensation. The exercise price was the closing bid price on
the date of grant.
29
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1996, the Company entered into a four-year consulting agreement
with Target Capital Corp. and Yitz Grossman, which went into effect on September
1, 1996 and terminates on May 16, 2000. Mr. Grossman was Chairman and Secretary
of the Company at the time the agreement was entered into. Mr. Grossman resigned
as an officer and director of the Company in December 1996. The agreement
provides for annual compensation of $150,000 per year and an annual bonus of
$30,000. Mr. Grossman is not required to devote his full time to the Company. In
the event of a change of control of the Company, the agreement provides for a
one-time payment equal to three times the then current annual compensation. A
change of control includes the acquisition of over 30% of the Company's stock,
the sale or transfers of over 50% of the Company's assets, or certain mergers or
other combinations.
Prior to July 1996, Werner Haase had borrowed funds from Journeycraft
which at the time of the acquisition of Journeycraft by Water-Jel amounted to
$1,000,000. As a result of the acquisition, the loan was transferred to the
Company. The loan bears interest at 7% and is payable in annual installments of
$100,000 which amount is first applied to interest and the balance to reduce
principal. The remaining balance and any accrued interest is due in full in
December, 2016. As of August 31, 1998, $1,223,000 was due from Mr.
Haase. See "Financial Statements--Footnotes."
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Schedules
The financial statements and schedules appearing
after the Index to Exhibits are filed as part of this
annual report.
2. Exhibits
The exhibits listed on the Index to Exhibits
following the Signature Page herein are filed as part
of this annual report by incorporation by reference
from the filings indicated in the footnotes to the
Index.
(b) Reports on Form 8-K
1. Report on Form 8-K dated February 27, 1998 and filed
with the Commission on February 27, 1998 reporting
the results of the Company's annual meeting of
shareholders.
2. Report on Form 8-K dated April 30, 1998 and filed
with the Commission on May 7, 1998 reporting the
approval by the Board of Directors of the extension
of the Class B Warrants.
30
<PAGE>
3. Report on Form 8-K/A dated July 30, 1998 and filed
with the Commission on July 30, 1998 reporting the
amount of Class A Warrants exercised and the proceeds
received by the Company.
4. Report on Form 8-K, together with exhibits, dated
August 13, 1998 and filed with the Commission on
August 14, 1998 reporting the prospective acquisition
of Reset, Inc.
5. Report on Form 8-K, together with exhibits, dated
September 17, 1998 and filed with the Commission on
September 17, 1998 reporting the acquisitions of
Mercury Seven, Inc.
and Zabit & Associates, Inc.
6. Report on Form 8-K/A dated November 10, 1998 and
filed with the Commission on November 10, 1998.
This report includes:
(a) Audited financial statements of Reset, Inc.
for the years ended December 31, 1997 and
1998 and unaudited statements for the six
months ended June 30, 1997 and 1998.
(b) Audited financial statements of Mercury
Seven, Inc. for the years ended December 31,
1997 and unaudited statements for the six
months ended June 30, 1997 and 1998.
(c) 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.
7. Report on Form 8-K/A, together with exhibits, dated
November 25, 1998 and filed with the Commission on
November 30, 1998. This report includes:
(a) Audited financial statements for Zabit &
Associates, Inc. for the years ended
December 31, 1995, 1996 and 1997 and
unaudited statements for the eight months
ended August 31, 1997 and 1998.
(b) Pro-forma combined financial statements for
X-ceed, Inc. and subsidiaries, Reset, Inc.,
Mercury Seven, Inc. and Zabit & Associates,
Inc. as of May 31, 1998 and for the nine
months ended May 31, 1998 and the year ended
August 31, 1997.
31
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED AUGUST 31, 1998
CONTENTS
Page
----
Independent auditors' report F-1
Consolidated balance sheets F-2
Consolidated statements of income F-3
Consolidated statement of stockholders' equity F-4
Consolidated statements of cash flows F-5
Notes to consolidated financial statements F-6 - F-18
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
X-Ceed, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of X-Ceed, Inc. and
Subsidiaries as of August 31, 1998 and 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for the three years
ended August 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of X-Ceed,
Inc. and Subsidiaries as of August 31, 1998 and 1997, and the results of their
operations and their cash flows for the three years ended August 31, 1998, in
conformity with generally accepted accounting principles.
/s/ HOLTZ RUBENSTEIN & CO., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
November 13, 1998
F-1
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
August 31,
ASSETS 1998 1997
------ --------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,789 $ 7,230
Investment in marketable securities (Note 5) 97 758
Accounts receivable, net of allowance for uncollectible
accounts of $25 and $154, respectively 5,325 3,714
Program costs and earnings in excess of customer billings 3,287 2,040
Inventories (Note 4) 1,022 1,365
Prepaid expenses and other current assets 861 334
Deferred income taxes (Note 10) 14 -
--------- --------
Total current assets 24,395 15,441
PROPERTY AND EQUIPMENT, net (Note 6) 1,533 1,354
DUE FROM OFFICER (Note 7) 1,223 1,223
GOODWILL, net (Note 3) 6,088 -
DEFERRED INCOME TAXES (Note 10) 484 231
OTHER ASSETS 993 551
--------- ---------
$ 34,716 $ 18,800
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 8) $ 5,793 $ 4,042
Current portion of long-term debt 41 39
Income taxes payable (Note 10) 219 359
Customer billings in excess of program costs and earnings 1,009 915
Deferred income taxes (Note 10) - 44
--------- ---------
Total current liabilities 7,062 5,399
--------- ---------
LONG-TERM DEBT - 52
--------- ---------
ACCRUED LEASE OBLIGATION 875 816
--------- ---------
DEFERRED REVENUES (Note 15) 587 -
--------- --------
COMMITMENTS (Note 15)
STOCKHOLDERS' EQUITY (Note 11):
Common stock, $.01 par value; authorized 30,000,000 shares;
10,277,053 and 7,043,180 issued and outstanding, respectively 103 70
Preferred stock, $.08 par value; authorized 125,000
shares; -0- issued and outstanding - -
Net unrealized (loss) gain on marketable securities (27) 216
Additional paid-in capital 22,657 10,211
Unearned compensation (112) -
Retained earnings 3,642 2,092
--------- ---------
26,263 12,589
Treasury stock, at cost; 15,000 and 10,000 shares, respectively (71) (56)
--------- ---------
26,192 12,533
--------- ---------
$ 34,716 $ 18,800
========= =========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
August 31,
-------------------------------------------------
1998 1997 1996
---------- ---------- -------
<S> <C> <C> <C>
REVENUES, net (Notes 13 and 16) $ 59,198 $ 62,885 $ 54,864
---------- ---------- ---------
COSTS AND EXPENSES (Notes 15 and 17) :
Cost of revenues 37,926 40,095 34,933
Selling, general and administrative 18,799 18,420 18,683
Research and product development 873 446 29
---------- ---------- ---------
57,598 58,961 53,645
---------- ---------- ---------
OPERATING INCOME 1,600 3,924 1,219
---------- ---------- ---------
OTHER INCOME (EXPENSE):
Interest and dividend income 691 451 298
Interest expense (13) (81) (126)
Gain (loss) on sale of investments 522 (20) 598
Merger costs and expenses (Note 3) - - (253)
Loss on impairment of notes
receivable (Note 12) - (100) (325)
Other, net 39 11 259
---------- ---------- ---------
1,239 261 453
---------- ---------- ---------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 2,839 4,185 1,672
PROVISION FOR INCOME TAXES (Note 10) 1,289 2,308 922
---------- ---------- ---------
INCOME BEFORE MINORITY INTEREST 1,550 1,877 750
MINORITY INTEREST - - 118
---------- ---------- ---------
NET INCOME $ 1,550 $ 1,877 $ 632
========== ========== =========
NET INCOME PER COMMON SHARE (Note 12):
Basic $.20 $.27 $.09
==== ==== ====
Diluted $.18 $.26 $.09
==== ==== ====
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic 7,755,795 7,023,770 7,001,295
========= ========= =========
Diluted 8,607,636 7,339,625 7,394,012
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(Note 11)
<TABLE>
<CAPTION>
Common Stock
30,000,000 Shares Preferred Stock
$.01 Par Value $.08 Par Value 125,000 Shares
------------------- ---------------- ---------------
Par Additional (Loss) Gain
Earnings/ Treasury Par Paid-in on Marketable
Shares Value Shares Value Capital Securities Compensation
----------- ---------- ------ ----- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total
Balance, September 1, 1995 6,824,180 $ 68 - $ - $ 10,143 $ 548 $ -
Transfer of shares in subsidiary
to minority shareholder - - - - (123) - -
Issuance of stock by subsidiary
for services - - - - 103 - -
Exercise of options/rights 196,000 2 - - 40 - -
Marketable securities valuation
adjustment (Note 5) - - - - - (241) -
Net income - - - - - - -
----------- ----- ------ ------ -------- ------ ------
Balance, August 31, 1996 7,020,180 70 - - 10,163 307 -
Exercise of options/rights 23,000 - - - 48 - -
Marketable securities valuation
adjustment (Note 5) - - - - - (91) -
Net income - - - - - - -
----------- ----- ------ ------ -------- ------ ------
Balance, August 31, 1997 7,043,180 70 - - 10,211 216 -
Exercise of options/warrants 1,983,873 20 - - 5,927 - -
Marketable securities valuation
adjustment (Note 5) - - - - - (243) -
Purchase of 5,000 shares
of treasury stock - - - - - - -
Issuance of stock options for
services (Note 11) - - - - 282 - (262)
Amortization of unearned
compensation - - - - - - 150
Issuance of stock in connection
with Reset merger (Note 3) 1,250,000 13 - - 6,237 - -
Net income - - - - - - -
----------- ----- ------ ------ -------- ------ ------
Balance, August 31, 1998 10,277,053 $ 103 - $ - $ 22,657 $ (27) $ (112)
=========== ===== ====== ====== ======== ====== ======
</TABLE>
Net
Retained
Earnings/ Unearned
(Deficit) Stock Total
--------- ----------- -----
Total
Balance, September 1, 1995 $ (417) $ (56) $ 10,286
Transfer of shares in subsidiary
to minority shareholder - - (123)
Issuance of stock by subsidiary
for services - - 103
Exercise of options/rights - - 42
Marketable securities valuation
adjustment (Note 5) - - (241)
Net income 632 - 632
-------- ----- ---------
Balance, August 31, 1996 215 (56) 10,699
Exercise of options/rights - - 48
Marketable securities valuation
adjustment (Note 5) - - (91)
Net income 1,877 - 1,877
-------- ----- ---------
Balance, August 31, 1997 2,092 (56) 12,533
Exercise of options/warrants - - 5,947
Marketable securities valuation
adjustment (Note 5) - - (243)
Purchase of 5,000 shares
of treasury stock - (15) (15)
Issuance of stock options for
services (Note 11) - - 20
Amortization of unearned
compensation - - 150
Issuance of stock in connection
with Reset merger (Note 3) - - 6,250
Net income 1,550 - 1,550
-------- ----- ---------
Balance, August 31, 1998 $ 3,642 $ (71) $ 26,192
======== ===== =========
See notes to consolidated financial statements
F-4
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
August 31,
-----------------------------------------
1998 1997 1996
-------- --------- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,550 $ 1,877 $ 632
-------- --------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
(Gain) loss on sale of marketable securities (522) 20 (598)
Gain on sale of equipment (9) - (4)
Loss on impairment of notes receivable - 100 325
Provision for losses on accounts receivable 4 27 311
Minority interest in net earnings - - 118
Non-cash compensation 170 - 45
Depreciation and amortization 351 461 540
Deferred income taxes (135) 451 543
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,166) 575 (2,663)
Inventories 342 (262) 11
Program costs and earnings in excess of billings (1,248) (1,775) 68
Prepaid expenses and other current assets (527) (53) (134)
Other assets (105) 32 (56)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 1,435 771 1,350
Income taxes payable (358) 139 (600)
Customer billings in excess of program costs 95 (1,208) 1,403
Accrued lease liability 11 22 (126)
Deferred revenues 587 - -
Other current liabilities - (15) (20)
-------- --------- --------
Total adjustments (1,075) (715) 513
-------- --------- --------
Net cash provided by operating activities 475 1,162 1,145
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in marketable securities (741) (27) (71)
Divestiture of consolidated affiliate - - (3,128)
Proceeds from sale of marketable securities 1,527 138 749
Repayments from shareholders - - 75
(Increase) decrease in notes receivable - (100) 150
Proceeds from sale of property and equipment 10 13 15
Cash acquired from acquisition of business 44 - -
Acquisition of property and equipment (207) (150) (237)
-------- --------- --------
Net cash provided by (used in) investing activities 633 (126) (2,447)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (49) (39) (39)
Repayment of notes payable - (1,065) -
Proceeds from notes payable - - 1,065
Advances (to) from affiliate (432) (83) 89
Purchase of treasury stock (15) - -
Proceeds from the exercise of warrants and options 5,947 48 43
-------- --------- --------
Net cash provided by (used in) financing activities 5,451 (1,139) 1,158
-------- --------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 6,559 (103) (144)
CASH AND CASH EQUIVALENTS, beginning of year 7,230 7,333 7,477
-------- --------- --------
CASH AND CASH EQUIVALENTS, end of year $ 13,789 $ 7,230 $ 7,333
======== ========= ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
X-CEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED AUGUST 31, 1998
(in thousands, except share and per share data)
1. Organization and Nature of Operations:
X-Ceed, Inc. and Subsidiaries (the "Company") provides solutions to
critical business issues of corporate customers through the development and
application of performance improvement programs. The Company also provides
travel management services, including reservations and ticketing, to major U.S.
corporations and also designs and implements training and communication programs
in the health care field as well as producing and marketing products for patient
education. In addition, the Company manufactures emergency first aid fire
blankets for burns and a line of burn dressings through its Water-Jel First Aid
division.
During fiscal 1998, Company management decided on strategic acquisitions
designed to let the Company evolve as a fully integrated marketing and
communications company with Internet and interactive services at its core. The
acquired companies were selected to be compatible and complementary to the
Company's primary existing operations, specifically The Performance Group and
TheraCom, as well as to each other, thus affording the Company the opportunity
to participate in the rapidly expanding Internet and interactive business sector
(see Notes 3 and 19).
2. Summary of Significant Accounting Policies:
a. Principles 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.
On April 1, 1996, the Company's majority interest in X-Ceed Atlanta
was reduced to 50%, as a result of a compensatory stock award to the minority
shareholder. Accordingly, effective April 1, 1996, the Company's investment is
being 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.
b. Revenue recognition
For long-term performance improvement contracts, the
percentage-of-completion method is used, whereby revenue, and related costs, are
recognized as work on the contract progresses. The Company bills clients in
advance for group recognition travel programs and seminars and records such
deposits on the balance sheet as customer billings in excess of program costs.
Revenue from the corporate travel management division is recognized
upon the ticketing of the related flights.
c. Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
F-6
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
d. Investments in marketable securities
Equity securities having readily determinable fair values and all
investments in debt securities are classified and accounted for in three
categories. Debt securities that management has the positive intent and ability
to hold to maturity are classified as 'held-to-maturity securities' and reported
at amortized cost. Debt and equity securities that are bought and principally
held for the purpose of selling them in the near term are classified as 'trading
securities' and reported at fair value, with unrealized gains and losses
included in operating results. Debt and equity securities not classified as
either held-to-maturity securities or trading securities are classified as
'available-for-sale securities' and reported at fair value, with the unrealized
gains and losses excluded from operating results and reported as a separate
component of stockholders' equity. A decline in the market value of any
available-for sale security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for the
security.
Gains and losses on the sale of securities available-for-sale are
computed on the basis of specific identification of the adjusted cost of each
security.
e. 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.
f. Concentration of risk
The Company invests its excess cash in deposits and money market
accounts with major financial institutions and in commercial paper of companies
with strong credit ratings. Generally, the investments mature within ninety days
and therefore, are subject to little risk. The Company has not experienced
losses related to these investments.
The concentration of credit risk in the Company's accounts receivable
is substantially mitigated by the Company's credit evaluation process,
reasonably short collection terms and the geographical dispersion of revenue.
Although the Company generally does not require collateral, reserves for
potential credit losses are maintained and such losses have been within
management's expectations.
A significant portion of revenue earned by the Company's retail
corporate travel business segment is derived from commissions earned on airline
bookings with major U.S. and foreign airline carriers.
g. 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.
F-7
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
h. Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," an impairment loss is recognized whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
i. Stock-based compensation
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock-based compensation to employees. Stock compensation to
non-employees is accounted for at fair value in accordance with Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation."
j. Research and product development costs
Research and product development costs, consisting of salaries and
materials related to software development, are expensed as incurred.
k. 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. Such estimates primarily relate to accounts receivable and
inventory valuation allowances, recoverability of goodwill and revenues and
costs on percentage of completion contracts. Actual results could differ from
those estimates.
l. Advertising costs
Advertising costs are charged to operations when the advertising
first takes place.
m. Statement of cash flows
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.
n. Net income per common share and per common and common equivalent share
In the second quarter of fiscal 1998, the Company 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 structures 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. The reconciliation for
the years ended August 31, 1998, 1997 and 1996, are as follows:
F-8
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
n. Net income per common share and per common and common equivalent
share (Cont'd)
<TABLE>
<CAPTION>
Year Ended August 31, 1998
---------------------------------------------------
Income Shares Per Share
---------------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 1,550 7,755,795 $ .20
Effect of dilutive securities'
common stock options 851,841 .02
--------- ------------ -----
Diluted EPS $ 1,550 8,607,636 $ .18
========= ============ =====
<CAPTION>
Year Ended August 31, 1997
---------------------------------------------------
Income Shares Per Share
---------------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 1,877 7,023,770 $ .27
Effect of dilutive securities'
common stock options 315,855 .01
--------- ------------ -----
Diluted EPS $ 1,877 7,339,625 $ .26
========= ============ =====
<CAPTION>
Year Ended August 31, 1996
---------------------------------------------------
Income Shares Per Share
---------------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 632 7,001,295 $ .09
Effect of dilutive securities'
common stock options 392,717 -
------- ------------ -----
Diluted EPS $ 632 7,394,012 $ .09
======= ============ =====
</TABLE>
o. New accounting pronouncements
Recent accounting pronouncements issued by the Financial Accounting
Standards Board, which the Company is not required to adopt at this time include
Statement of Financial Accounting Standards No. 130, 'Reporting Comprehensive
Income' ("SFAS 130"), Statement of Financial Accounting Standards No. 131,
'Disclosure About Segments of an Enterprise' ("SFAS 131") and Statement of
Financial Accounting Standard No. 132, 'Disclosure About Pensions and Other
Postretirement Benefits' ("SFAS 132"). The Company intends to comply with the
disclosure requirements of SFAS 130, SFAS 131 and SFAS 132 and does not expect
these pronouncements to have a material effect on the Consolidated Financial
Statements.
p. Reclassifications
Certain reclassifications have been made to the financial statements
for the year ended August 31, 1997 and 1996 to conform with the classifications
used in 1998.
3. Business Combination:
On August 29, 1998, the Company purchased all of the common stock of
Reset, Inc. ("Reset"). In the transaction, accounted for as a purchase, the
Company issued 1,250,000 shares of common stock for a purchase price of $6,250.
In addition, as consideration for services rendered in connection with the
transaction, the Company agreed to grant a consultant 18,230 shares of common
stock. The excess purchase price over the estimated fair value of the net assets
was $6,088 and will be amortized using the straight-line method over its
estimated useful life.
F-9
<PAGE>
3. Business Combination: (Cont'd)
Subsequent to year end, the Company entered into two additional business
combinations (see Note 19).
The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the business combination had occurred
on September 1, 1996:
Years Ended August 31,
--------------------------
1998 1997
---- ----
Revenues $ 61,103 $ 63,547
Net earnings 1,566 1,564
Years Ended August 31,
--------------------------
1998 1997
---- ----
Net earnings per share:
Basic $.18 $.19
==== ====
Diluted $.16 $.18
==== ====
The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable. The pro forma results do not necessarily
represent results which would have occurred if the business combination had
taken place at the date and on the basis assumed above.
4. Inventories:
Inventories consists of the following:
August 31,
--------------------------
1998 1997
---- ----
Raw materials $ 612 $ 401
Finished goods 410 963
-------- --------
$ 1,022 $ 1,364
======== ========
5. Investment in Marketable Securities:
Marketable equity securities, which are classified as available-for-sale
securities, are valued at the fair value of the securities and the unrealized
gain (loss) on the securities, net of income taxes, is reflected in
stockholders' equity. During the years ended August 31, 1998 and 1997, the net
change in the valuation adjustment on marketable securities classified as
available-for-sale amounted to $(243) and $(91), respectively.
The carrying amounts of investment securities as shown in the balance
sheet of the Company and their approximate values were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
August 31, 1998 Cost Gains Losses Fair Value
--------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale
equity investments $ 170 $ - $ (73) $ 97
======= ======== =========== ==========
</TABLE>
F-10
<PAGE>
5. Investment in Marketable Securities: (Cont'd)
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
August 31, 1997 Cost Gains Losses Fair Value
--------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale
equity investments $ 422 $ 347 $ (11) $ 758
======= ======= =========== ==========
</TABLE>
6. Property and Equipment:
Property and equipment, at cost, consists of the following:
August 31,
----------------------
1998 1997
---- ----
Machinery and equipment $ 2,490 $ 2,120
Furniture and fixtures 457 522
Software 175 153
Transportation equipment 61 56
Leasehold improvements 1,031 916
-------- --------
4,214 3,767
Less accumulated depreciation and amortization 2,681 2,413
-------- --------
$ 1,533 $ 1,354
======== ========
7. Due From Officer:
Due from officer represents a loan to the Company's Co-Chairman. The loan
bears interest at 7% and, is payable in annual installments of $100, first
applied to accrued interest, with the balance applied to reduce the principal.
The remaining unpaid principal and any accrued interest is payable in full in
December 2016.
8. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consist of the following:
August 31,
----------------------
1998 1997
---- ----
Accounts payable and accrued expenses $ 3,157 $ 1,187
Accrued payroll and related costs 1,625 1,099
Accrued commissions 1,011 1,756
-------- --------
$ 5,793 $ 4,042
======== ========
9. Credit Facility:
The Company has available a credit facility with its bank, which provides
for a $600 term loan bearing interest at % above the bank's prime rate, and a
line of credit facility of $2,500 bearing interest at the bank's prime rate. As
of August 31, 1998, $558 remains available under the term loan facility.
Outstanding letters of credit under the credit facility approximated $482 as of
August 31, 1998. In addition, the agreement provides for a foreign exchange
line, to hedge against fluctuations in foreign countries, in the amount of
$2,000. The facility contains various covenants pertaining to the maintenance of
certain financial ratio restrictions and expires in December 1998.
In view of the acquisitions discussed in Note 1, the Company and its bank
are presently evaluating its credit facility.
F-11
<PAGE>
10. Income Taxes:
The Company files a Consolidated U.S. Federal Income Tax return that
includes all 80% or more owned subsidiaries. State tax returns are filed on a
consolidated, or separate basis depending on applicable laws.
The provision (benefit) for income taxes is comprised of the following:
Years Ended August 31,
------------------------------------------
1998 1997 1996
--------- -------- ------
Current:
Federal $ 980 $ 1,200 $ 46
States 444 657 333
--------- -------- ------
1,424 1,857 379
--------- -------- ------
Years Ended August 31,
------------------------------------------
1998 1997 1996
--------- -------- -----
Deferred:
Federal (55) 395 414
States (80) 56 129
--------- -------- ------
(135) 451 543
--------- -------- ------
$ 1,289 $ 2,308 $ 922
========= ======== ======
The Company's provisions for income taxes reflects benefits from the
utilization of net operating loss carryforwards of approximately $386 and $802
for the years ended August 31, 1997 and 1996, respectively.
The net deferred tax amounts included in the financial statements consist
of the following:
August 31,
------------------
1998 1997
---- ----
Deferred tax assets:
Depreciation $ 118 $ 107
Accrued expenses - 42
Accrued lease obligation 402 343
Accounts receivable 10 63
Amortization - 38
Deferred revenue 270 -
Stock compensation 78 -
Unrealized loss on marketable securities 34 -
Other 6 64
------ ------
918 657
------ ------
Deferred tax liabilities :
Unrealized gain on marketable
securities - (120)
Investment in subsidiary (307) (265)
Deferred commissions (113) (84)
------ ------
(420) (469)
------ ------
Net deferred income taxes $ 498 $ 187
====== ======
F-12
<PAGE>
10. Income Taxes: (Cont'd)
The Company's effective tax rates on earnings differs from the Federal
Statutory regular tax rate as follows:
<TABLE>
<CAPTION>
Years Ended
August 31,
--------------------------------------------------------
1998 1997 1996
-------------- ------------- ------------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 10.0 15.0 15.0
Adjustment of prior years' accrual 2.8 6.0 17.3
Reduction of valuation allowance - - (17.9)
Federal income tax credits (2.8) (1.5) (3.0)
Permanent differences 2.4 1.7 12.1
Other (1.0) - (2.4)
----- ----- -----
45.4% 55.2% 55.1%
===== ====== ======
</TABLE>
11. Stockholders' Equity:
a. Stock options
(i) The Company adopted incentive stock option plans in various years
from 1990 through 1998 which provide for the granting of options to employees,
officers, directors, and others who render services to the Company. Under these
plans, options to purchase not more than 2,687,500 shares of common stock may be
granted, at a price which may not be less than the fair market value per share
in the case of incentive stock options or 85% of fair market value for
non-qualified options. Options expire at various dates through March 1, 2008.
The following table summarizes the status of stock options outstanding
under the plans:
Number of Option
Shares Prices
--------- ------
Outstanding, September 1, 1995 187,500 $1.52
Granted 500,000 $2.19
Exercised (5,000) $1.52
Canceled and expired (56,000) $1.52 - $2.19
---------
Outstanding, August 31, 1996 626,500 $1.52 - $2.32
Granted 32,500 $2.00
Exercised (22,000) $1.52 - $2.32
Outstanding, August 31, 1997 637,000 $1.52 - $2.32
Granted 950,000 $3.44 - $7.19
Exercised (58,250) $1.52 - $2.19
---------
Outstanding, August 31, 1998 1,528,750 $1.52 - $7.19
=========
Exercisable 1,215,625 $1.52 - $7.19
=========
(ii) Options to acquire approximately 72,000 shares of the Company's
common stock at $1.52 per share under a non-qualified stock option plan, were
outstanding as of August 31, 1998.
F-13
<PAGE>
11. Stockholders' Equity: (Cont'd)
a. Stock options (Cont'd)
(iii) In October 1994, the Company issued non-qualified options to
acquire 420,000 shares of common stock to its officers, directors and certain
legal counsel. The exercise price of these options are $1.52 and expire in
October 2004.
In July 1998, the Company granted an officer an option to
acquire 1,000,000 shares of common stock (see Note 15).
In 1998, the Company issued 200,000 options to consultants
which resulted in compensation expense approximating $282,000.
(iv) The Company has elected the disclosure-only provisions of
Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation ("FASB 123") in accounting for its employee stock options.
Accordingly, no compensation expense has been recognized. Had the Company
recorded compensation expense for the stock options based on the fair value at
the grant date for awards in the year ended August 31, 1998, consistent with the
provisions of SFAS No. 123, the Company's net income and net income per share
would have been reduced to the following pro forma amounts:
As Pro
Reported Forma
-------- -----
Net income $1,550 $1,189
Basic earnings per share .20 .15
Diluted earnings per share .18 .14
The effect on the Company's 1997 and 1996 net income and net
income per share would have been immaterial.
The fair value of each option grant is estimated on the date of
grant using the Black Scholes option pricing model with the following range of
weighted-average assumptions used for grants in years ended August 31, 1998,
1997 and 1996: expected volatility of .78; risk free interest rate averaging
5.9%, and expected life of one year.
The weighted-average grant-date fair value of options granted
for the years ended August 31, 1998 and 1997 were $2.74 and $1.52, respectively.
In addition, there were 4,178,185 options at a weighted-average per share
exercise price of $4.63 per option exercisable at August 31, 1998.
The weighted-average exercise price and remaining contractual
life of options outstanding at August 31, 1998 is $4.74 and 1.8 years,
respectively.
b. Warrants
In connection with a second public offering of its securities in
November 1988, the Company issued Class A warrants. Each Class A warrant
entitles the holder to receive one share of common stock and one Class B warrant
at an exercise price of $3.00 per share. Each Class B warrant entitles the
holder to purchase one share of common stock for an exercise price of $6.00 per
share.
During fiscal year 1998, holders of Class A warrants exercised
approximately 1,690,000 warrants prior to the extended expiration date of April
30, 1998. On May 7, 1998, the Company extended the expiration date of the Class
B warrants until September 30, 1999.
In addition, the underwriter for the second offering holds 176,795
Class B warrants.
F-14
<PAGE>
11. Stockholders' Equity: (Cont'd)
c. Common shares reserved
Common shares reserved at August 31, 1998, are as follows:
Incentive stock option plans 1,592,750
Non-qualified stock option plan 71,875
Class B Warrants 1,765,398
Underwriters' units 176,795
Key employees' units 1,420,000
Consultant's units 200,000
----------
5,226,818
d. Capitalization
During fiscal 1998, the Company amended its Certificate of
Incorporation and increased the amount of authorized common stock from
12,500,000 to 30,000,000 and changed the par value of the stock from $.08 to
$.01. All references to the par value of common stock outstanding have been
restated to reflect the new par value.
12. Loss on Impairment of Notes Receivable:
The Company has reduced the carrying value of notes receivable to reflect
the diminution of their value caused by the financial instability of the
borrowers. The reductions resulted in a charge to operations of $100 and $325 in
the years ended August 31, 1997 and 1996, respectively. The note reduced in 1997
was due from a company affiliated with a director/officer of the Company.
13. Business Segments:
The Company's major operations are in Corporate Communication, Travel
Management Services and First Aid Products.
The Corporate Communications Group provides solutions for critical
business issues to corporate customers based on management techniques coupled
with award programs, while the Medical Communications division designs and
implements seminars for training health care professionals and produces and
markets patient education programs. The Travel Management Services segment
provides corporate travel management and consulting services. The First Aid
Products segment manufacturers and markets products which consist of a
proprietary burn care line and a line of generic creams and ointments to the
industrial marketplace and on a limited basis to consumer markets.
Revenues, operating income, capital expenditures and depreciation and
amortization pertaining to the industries in which the Company operates are
presented below.
Years Ended August 31,
----------------------------------------
1998 1997 1996
---- ---- ----
Revenue:
First Aid Products $ 5,940 $ 5,296 $ 4,223
Travel Management Services 10,988 11,571 10,811
Corporate Communications 42,270 46,018 39,830
---------- --------- ---------
$ 59,198 $ 62,885 $ 54,864
========== ========= =========
F-15
<PAGE>
13. Business Segments: (Cont'd)
Years Ended August 31,
----------------------------------------
1998 1997 1996
---- ---- ----
Operating (Loss) Income:
First Aid Products $ 836 $ 696 $ (108)
Travel Management Services 337 937 801
Corporate Communications 427 2,291 526
--------- -------- --------
$ 1,600 $ 3,924 $ 1,219
========= ======== ========
Capital Expenditures:
First Aid Products $ 152 $ 89 $ 52
Travel Management Services 5 23 85
Corporate Communications 50 37 100
--------- -------- --------
$ 207 $ 149 $ 237
========= ======== ========
Depreciation and Amortization:
First Aid Products $ 240 $ 303 $ 364
Travel Management Services 61 75 67
Corporate Communications 50 83 109
--------- -------- --------
$ 351 $ 461 $ 540
========= ======== ========
Identifiable assets pertaining to the industries are as follows:
August 31,
------------------------
1998 1997
---- ----
First Aid Products $ 2,602 $ 3,172
Travel Management Services 1,153 1,219
Corporate Communications 9,764 5,042
General corporate assets 21,197 9,367
--------- ---------
$ 34,716 $ 18,800
========= =========
14. Fair Value of Financial Instruments:
The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
Long-Term Debt: The fair value of the Company's long-term debt, including
the current portion, was estimated using a discounted cash flow analysis,
based on the Company's assumed incremental borrowing rates for similar
types of borrowing arrangements. The carrying amount of variable and
fixed rate debt at August 31, 1998 and 1997 approximates fair value.
15. Commitments and Contingencies:
a. Lease commitment
The Company conducts its operations from leased space in various
locations throughout the United States. These leases (classified as operating
leases) expire at various dates through June 2008. Management expects that in
the normal course of business these leases will be renewed or replaced by other
leases.
F-16
<PAGE>
15. Commitments and Contingencies: (Cont'd)
a. Lease commitment (Cont'd)
As of August 31, 1998, future net minimum rental payments under
operating leases having initial or remaining non-cancelable terms in excess of
one year are as follows:
Year Ending
August 31,
-----------
1999 $ 850
2000 806
2001 782
2002 799
2003 636
Thereafter 3,010
Rental expense approximated $861, $866 and $956 for the years ended
August 31, 1998, 1997 and 1996, 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.
b. Employment agreements
The Company is party to employment and consulting agreements with
officers/ consultants which provide for minimum annual salaries. Certain
agreements provide for incentive bonuses based upon divisional profitability and
also include a one-time compensation payment of three times the current annual
compensation in the event of a change in corporate control, as defined.
One of the agreements provides for a $960 signing bonus, to be paid
in 12 equal installments commencing July 1998. In addition, the employee was
granted an option, expiring in July 2008, to acquire 1,000,000 shares of common
stock at an exercise price of $6.00 per share. In the event of exercise by the
employee, the agreement provides for certain restrictions on the sale or
transferability of the shares.
The aggregate minimum commitment under these agreements are as
follows:
Year Ending
August 31,
-----------
1999 $ 2,710
2000 1,862
2001 1,780
2002 882
2003 250
Thereafter 250
c. Retirement plan
The Company maintains a retirement plan which is a salary reduction
plan under Section 401(k) of the Internal Revenue Code. Participation in the
plan is voluntary, and any participant may elect to contribute up to 15% of
their earnings. The Company will match 10% of the first 6% of the employee's
contribution. The Company's contribution approximated $17, $14 and $22 for the
years ended August 31, 1998, 1997 and 1996, respectively.
F-17
<PAGE>
15. Commitments and Contingencies: (Cont'd)
d. Vendor agreement
During 1998, the Company entered into a five year contract with a
vendor to provide terminals and software for airline ticketing. In connection
with this agreement, the Company was paid a $750 fee to use the vendor
exclusively for this function. The Company is amortizing the fee over the life
of contract.
e. Litigation:
The Company is involved in various lawsuits and claims incidental to
its business. In the opinion of management, the ultimate liabilities, if any,
resulting from such lawsuits and claims, will not materially affect the
financial position of the Company.
16. Major Customers:
Revenues from one customer approximated 33%, 33% and 24% of total
revenues for the years ended August 31, 1998, 1997 and 1996, respectively.
Revenues from another customer approximated 21% and 20% of total revenues for
the years ended August 31, 1997 and 1996, respectively.
17. Advertising Costs:
Included in selling, general and administrative expenses are advertising
costs of $301, $203 and $284 for the years ended August 31, 1998, 1997 and 1996,
respectively.
18. Supplemental Disclosures of Cash Flow Information:
Years Ended August 31,
--------------------------------------------
1998 1997 1996
--------- -------- ------
Interest paid $ 13 $ 81 $ 126
========= ======== ======
Income taxes paid $ 1,719 $ 1,384 $ 584
========= ======== ======
During the year ended August 31, 1998, the Company issued 1,250,000
shares of common stock in connection with the Reset merger and stock options in
exchange for services approximating $282.
19. Subsequent Events:
On September 9, 1998, the Company completed a Plan of Merger with Mercury
Seven, Inc., a company engaged in the business of Internet consulting, marketing
and development in creating Internet-based businesses. In exchange for all of
the issued and outstanding stock of Mercury Seven, Inc., the Company issued
1,073,333 shares of restricted common stock having a market value of $8,050,
together with cash consideration of $1,500. In addition, the Company entered
into employment contracts with certain employees of Mercury Seven, Inc.
On September 14, 1998, the Company completed a Plan of Merger with Zabit
and Associates, Inc. and Affiliate ("Zabit"), a company engaged in corporate
communications. In exchange for all of the issued and outstanding stock of
Zabit, the Company issued 2,258,724 shares of restricted common stock having a
market value of $18,070 and notes totaling $6,730, together with cash
consideration of $5,200. In addition, the Company entered into employment
contracts with certain employees of Zabit.
The stock consideration of $18,070 included $5,000 of common stock issued
to Zabit shareholders/ employees in connection with future services to be
provided.
The Company will account for these acquisitions under the purchase method
of accounting.
F-18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
X-CEED, INC.
By /s/ Werner G. Haase
------------------------------
Werner G. Haase
Chief Executive Officer
Dated: December 9, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below on December 9, 1998 by the following persons
on behalf of Registrant and in the capacities indicated.
/s/ Scott Mednick
------------------------------
Scott Mednick, Chairman and Chief
Strategic Officer
/s/ Werner G. Haase
------------------------------
Werner G. Haase,
Co-Chairman and Chief Executive Officer
/s/ William Zabit
------------------------------
William Zabit, President and Director
/s/ Norman Doctoroff
------------------------------
Norman Doctoroff, Director
/s/ John Bermingham
------------------------------
John Bermingham, Director
32
<PAGE>
Exhibits
(2)(b) Certificate of Merger (1)
(2)(c) Merger Agreement (1)
(2)(d) Agreement and Plan of Merger and Reorganization between
X-ceed, Inc and Reset, Inc. (2)
(2)(e) Agreement and Plan of Merger by and among X-ceed, Inc.,
X-ceed Merger, Inc., Mercury Seven, Inc. and the Shareholders
of Mercury Seven, Inc. (3)
(2)(f) Certificate of Merger of Mercury Seven, Inc. into X-ceed
Merger, Inc. (3)
(2)(g) Agreement and Plan of Merger among X-ceed, Inc., Zabit &
Associates, Inc. and the Shareholders
Named Therein (3)
(2)(h) Certificate of Merger of Zabit & Associates, Inc. and the
Shareholders Named Therein (3)
(3)(a) Certificate of Incorporation (Water-Jel), previous
Amendments (3) (6) (7). (4)
(3)(b) By-laws of the Registrant (4)
(3)(c) Certificate of Incorporation of X-ceed, Inc. (5)
(4)(a) Form of Common Stock (6)
(4)(b) Form of Class A Warrant and Class B Warrants (7)
(4)(c) Form of Warrant Agreement (7)
(10)(d) Copy of Non-Qualified Stock Option Plan (4)
(10)(e) Copy of 1990 Stock Option Plan (8)
(10)(f) Copy of 1995 Stock Option Plan (9)
(10)(g) Agreement and Plan of Merger dated as of May 17, 1996, by
and among Water-Jel and Journeycraft, Inc. et al. (10)
(10)(h) Employment Agreement, dated as of July 1, 1996, by and
among the Company and Nurit Kahane Haase (10)
(10)(i) Employment Agreement, dated as of December 11, 1996, by and
among the Company and Werner Haase (10)
(10)(j) Stock Purchase Agreement among X-ceed, Inc., William Zabit
and Joyce Weslowski (3)
(10)(k) Purchase Agreement by and among X-ceed, Inc., William Zabit
and Joyce Weslowski (3)
(10)(l) Employment Agreement of Scott Mednick (11) (10)(m) Employment
Agreement of William Zabit (11) (10)(n) Copy of 1998 Stock Option Plan
(12) (23)(a) Consent of Holtz Rubenstein & Co., LLP dated
December 8, 1998*
(27) Financial Data Schedule*
- -----------------------------
* Filed herewith
(1) Incorporated by reference from the Company's Registration Statement
on Form 8-K, dated February 27, 1998 and filed with the Commission on February
27,1998.
(2) Incorporated by reference from the Company's Report on Form 8-K
dated August 13, 1998 and filed with the Commission on August 14, 1998.
(3) Incorporated by reference from the Company's Report on Form 8-K
dated September 17, 1998 and filed with the Commission on September 17, 1998.
(4) Incorporated by reference from Water-Jel's Registration Statement
on Form S-18, File No. 2-90512-NY, initially filed with the Commission on
January 8, 1998.
(5) Incorporated by reference from the Company's Report on Form 8-K,
dated February 27, 1998 and filed with the Commission on February 28,1998.
(footnotes continued on next page)
33
<PAGE>
(footnotes continued from previous page)
(6) Incorporated by reference from the Company's Registration Statement
on Form S-18 filed with the Commission on April 12, 1989, Commission File No.
2-90512-NY.
(7) Incorporated by reference from the Company's Registration Statement
on Form S-1, File No. 33-23910, initially filed with the Commission on August
23, 1998.
(8) Incorporated by reference from the Company's Annual Report on From
10-K for the fiscal year ended August 31, 1990.
(9) Incorporated by reference from the Company's Registration Statement
on Form S-8, File No. 333-01685, initially filed with the Commission on March
13, 1996.
(10) Incorporated by reference from the Company's Report on Form 8-K
filed with the Commission on July 12, 1996.
(11) Incorporated by reference from the Company's Registration
Statement on Form S-3, Amendment No. 5 filed with the Commission on November 19,
1998, Registration No. 333-57173.
(12) Incorporated by reference from the Company's Definitive Proxy
Statement filed with the Commission on January 8, 1998.
34
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into the Registration
Statements on Forms S-8 and S-3 of our report dated November 13, 1998 with
respect to the consolidated financial statements of X-Ceed, Inc. included in the
Annual Report on Form 10-K for the year ended August 31, 1998.
/s/ HOLTZ RUBENSTEIN & CO., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
December 8, 1998
<PAGE>
Officers Directors
- -------- ---------
Werner G. Haase Scott Mednick, Chairman
Chief Executive Officer
Werner G. Haase, Co-Chairman
Scott Mednick
Chief Strategic Officer William Zabit
William Zabit Norman Doctoroff
President
John Bermingham
Wolf Boehme
Chief Operating Officer
Nurit Kahane Haase
Senior Vice President
Bradley K. Nelson
President of Zabit Division
Corporate Offices Registrar/Transfer Agents
- ----------------- -------------------------
488 Madison Avenue American Stock Transfer & Trust Co.
New York, NY 10022 40 Wall Street
New York, NY 10005
Certified Public Accountants Counsel
- ---------------------------- -------
Holtz Rubenstein & Co. LLP McLaughlin & Stern, LLP
Melville, NY New York, NY
Stock Listing Warrant Listing
- ------------- ---------------
NASDAQ (National Market) OTC Bulleting Board
Common Stock - "XCED" Class B Warrants - "XCEDW"
Scheduled to be redeemed by
February 22, 1999
Copies of the Company's Financial Reports including the most recent quarter
ending November 30, 1998 are available to stockholders upon request to:
Lynn Ball
Xceed, Inc.
488 Madison Avenue
New York, NY 10022
(212) 419-1210 or e-mail [email protected]
<PAGE>
A Comprehensive Report to our Shareholders...
"Nothing is more powerful than an idea whose time has come."
Victor Hugo
We are pleased to introduce to our shareholders a new, unique business
model we have branded as Xceed, Inc.
Xceed is an integrated marketing and communications company with
interactive and Internet services at our core.
Inside and outside the world's major corporations, the pace of change is
accelerating. Entire businesses are being forced to reinvent themselves to keep
pace with the technological revolution and consolidation on an unprecedented
scale. Consolidation that changes the very playing field on which business
models are predicated.
At Xceed we recognize that such profound shifts create a need - a need for
global enterprises to speak with a single, clear, and distinctive voice. That
voice must be heard in all communication, to all constituencies, or risk being
lost in a sea of conflicting and competing messages. Xceed's capabilities play a
critical role in this context. From Web business strategy to development and
implementation of E-commerce solutions, from internal communication to external
stewardship of a brand, Xceed provides leadership by helping clients not just
cope with change, but prosper from the opportunities it presents.
Following an ambitious and aggressive business plan highlighted by a series
of key executive hires and affiliate acquisitions, Xceed now stands poised to
take a leadership position in the new economy.
This report provides an overview of our vision and describes a number of
the strategic and tactical steps we have taken to reinvent our company.
A gathering of talent
Werner Haase has been responsible for growing the company and establishing
this timely opportunity in the creation of Xceed, Inc. Mr. Haase now serves as
Co-Chairman and CEO for the new entity. He provides continuity of leadership and
articulation of the vision for the enterprise.
<PAGE>
Scott Mednick has been appointed chairman and chief strategic officer. Mr.
Mednick is founder and former chairman and CEO of Think New Ideas, Inc. He built
Think (a member of Omnicom Communicade Group) into a company with annual
revenues in excess of $50 million in less than two years. Mr. Mednick's role is
to define, deploy and lead our integrated and interactive branding strategy
while evangelizing the Xceed story through all channels.
Bill Zabit has been named our President. Mr. Zabit brings 20 years of
leadership experience as a communications strategist to Xceed and is recognized
as an expert in integrated communication. His leadership as CEO of Zabit &
Associates put Z&A on Inc. magazine's list of the fastest growing companies in
America and on the San Francisco Business Journal's list of the 50 fastest
growing companies in the Bay area. Z&A has delivered communication campaigns
that have won over 160 business and creative communication awards, including two
Emmy nominations. Z&A's client list includes an impressive mix of top high tech
and blue chip companies. Mr. Zabit's role is to spearhead further aggressive
growth in all of Xceed's lines of business.
Wolf Boehme has been appointed Xceed's Chief Operating Officer. Mr. Boehme
comes to Xceed after a 12-year tenure as one of Bloomberg Financial Markets' key
executives. Bloomberg is one of the fastest growing and most successful new
media and information companies in the world. At Bloomberg, Mr. Boehme was
responsible for operational areas such as designing, procuring and implementing
systems for the core terminal business, its television and radio businesses, and
its print publications. At Xceed Mr. Boehme will be responsible for worldwide
systems as well as integrating Xceed's recent acquisitions into its core
communication business.
Introducing the reinvention: Xceed, Inc.
Xceed harnesses the power of interactivity to affect bottom line results in
business and people performance through communication tools, techniques, and
technologies. Because to our clients, the bottom line is what communication is
all about.
Xceed consults with clients to develop and clarify their business
strategies, and then creates and delivers the most effective solutions. We
devise tactics and build tools to cover any message, in any medium, with one
voice from interactive and Web-based solutions to more traditional media and
methods. We integrate all of the tools and all of the messages to give our
clients maximum impact and measurable results.
Among the services Xceed delivers to its clients are:
- Web business strategy, development and implementation
- E-commerce solution strategy, development and implementation
- Interactive marketing and branding
<PAGE>
- Web-based sales incentive programs
- Internal communication
- Human resource communication
- Publicity and public relations
- Marketing communication and advertising.
Xceed brings technology solutions and a singular voice to business
interactions inside and outside our clients' organizations - a far-reaching idea
whose time has come. To date, Xceed is one of very few companies prepared to
offer this robust set of services to an eager marketplace.
Introducing the synergistic collection of Xceed's divisions
Xceed, Inc.(www.xceed.com) - Xceed is our new master brand and represents a
bundled - and synergistic -- set of services aligned into a powerful force to
lead its clients through the rapidly changing landscape of the new economy. The
following Xceed companies represent our core divisions...
Xceed Performance Group (www.xceed.com) - productivity enhancement systems
Xceed Performance Group is a full service performance improvement company
providing solutions to critical business issues for numerous companies including
some in the Fortune 100. Based on work for clients MCI and Ricoh, the
Performance Group has developed an innovative Web-based performance improvement
system, called Maestro. Maestro is a productivity enhancing system for managing
training, sales tracking and reporting, awards and recognition programs
providing real-time results via Internet and intranet technologies. The
performance improvement business is a $3-4 billion dollar industry which is
highly fragmented. Xceed Performance Group anticipates growing its market share
with Maestro, its proprietary product, which is expected to fuel this growth.
Journeycorp Travel Management has been integrated into the Performance
Group. With close to $10 million in revenues from providing travel services,
especially airline ticketing, it provides the basis for enhanced purchasing
power in the delivery of travel related awards sold by the Performance Group.
Xceed's Mercury Seven division (www.mercuryseven.com) - builders of
Internet-based businesses
Mercury Seven is a new Xceed division, acquired in September 1998. This
is a consultancy and development company that specializes in building
Internet-based businesses. Mercury Seven is also known for creating and
publishing ChannelSeven.comSM, an online network for Internet development,
marketing and advertising professionals worldwide. Mercury Seven's client list
includes Madison Square Garden, Arthur Andersen, Men's Health Magazine,
Spree.com, Ericcson, Hearst Entertainment, Radio City Music Hall,
AnotherUniverse.com, SRDS and Scholastic, among others. Mercury Seven's online
business expertise complements Xceed's content development capabilities
providing unique and powerful Internet solutions to clients.
<PAGE>
Xceed's ChannelSeven.com (www.ChannelSeven.com) - online network for Internet
development, marketing and advertising professionals worldwide
ChannelSeven.com is a division of MercurySeven. ChannelSeven.com
incorporates advanced cross-marketing navigational techniques and centralized,
rich-media advertising management to connect Internet professionals with
important news about the Internet and valuable information on resources and
services. In addition to the on-line network, ChannelSeven.com serves its core
audience with printed publications, special industry events such as the Momentum
AwardsSM, a speakers bureau and subscription-based e-mail newsletters. Sponsors
and advertisers include Intel, Netscape, AdKnowledge, Doubleclick, Warp 10,
Mecklermedia, Valuclick, Microsoft, InterVU Networks, Andover.net, Spree.com,
Enliven, GTE Superpages, Talk City, ICONOCAST, IBM, the @Home Network, EarthWeb
and Accipiter.
Xceed's Reset (www.reset.com) - interactive, online entertainment and corporate
communications
Reset is an innovative new media division of Xceed with a unique
approach that takes a client's message and produces an entertaining and
informative, interactive website. Acquired in August 1998, Reset works closely
with entertainment clients such as HBO, Time Warner, New Line Cinema, Interscope
Records, Loud Records and corporate clients such as Con Edison and the online
market newsletter The Street. Reset creates winning interactive strategies
ranging from innovative online branding and drivin Web traffic to developing
original content and implementing strategies for generating online revenues.
Specialties include Website design and software, game development, streaming
video, Internet commerce solutions, design and production of CD's and enhanced
CDs. Reset Websites have been recognized on-line: MSN Pick of the Day, Yahoo
Pick of the Day, and Cool Site of the Day. Reset has also garnered prominent
recognition off-line in publications including Variety, Newsweek, Entertainment
Weekly, Computer World, New Media and The Web Magazine.
Xceed's Zabit & Associates (www.zabit.com) - creative internal and external
integrated communications
Zabit & Associates is a recognized leader in integrated communications.
Acquired by Xceed in September, 1998, Z&A helps organizations solve problems and
capitalize on opportunities through smart communications planning and creative
communications solutions. Z&A's client list includes such leading organizations
as Aetna, Advanced Micro Devices, @Home, Charles Schwab, Cirrus Logic, Dell
Computer, EDS, Fidelity, Fireman's Fund, Intel, Kaiser Permanente, McKesson, MGM
Grand, NEC America, Oracle, Pitney Bowes, Promus, Sutter Health, TCW,
Transamerica, Unisys, Wellpoint, and Xerox New Enterprises, among others.
Xceed's TheraCom (www.xceed.com) - communications programs supporting the
pharmaceutical industry
TheraCom creates and implements integrated medical communications in
support of large drug companies' educational programs for physicians and allied
health professionals. TheraCom's blue chip client roster is lead by Pfizer, with
additional revenues from Merck and SmithKline, among others.
<PAGE>
Positioned to Xceed in the new economy...
We are enthusiastic about the potential of the new Xceed organization.
Our focus is to respond with speed and creativity to the opportunities and
demands generated by the new economy. We will continue to focus on our core
business strategy and objectives, acquiring people and companies to assist us in
executing our vision to the highest levels of quality, and divesting ourselves
of non-strategic assets that will allow us to continually refine and direct the
company.
We believe that ours is a powerful business model well positioned to
succeed in the new digital landscape.
Thank you for being a valued shareholder of our Xceed family. As we
continue to build the new Xceed we look forward to reporting to you the impact
we will continue to have in the marketplace of the next millennium.
Sincerely,
Scott Mednick, Werner Haase, Bill Zabit,
Chairman & Chief Strategic Officer Co-Chairman and CEO President
IMPORTANT NOTE: This shareholder report contains forward-looking statements as
defined in the private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on these forward-looking statements. These
forward-looking statements involve risks and uncertainties, including timely
development and upgrades to existing products, the impact of competitive
products and pricing, and other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission (SEC). In
particular, the Company's Form 10-K filed with the SEC in 1998 for the year
ended August 31, 1998 should be referenced.
