<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended November 30, 1998
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _____________ to ____________
Commission file number 0-13049
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X-CEED, INC.
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(Exact Name of Small Business Issuer as Specified in its charter)
NEW YORK 13-3006788
- --------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
488 MADISON AVENUE, NEW YORK, NEW YORK 10022
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(Address of Principal Executive Offices)
(212) 419-1200
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 13,795,092 as of
January 11, 1999
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X-CEED, INC. AND SUBSIDIARIES
INDEX
PART I
ITEM 1. Financial Information Page No.
Consolidated balance sheets
November 30, 1998 and August 31, 1998. . . . . . . . . . . . . . . . 3
Consolidated statements of operations
Three Months Ended November 30, 1998 and 1997 . . . . . . . . . . . 4
Consolidated statements of cash flows
Three Months Ended November 30, 1998 and 1997 . . . . . . . . . . . 5
Notes to consolidated financial statements . . . . . . . . . . . . . 6-7
ITEM 2. Management's Discussion and Analysis of
the Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . 8-10
PART II
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . 11-12
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2
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X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS NOVEMBER 30, AUGUST 31,
1998 1998
(As Restated
See Note 3)
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,647 $13,789
Investment in marketable securities 157 97
Accounts receivable, net of allowance for
doubtful accounts of $154 at November 30, 1998 and August 31, 1998 9,780 5,325
Program costs and earnings in excess of customer billings 1,791 3,287
Inventories 1,077 1,022
Prepaid expenses and other current assets 1,236 861
Deferred income taxes 169 14
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Total current assets 19,857 24,395
PROPERTY AND EQUIPMENT, net 2,636 1,533
DUE FROM OFFICER 1,223 1,223
GOODWILL, net 36,249 6,088
TRADEMARKS, net 3,147 -
DEFERRED INCOME TAXES 648 484
OTHER ASSETS 1,129 993
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$64,889 $34,716
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,565 $ 5,793
Current portion of long-term debt 1,037 41
Income taxes payable, current - 219
Customer billings in excess of program costs 2,288 1,009
Notes payable 4,800 -
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Total current liabilities 13,690 7,062
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LONG-TERM DEBT 2,475 -
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INCOME TAXES PAYABLE 720 -
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ACCRUED LEASE OBLIGATIONS 875 875
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DEFERRED REVENUES 578 587
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 30,000,000 shares;
13,702,695 and 10,277,053 issued and outstanding, respectively 137 103
Preferred stock, $.05 par value; authorized 1,000,000
shares; -0- issued and outstanding - -
Net unrealized (loss) on marketable securities (33) (27)
Additional paid-in capital 49,040 22,657
Unearned compensation (4,442) (112)
Retained earnings 1,920 3,642
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46,622 26,263
Treasury stock, at cost; 15,000 and 15,000 shares, respectively (71) (71)
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46,551 26,192
$64,889 $34,716
</TABLE>
See notes to consolidated financial statements.
3
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X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
------------------------
1998 1997
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(As Restated
see Note 3)
<S> <C> <C>
REVENUES, net $ 11,288 $ 10,282
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COST AND EXPENSES:
Cost of revenues 6,085 5,189
Selling, general and administraive 5,899 4,320
Research and Product Development 113 205
Amortization 1,546 -
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13,643 9,714
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OPERATING (LOSS) INCOME (2,355) 568
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OTHER INCOME (EXPENSE):
Interest and dividend income 109 121
Interest expense (49) (2)
Gain on sale of investment in marketable securities 5 347
Equity gain (loss) on investment 11 (44)
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77 421
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(LOSS) INCOME BEFORE INCOME TAXES (2,278) 989
INCOME TAX (BENEFIT) PROVISION (556) 544
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NET (LOSS) INCOME ($1,722) $ 445
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NET (LOSS) INCOME PER COMMON SHARE
Basic ($0.13) $0.06
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Diluted ($0.13) $0.06
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 13,687,706 7,033,491
=========== ==========
Diluted 13,687,706 7,686,404
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</TABLE>
See notes to consolidated financial statements.
4
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X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1998 1997
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(As Restated
See Note 3)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($1,722) $ 445
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Adjustment to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Gain on sale of marketable securities (5) (347)
Depreciation and amortization 1,725 66
Deferred Income Taxes (312) (154)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (2,038) (301)
Inventories (55) 54
Program costs and earnings in excess of billings 1,496 (69)
Prepaid expenses and other current assets (256) 80
Other assets (94) (35)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (1,440) 1,165
Income taxes payable (249) 189
Customer billings in excess of program costs 1,279 2,137
Deferred revenues (39) -
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Total adjustments 12 2,785
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Net cash (used in) provided by operating activities (1,710) 3,230
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities (130) -
Proceeds from sale of marketable securities 62 741
Business acquisitions, net of cash acquired (6,286) -
Acquisition of property and equipment (234) (219)
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Net cash (used in) provided by investing activities (6,588) 522
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (141) (10)
Advances to affiliate - (293)
Proceeds from excercise of warrants and options 297 3
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Net cash provided by (used in) financing activities 156 (300)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,142) 3,452
CASH AND CASH EQUIVALENTS - beginning of period 13,789 7,230
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CASH AND CASH EQUIVALENTS - end of period $ 5,647 $10,683
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</TABLE>
See notes to consolidated financial statements.
5
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X-CEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 1998
(UNAUDITED)
(in thousands, except share and per share data)
1. Basis of Quarterly Presentation:
The accompanying quarterly financial statements have been prepared in
conformity with generally accepted accounting principles.
The financial statements of the Registrant included herein have been
prepared by the Registrant pursuant to the rules and regulations of
the Securities and Exchange Commission and, in the opinion of
management, reflect all adjustments which are necessary to present
fairly the results for the period ended November 30, 1998.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations; however, management believes that the
disclosures are adequate to make the information presented not
misleading. This report should be read in conjunction with the
financial statements and footnotes therein included in the audited
annual report on Form 10-K as of August 31, 1998.
2. Principle of Consolidation:
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Upon
consolidation, all significant intercompany accounts and transactions
are eliminated.
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 he
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.
3. Restatement:
During 1999, the Company made several business acquisitions. During the first
three quarters of 1999, the Company had not completed its evaluation of the
useful lives of related goodwill and intangible assets, however had utilized
15 to 25 years for interim reporting purposes. During the fourth quarter of
1999, the Company completed an evaluation of the amortization periods of
goodwill and other intangible assets, as a result the Company adopted
amortization periods of 7 to 12 years. The impact of this reduction in lives
was $420 for the three months ended November 30, 1998. The accompanying
financial statements have been restated to reflect the reduced lives.
4. Inventories consisted of the following:
November 30, 1998 August 31, 1998
----------------- ---------------
(unaudited)
Raw Materials $ 747 $ 612
Finished goods 330 410
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$1,077 $1,022
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6
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5. Supplemental Information - Statements of Cash Flow:
Quarter Ended
November 30,
1998 1997
Interest paid........................ $ 49 $ 2
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Income taxes paid.................... $291 $465
======= ======
During the three months ended November 30, 1998, the Company issued
3,332,057 shares of common stock in connection with the Mercury
Seven, Inc. and Zabit & Associates, Inc. mergers.
6. Earnings Per Share:
During Fiscal 1998, The Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 128, "Earnings per share."
Basic earnings per common share is computed by dividing the net
earnings by the weighted average number of shares of common stock
outstanding during the period. Dilutive earnings per share gives
effect to stock using and warrants which are considered to be
dilutive common stock equivalents. Treasury share have been excluded
from the weighted average number of shares. Earnings per share have
been retroactively restated to reflect FASB No. 128 for all prior
periods presented.
Net earnings for basic and dilutive computations were equivalent for
all periods presented. The following is a reconciliation of the weighted
average shares:
Three Months ended
November 30,
1998 1997
---- ----
Basic 13,687,706 7,033,491
effect of dilutive
securities - 652,913
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Diluted 13,687,706 7,686,404
========== =========
7. Income Taxes:
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
8. Amortization:
The amortization period of intangibles assets is as follows:
Goodwill 7 to 12 years
Trademarks 3 years
Unearned Compensation 2 years
7
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MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
During the quarter ended November 30, 1998 as part of the Company's
ongoing effort to evolve its core business into a fully integrated marketing
and communications company it acquired Mercury Seven, Inc. and Zabit &
Associates by way of merger. The first of the acquisitions was Mercury Seven,
Inc., a privately held company which was established in 1996. The Company paid
a total consideration consisting of 1,073,333 shares of restricted common
stock having a market value of $8,050 and cash of $1,500. Mercury Seven, Inc.
is engaged in creating Internet-based business solutions for corporate
clients. The second acquisition was Zabit & Associates, Inc., also a privately
held company which was established in 1993. The Company paid a total
consideration consisting of 2,258,724 shares of restricted common stock having
a market value of $18,070 and the issuance of four notes totaling $6,670. In a
separate transaction, the Company purchased all of the outstanding stock of
Water Street Design, Inc., a company which was owned by the principals of
Zabit & Associates, Inc. for $2,000 and the trade name and trademark of Zabit
for $3,200 in cash. Zabit & Associates, Inc. is primarily engaged in advising
companies and organizations in developing strategic communication solutions
for employee, shareholder and customer information. Zabit & Associates is also
engaged in providing marketing and public relations services.
Net revenues for the three months ended November 30, 1998 and 1997,
respectively, were $11,288 and $10,282 representing a 10% increase. During the
current period the Performance Group experienced a decline in revenues of
$3,100 as a result of a temporary discontinuance by one client of a certain
incentive marketing and communications program. As of September 1, 1998, the
Company was re-awarded this contract. The Company anticipates that revenues
and gross profits will be favorably affected in the second and third quarters.
The newly acquired divisions accounted for $4,200 in revenues during the
current period which offset the decline in revenues from the Performance
Group.
Cost of revenues for the period ending November 30, 1998 was $6,085
as compared to $5,189 for the period ended November 30, 1997, representing 54%
and 50% of net sales, respectively. The increase in cost of revenues during
the current period is attributable to direct cost of project operations
related to the newly acquired divisions. Selling, general and administrative
expenses for the period ended November 30, 1998 were $5,899 as compared to
$4,320 for the period ended November 30, 1997, representing 51% and 42% of net
sales, respectively. The increase in selling, general and administrative
expenses during the current
8
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period is a result of expenses which relate to the newly acquired divisions.
In addition, during the current period, the Company's Performance Group
incurred additional expenses for personnel cost for marketing.
Research and product development expense of $113 was incurred during
the three months ended November 30, 1998 in the development of E-Commerce
ventures. Research and product development expense of $205 was incurred during
the three months ended November 30, 1997 for the continued development of the
Performance Group's Maestro software. Amortization expense during the three
months ended November 30, 1998 was $1,546 primarily resulting from the
goodwill and unearned compensation amortization related to the Company's newly
acquired divisions which were not present in the corresponding prior period.
Other income for the three months ended November 30, 1998 was ($25) as
compared to $421 for the corresponding prior period. The corresponding
prior period reflected a gain on sales of investments of $347 as compared to
$5 for the current period.
The Company's effective tax rate for the three months ended November
30, 1998 was (24%) as compared to 55% for the three months ended November 30,
1997. The increase in the effective tax rate is due to non-deductible goodwill
in connection with the recent mergers that increased the Company's effective
tax rate.
LIQUIDITY AND CAPITAL RESOURCES:
At November 30, 1998 the Company had working capital of $6,167 as
compared to $17,333 at August 31, 1998. The decrease in working capital for
the current period is a result of a decrease in cash and cash equivalent of
$6,700 for the acquisitions of Mercury Seven, Inc. and Zabit & Associates,
Inc. Also attributing to the decrease, is a note payable to the former
principals of Zabit & Associates, Inc. for $4,800 which is payable on or
before March 15, 1999. The Company at present is re-negotiating its credit
facility with its lead bank. The current facility provides for a $600 term
loan bearing interest at 1/2% over the bank's prime and a line of credit
facility of $2,500 bearing interest at the bank's prime rate. In addition, the
credit facility also provides for a foreign exchange line in the amount of
$2,000 which may be used to hedge against fluctuations in foreign currency.
The consolidated statement of cash flows for the period ended
November 30, 1998 reflects net cash used in operating activities of $1,710
resulting from a net loss of $1,302, an increase in accounts receivable of
$2,038 and an decrease in accounts payable and accrued expenses of $1,440.
Cash used in investing activities was $6,588, resulting from business
acquisitions of $6,286. Cash provided by financing activities approximated
$156.
9
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The Company believes that it has adequate working capital for at
least the next twelve months of operations at current levels. As of January
13, 1999 the Company had approximately $10,110 in cash and cash equivalents.
10
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PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
There is no material litigation currently pending against
the Company, its officers or employees.
ITEM 2 - Changes in Securities
None
ITEM 3 - Defaults on Senior Securities
None
ITEM 4 - Submission to a Vote of Security Holders
None
ITEM 5 - Other Information
None
ITEM 6 - Exhibits and Reports on Form 8-K
(a) (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. (1)
(2)(f)Certificate of Merger of Mercury Seven, Inc. Into
X-ceed Merger, Inc. (1)
(2)(g)Agreement and Plan of Merger among X-ceed, Inc.,
Zabit & Associates, Inc. And the Shareholders named
therein (1)
(2)(h)Certificate of Merger of Zabit & Associates, Inc.
and the shareholders named therein (1)
(10)(j)Stock Purchase Agreement among X-ceed, Inc.,
William Zabit and Joyce Weslowski (1)
(10)(k)Purchase Agreement by and among X-ceed, Inc.,
William Zabit and Joyce Weslowski (1)
(10)(l)Employment Agreement of Scott Mednick (2)
Employment Agreement of William Zabit (2)
(b) (1)The Company's Current Report on Form 8-K, together with
exhibits, dated September 17, 1998 and filed with the
Commission on September 17, 1998.
(2)The Company's Current Report on Form 8-K/A, together with
audited financial statements for Reset, Inc and Mercury
Seven, Inc. and unaudited pro-forma combined financial
statements, dated November 10, 1998 and filed with the
Commission on November 10, 1998.
11
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(3)The Company's Current Report of form 8-K/A, together with
audited financial statements of Zabit & Associates, Inc. and
affiliate and unaudited statements and pro-forma combined
financial statements, filed with Commission on November 30,
1998.
12
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X-CEED, INC.
488 MADISON AVENUE
NEW YORK, N.Y. 10022
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FILE # 0-13049
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BY: /s/ Werner Haase
------------------------
WERNER HAASE,
CEO
DATE: April 11, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> NOV-30-1998
<CASH> 5,647
<SECURITIES> 157
<RECEIVABLES> 9,780
<ALLOWANCES> 154
<INVENTORY> 1,077
<CURRENT-ASSETS> 19,857
<PP&E> 3,704
<DEPRECIATION> 1,068
<TOTAL-ASSETS> 64,889
<CURRENT-LIABILITIES> 13,590
<BONDS> 2,475
<COMMON> 137
0
0
<OTHER-SE> 46,414
<TOTAL-LIABILITY-AND-EQUITY> 64,889
<SALES> 11,288
<TOTAL-REVENUES> 11,288
<CGS> 6,085
<TOTAL-COSTS> 6,085
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149
<INCOME-PRETAX> (2,278)
<INCOME-TAX> (556)
<INCOME-CONTINUING> (1,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,722)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
