<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, 2000
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-13049
WORLDWIDE XCEED GROUP, INC.
------------------------------------------------------
(Exact Name of registrant as specified in its charter)
DELAWARE 13-3006788
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
233 BROADWAY, NEW YORK, NEW YORK 10279
------------------------------------ ----------------
(Address of Principal (Zip Code)
Executive Offices)
(212) 553-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
-----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes __X ___
No ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes _____ No ______
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's common stock as of January 12,
2001 was 48,217,112.
<PAGE>
WORLDWIDE XCEED GROUP, INC. AND SUBSIDIARIES
INDEX
PART I
ITEM 1. Financial Information Page No.
Consolidated Balance Sheets
November 30, 2000 and August 31, 2000..................... 3
Consolidated Statements of Operations
Three Months Ended November 30, 2000 and 1999............. 4
Consolidated Statements of Cash Flows
Three Months Ended November 30, 2000 and 1999............. 5
Notes to Consolidated Financial Statements................ 6-7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8-12
PART II
Other Information.......................................... 13
Signatures................................................. 14
2
<PAGE>
PART I
ITEM 1 FINANCIAL INFORMATION
WORLDWIDE XCEED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
November 30, August 31,
2000 2000
------------ ----------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,074 $ 9,888
Restricted cash 1,930 1,930
Investment in marketable securities 382 382
Accounts receivable, net of allowance for
doubtful accounts of $6,751 and $9,359, respectively 10,602 11,607
Income tax refund receivable 270 270
Prepaid expenses and other current assets 573 799
Deferred income taxes 358 358
Net assets related to discontinued operations - 2,936
-------- --------
Total current assets 16,189 28,170
PROPERTY AND EQUIPMENT, net 12,630 14,285
NOTE RECEIVABLE 570 615
INTANGIBLE ASSETS, net 51,175 75,473
DEFERRED INCOME TAXES 1,046 1,046
OTHER ASSETS 170 401
-------- --------
$ 81,780 $119,990
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $12,179 $13,003
Accrued restructuring costs 2,559 -
Accrued compensation 543 278
Notes payable, banks - 60
Current portion of long-term debt 466 955
Other current liabilities 442 -
-------- --------
Total current liabilities 16,189 14,296
-------- --------
LONG-TERM DEBT 175 527
ACCRUED LEASE OBLIGATION - 789
-------- --------
Total liabilities 16,364 15,612
-------- --------
CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED STOCK
Series A 4%, $0.05 par value; authorized
30,000 shares; 0 and 30,000 issued and outstanding
at November 30, 2000 and August 31, 2000,
respectively - 30,450
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized
100,000,000 shares; 28,790,241 and
24,127,241 issued and outstanding,
respectively 288 241
Preferred Stock, $0.05 par value;
authorized 1,000,000 shares; 26,653 and 0
issued and outstanding at November 30, 2000
and August 31, 2000, respectively 1 -
Common stock warrants 16,819 12,087
Accumulated other comprehensive income 4 67
Additional paid-in capital 271,080 240,258
Deferred stock compensation (654) (932)
Deferred stock warrant costs (229) -
Treasury stock, at cost; 15,000 shares (71) (71)
Accumulated deficit (221,822) (177,722)
-------- --------
65,416 73,928
-------- --------
$ 81,780 $ 119,990
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
WORLDWIDE XCEED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
--------------------------------
2000 1999
----------- ------------
<S> <C> <C>
REVENUES, net $ 13,038 $ 15,495
-------- --------
OPERATING EXPENSES:
Cost of revenues 10,577 11,913
Selling, general and administrative 12,270 8,040
Provision for doubtful accounts 673 600
Write off of leasehold improvements 1,997 -
Stock Compensation 278 -
Impairment of Goodwill 25,977 -
Gain on sale of business (3,016) -
Research and development - 18
Restructuring charges 3,704 -
Depreciation and amortization 4,454 1,797
----------- --------
56,914 22,368
----------- --------
OPERATING LOSS (43,876) (6,873)
----------- --------
OTHER INCOME (EXPENSE):
Interest and dividend income 53 158
Interest expense (23) (72)
Other, net 55 1
----------- --------
85 87
----------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAX BENEFIT (43,791) (6,786)
INCOME TAX BENEFIT - (2,027)
----------- --------
LOSS FROM CONTINUING OPERATIONS (43,791) (4,759)
INCOME FROM DISCONTINUED OPERATIONS,
net of tax provision of $0 and $504, respectively - 678
----------- --------
NET LOSS $ (43,791) $ (4,081)
Preferred Stock dividends 310 -
----------- --------
Net loss applicable to common shareholders $(44,101) $ (4,081)
=========== ========
NET LOSS PER COMMON SHARE
Loss from continuing operations ($1.73) ($0.26)
Income from discontinued operations - $0.04
----------- --------
Net loss ($1.73) ($0.22)
=========== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING: 25,515,966 18,240,791
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
WORLDWIDE XCEED GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(43,791) $(4,081)
Adjustment to reconcile net loss to net cash
used in operating activities:
Gain on sale of businesses (3,016) -
Impairment of leasehold improvements 1,997 -
Impairment of goodwill 25,977 -
Depreciation and amortization 4,454 1,840
Non-cash compensation 278 -
Deferred income taxes - (1,591)
Provision for doubtful accounts 673 600
Changes in operating assets and liabilities:
Accounts receivable (743) (4,272)
Inventories - 54
Program costs and earnings in excess of
customer billings 543 (2,360)
Prepaid expenses and other current assets 226 208
Other assets 179 73
Accounts payable and accrued expenses 1,537 764
Accrued restructuring costs 2,559 -
Income taxes payable - (5)
Customer billings in excess of program costs
and earnings 4,192 3,735
Other liabilities - (159)
-------- --------
Net cash (used in) operating activities (4,935) (5,194)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired - (4,500)
Acquisition of property and equipment (2,026) (933)
-------- --------
Net cash (used in) investing activities (2,026) (5,433)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt, net (842) (107)
Payment of notes payable (60) -
Proceeds from note receivable 45 -
Proceeds from exercise of warrants and options 4 1,169
-------- --------
Net cash (used in) provided by financing activities (853) 1,062
-------- --------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (7,814) (9,565)
CASH AND CASH EQUIVALENTS - beginning of period 9,888 19,754
-------- --------
CASH AND CASH EQUIVALENTS - end of period $ 2,074 $10,189
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
WORLDWIDE XCEED GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2000
(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, consisting of normal and recurring adjustments,
which are necessary to present fairly the results for the period ended
November 30, 2000.
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 for the fiscal year
ended August 31, 2000.
2. PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Upon consolidation, all
intercompany accounts and transactions are eliminated.
3. SUPPLEMENTAL INFORMATION - STATEMENTS OF CASH FLOW:
<TABLE>
<CAPTION>
Three Months Ended
November 30,
-------------------
2000 1999
<S> <C> <C>
Interest paid.............................. $ 23 $ 72
===== ====
</TABLE>
6
<PAGE>
NON-CASH FINANCING AND INVESTING ACTIVITIES:
<TABLE>
<CAPTION>
Three Months Ended
November 30,
-------------------
2000 1999
<S> <C> <C>
Common stock issued in
connection with acquisitions................... $ -- $8,200
===== ======
</TABLE>
4. DISCONTINUED OPERATIONS AND SALE OF NON STRATEGIC ASSETS
In January 2000, the Company completed the sale of its Water-Jel
division to an unrelated company for $4 million in cash. Also, in
January 2000, the Board of Directors approved a plan to sell the
Company's Journeycorp division. Accordingly, the Company segregated the
operating results from continuing operations of Water-Jel and
Journeycorp for the three months ended November 30, 1999. Revenues,
income from discontinued operations before tax provisions and income from
discontinued operations net of tax provisions were $4,433, $1,182 and
$678, respectively, for the three months ended November 30, 1999.
5. BASIC AND DILUTED NET INCOME PER COMMON SHARE:
Basic net income per common share is based on the weighted average number
of shares of common stock outstanding during each year. Diluted net income
per common share is based on the weighted average number of shares of
common stock outstanding during each year, adjusted for the dilutive effect
of common potentially issuable shares arising from the assumed exercise of
stock options and warrants and conversion of preferred shares. Basic loss
per common share was computed by dividing net loss by the weighted average
number of shares of common stock outstanding. Diluted loss per common share
does not give effect to the impact of options, warrants and conversion of
preferred shares because their effect would have been anti-dilutive.
6. INCOME TAXES:
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis 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. No tax benefit has been
recognized during the three month period ended November 30, 2000 since
realization of net deferred tax assets cannot be reasonably assured.
7. RESTRUCTURING CHARGES:
In the first quarter of fiscal 2001, the Board of Directors approved and
management initiated a restructuring plan in connection with certain of
its operations. The plan was designed to implement a profitable business
model and the divestiture of non-strategic assets. The restructuring
included the completed sale of the Performance Enhancement Business and
a workforce reduction. Restructuring costs of $3.7 million primarily
relate to severance and related benefits of $1.6 million and lease
termination costs of $2.1 million due to the anticipated relocation,
down-sizing and closing of various offices.
8. IMPAIRMENT OF GOODWILL:
The Company reviews long-lived assets and certain identifiable
intangibles to be held and used, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset exceeds the fair value of the asset. During the first
quarter of fiscal 2001, the Company evaluated the carrying value of the
goodwill and other intangibles related to their acquisitions. As a
result, unamortized goodwill of $25,977 related to certain of these
acquisitions was written off. This write-off was the result of the
significant decrease in the number of employees that remained with Xceed
following certain acquisitions, a significant decrease in the profit
that could be generated from the remaining employees acquired, a loss of
recurring projects from the clients obtained through certain
acquisitions and a decrease in the market values of similar types of
businesses in the current marketplace.
9. CONVERSION OF SERIES A CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Beginning on October 13, 2000, the conversion price applicable to
outstanding Series A Cumulative Redeemable Convertible Preferred Stock
adjusted (pursuant to the terms of the offering documents) to the lowest
of the daily weighted average trading prices of our outstanding common
stock on the Nasdaq National Market for the ten trading days preceeding
and including the conversion date. In addition, as of November 30, 2000,
no conditions existed which gave the holders of the Series A Cumulative
Redeemable Convertible Preferred Stock the right to redeem such shares.
As a result, such shares have been reflected as a component of
stockholders equity as of November 30, 2000.
10. RECLASSIFICATIONS:
Certain reclassifications have been made to the financial statements as
of and for the three months ended November 30, 1999 to conform with the
classifications used in 2000.
7
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of Worldwide Xceed Group, Inc. (referred to below as the Company or
Xceed) should be read in conjunction with our consolidated financial statements
that appear in this document.
OVERVIEW
We are an Interactive Architect and solutions builder. We help companies develop
e-commerce and e-business solutions, improving people and business performance
through communication tools, techniques and technologies. Due to recent and
continuing changes in our business model and our restructuring plans,
comparisons of year-to-year performance may not be indicative of performance or
changes in performance.
RESTRUCTURING PLANS
In direct response to fiscal 2000 performance, there have been various
executive level management changes during the fourth quarter of fiscal 2000
and the first quarter of fiscal 2001. Our new management team has developed
and commenced implementation of a restructuring plan which management
believes will enable us to focus on our position as an Interactive Architect.
The restructuring plan seeks to implement a profitable business model and
contemplates the divestiture of non-strategic assets. Pursuant to the plan,
during the first quarter of fiscal year 2001, we sold our Performance
Enhancement Business and our Retail Solutions Group, Inc. and completed a
reduction in force. During the remainder of fiscal year 2001, management
expects to continue to implement the plan, leverage our current strategic
alliance with Spherion Corporation and continue the redirection of our target
client base to Fortune 1000 companies. In addition, management hopes to
sublease a portion of our New York corporate office, further integrate the
previous year's acquisitions and maximize resulting efficiencies, reduce our
discretionary advertising expenditures, increase the productivity of our
employees, increase revenue per hour on prospective projects, reduce and
restructure certain unprofitable locations acquired through past business
combinations, obtain additional equity from third-party sources and implement
additional cost cutting measures.
SALE OF NON-STRATEGIC ASSETS
In October 2000, the Company sold the operations previously acquired by our
acquisition of Enterprise Solutions Group, Inc., Catalyst Consulting Services,
Inc. and a portion of the operations of Sterling Carteret, Inc. to Xceed Retail
Solutions Group, Inc. a company formed and privately-owned by Gary S. Kahl, our
former Executive Vice President of National Practices, and other former
employees of Xceed in a negotiated transaction in exchange for the assumption by
Xceed Retail Solutions Group of the liabilities related to these operations. In
connection with that sale, we granted a temporary nonexclusive license to Xceed
Retail Solutions Group to use the XCEED service mark. The license expires on
January 26, 2001. Upon consummation of the sale of these operations to Xceed
Retail Solutions Group, Mr. Kahl, and the other former employees joining Xceed
Retail Solutions Group resigned from their positions with Xceed and agreed to
relinquish their Xceed stock options and all claims for severance compensation.
In November 2000, the Company sold our Performance Enhancement Business to 488
Performance Group, Inc., a company formed and privately-owned by Werner G.
Haase, our former President, Chief Executive Officer, Co-Chairman and director,
in a negotiated transaction in exchange for a purchase price comprised of a
promissory note from 488 Performance Group in the principal amount of
$3,600,000, the assumption by 488 Performance Group of all liabilities related
to the Performance Enhancement Business and the retention by the Company of
$2,000,000 in cash collected from receivables associated with the Performance
Enhancement Business. The purchase price is subject to subsequent adjustment
based upon the net worth of the Performance Enhancement Business as of the
closing date of the sale. Upward adjustments of the purchase price were to be
added to the principal amount of the purchase note and were unlimited. Downward
adjustments of the purchase price were to be deducted from the principal amount
of the purchase note, subject to a maximum downward adjustment of $3,600,000.
Due to the uncertain nature of the final accounting, the note was not recorded
in determining the gain or loss from the sale of the Performance Enhancement
Business. The sale included the sale of the assets of our Performance
Enhancement Business in Atlanta, Georgia and the sale of one hundred percent of
the capital stock of Journeycraft, Inc., which was a wholly-owned subsidiary of
Xceed immediately prior to the closing of the sale and the owner of the
Performance Enhancement Business based in New York, to 488 Performance Group.
Upon consummation of the sale of the Performance Enhancement Business to 488
Performance Group, Mr. Haase resigned from all of his positions with Xceed, but
his resignation as President was not effective until November 16, 2000. In
addition, upon closing of the sale, Mr. Haase relinquished all future
compensation and stock options from Xceed, other than options to purchase an
aggregate of 43,750 shares of Common Stock, and a third party purchased from
Xceed for $100,000 cash a promissory note to Journeycraft, payable by Mr.
Haase, maturing in 2016 and having a balance of $1,247,483 as of the date
of sale.
8
<PAGE>
Results of Operations
The following table sets forth the percentage of revenues to certain items
included in our consolidated statements of operations.
<TABLE>
<CAPTION>
Three Months Ended
November 30,
-------------------
2000 1999
----- ------
<S> <C> <C>
Revenues............................................ 100.0% 100.0%
------ -----
Operating expenses:
Cost of revenues................................ 81.1 76.9
Selling, general and administrative............. 94.1 51.9
Provision for doubtful accounts..................... 5.2 3.9
Depreciation and amortization................... 34.2 11.6
Research and development........................ 0.0 0.1
Gain on sale of
Non-strategic assets........................... (23.1) 0.0
Stock Compensation............................. 2.1 0.0
Restructuring Charges.......................... 28.4 0.0
Impairment of Goodwill......................... 199.2 0.0
Write-off of Leasehold.............................. 15.3 0.0
------ -----
Total operating expenses........................... 436.5% 144.4%
Operating loss..................................... (336.5%) (44.4)%
Loss from continuing operations.................... (335.9%) (30.7)%
</TABLE>
Three Months Ended November 30, 2000 to Three Months Ended November 30, 1999
Revenues for the three months ended November 30, 2000 decreased 15.9% to $13.0
million from $15.5 million for the three months ended November 30, 1999.
Internet professional services revenues increased 52.9% to $13.0 million from
$8.5 and revenues from our Performance Enhancement Business decreased 100% to
zero from $7.0 million. The increase in Internet professional services revenues
reflects the continued internal growth of our Internet professional services,
which increased in both size and scope relating to client projects. This
increase was also attributable to a series of acquisitions completed during the
prior fiscal year. The decrease in revenues from our recently sold Performance
Enhancement Business was attributable to no closed programs during the period
prior to the sale.
Cost of revenues includes salaries, benefits and incentive compensation of
billable employees. Billable employees are full-time employees whose time
spent working on client projects is charged to that client at agreed upon rates.
Billable employees are our primary source of Internet professional services
revenue. Cost of revenues for the three months ended November 30, 2000 decreased
to $10.6 million from $11.9 million for the three months ended November 30,
1999. As a percentage of revenues, cost of revenues increased to 81.1% for the
three months ended November 30, 2000 from 77% for the three months ended
November 30, 1999. The decrease in cost of revenues was primarily attributable
to the restructuring that the Company has implemented throughout the quarter.
Selling, general and administrative expense includes promotion and new
business development expenses, salary and benefit costs of non-billable
employees, rent, accounting, legal and human resources costs and costs not
allocated to research and development. Selling, general and administrative
expense for the three months ended November 30, 2000 increased 52.6% to $12.2
million from $8.0 million for the three months ended November 30, 1999. As a
percentage of revenues, selling, general and administrative expense increased
to 94.1% for the three months ended November 30, 2000 from 51.9% for the
three months ended November 30, 1999. The increase in selling, general and
administrative expense was a direct result of increased selling, marketing
and corporate expenses, including administrative personnel and increased
infrastructure-related costs associated with our provision of Internet
professional
9
<PAGE>
services and the expansion of our locations. In addition, we incurred
additional selling, general and administrative expense in connection with
acquisitions. Selling, general and administrative expense also includes all
terminated non-billable employees' salaries incurred during the quarter prior
to their actual severance from the Company, and the selling, general and
administrative expenses of $0.9 million incurred by the businesses sold
during the quarter.
Provision for doubtful accounts includes estimates of losses on all contracts
made during the period in which such losses become probable and can be
reasonably estimated. Provision for doubtful accounts for the three months ended
November 30, 2000 was $0.7 million. As a percentage of revenues, provision for
doubtful accounts was 5.2% for the three months ended November 30, 2000.
Depreciation and amortization expense primarily includes depreciation of
technology equipment, furniture and fixtures and leasehold improvements.
Amortization of goodwill expense includes charges for the excess of purchase
price over net tangible book value of acquired companies, and goodwill is
typically amortized over a period of seven to twelve years. Depreciation and
amortization expense for the three months ended November 30, 2000 increased
147.9% to $4.5 million from $1.8 million for the three months ended November 30,
1999. As a percentage of revenues, depreciation and amortization expense for the
three months ended November 30, 2000 increased to 34.2% from 11.6% for the three
months ended November 30, 1999. The increase in depreciation and amortization
expense was primarily the result of increased amortization expenses associated
with the fiscal year 2000 amortization of intangible assets from acquisitions
made by us. In addition, we incurred increased depreciation and amortization
expense as a result of increased fixed assets purchases of computer and other
related equipment as well as amortization of leasehold improvements associated
with the increased number of our locations. Depreciation and amortization
expense recognized during the quarter were unaffected by impairment of goodwill
recognized at the end of the quarter. We accelerated the depreciation of
certain leasehold improvements in anticipation of early lease termination of
the current New York office. The Company also reduced the straight-line
depreciation on computer hardware from seven to three years.
As a result of recent downsizing in anticipation of the Company's expected
early termination of its New York office lease obligation, the Company
expensed leasehold obligations of $2.0 million related to space vacated
during the quarter. In addition, the Company accelerated the depreciation on
the remaining leasehold obligations to reflect the shorter expected lease
term.
Research and development expense includes costs associated with the design,
development, testing, deployment and enhancement of our services. Research
and development expense for the three months ended November 30, 2000
decreased 100% from $18 thousand for the three months ended November 30,
1999. Research and development expense for the three months ended November
30, 1999 was primarily incurred in connection with the development of an
e-commerce product. The expenses were incurred in connection with the
Performance Enhancement Business software, with development ending during
fiscal 1999.
In the first quarter of fiscal 2001, the Board of Directors approved and
management initiated a restructuring plan in connection with certain of our
operations. The plan was designed to implement a profitable business model
and the divestiture of non-strategic assets. The restructuring included the
completed sale of the Performance Enhancement Business and a workforce
reduction. Restructuring costs of $3.7 million primarily relate to severance
and related benefits of $1.6 million and lease termination costs of $2.1
million due to the anticipated relocation, down-sizing and closing of various
offices. As of November 30, 2000, payments of $1.1 million have been made for
these costs.
The Company reviews long-lived assets and certain identifiable intangibles to
be held and used, including goodwill, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
exceeds the fair value of the asset. During the first quarter of fiscal 2001,
the Company evaluated the carrying value of the goodwill and other
intangibles related to their acquisitions. As a result, unamortized goodwill
of $25,977 related to certain of these acquisitions was written off. This
write-off was the result of the significant decrease in the number of
employees that remained with Xceed following certain acquisitions, a
significant decrease in the profit that could be generated from the remaining
employees acquired, a loss of recurring projects from the clients obtained
through certain acquisitions and a decrease in the market values of similar
types of businesses in the current marketplace.
Other income, net for the three months ended November 30, 2000 decreased 2.3%
to $85 thousand from $87 thousand reported for the three months ended
November 30, 1999.
No income tax benefit was recorded for the three months ended November 30,
2000 due to the Company's recurring losses. An income tax benefit of $2.0
million was recorded for the three months ended November 30, 1999. Our
effective tax rate for the three months ended November 30, 1999 was 29.9%.
Stock based compensation of $0.3 million was recorded for the three months
ended November 30, 2000 due to the amortization of unearned compensation
associated with the method five, inc. acquisition completed during the prior
fiscal year.
For the three months ended November 30, 2000, we incurred a loss from continuing
operations of $43.8 million, as compared to a loss from continuing operations of
$4.8 million for three months ended November 30, 1999. Our loss for the three
months ended November 30, 2000 is primarily due to goodwill impairment of $26.0
million , depreciation and amortization of $4.5 million, restructuring costs of
$3.7 million and write-off of leasehold improvements of $2.0 million.
10
<PAGE>
Income, net of related taxes, from discontinued operations decreased 100% for
the three months ended November 30, 2000 from $0.7 million for the three months
ended November 30, 1999. Discontinued operations includes results from our
Water-Jel division, which was sold in January 2000, and our Journeycorp division
which was sold in July 2000.
We reported a net loss of $43.8 million for the three months ended November 30,
2000, compared to a net loss of $4.1 million for the three months ended November
30, 1999. The net loss was due to the factors described above.
Recently Issued Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which was
subsequently amended by SFAS 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of SFAS 133, and SFAS 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at fair value. This
statement also requires that changes in fair value be recognized in earnings
unless specific hedge accounting criteria are met. SFAS 133, as amended by SFAS
137 and SFAS 138, was adopted by the Company on applies to us beginning
September 1, 2000 and did not have a material impact on our financial condition
or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, which provides
guidance related to revenue recognition based on interpretations and practices
followed by the SEC. SAB 101 requires companies to report any changes in revenue
recognition as a cumulative change in accounting principle at the time of
implementation in accordance with Accounting Principles Board Opinion No. 20,
Accounting Changes. We are required to implement SAB 101 no later than the
fourth quarter of fiscal 2001 in accordance with SAB No. 101B "Delaying
Implementation of SAB 101," which was issued in June 2000. We do not expect
the implementation of SAB 101 to have a material effect on our financial
position or results of operations.
Liquidity and Capital Resources
As of November 30, 2000, we had a working capital shortfall of $0.1 million, a
decrease of $14.0 million from working capital of $13.9 million as of August 31,
2000.
For the quarter ended November 30, 2000 the Company used $4.9 million in
operating activities. This was a result of a net loss of $43.8 million offset
by impairment of goodwill of $26.0 million, depreciation and amortization of
$4.5 million, an increase in accrued restructuring costs of $2.6 million,
impairment of leasehold improvements of $2.0 million, accounts payable and
other accrued expenses of $1.5 million, provision for doubtful accounts of
$0.7 million and non-cash compensation of $0.3 million.
For the quarter ended November 30, 2000 the Company used $2.0 million in
investing activities. This was a result of the Company's investment in systems,
software and facilities during the period.
For the quarter ended November 30, 2000 the Company used $0.9 million in
financing activities. This was primarily the result of repayment of long-term
debt of $842 thousand.
We expect our working capital needs to be funded through our current cash
resources, cash flow from operations, and third party credit facilities. In
this regard, in November 2000 we entered into a $5,000,000 revolving credit
facility with Spherion Corporation secured by a security interest in our
accounts receivable. The proceeds of advances under the facility may be used
to fund operating expenses. Interest accrues on the revolving loans at the
prime rate plus 2% per annum. The facility expires in May 2002. Upon the
occurrence of customary defaults, Spherion has the right to exercise the
rights and remedies of a secured creditor and, in addition, upon the
occurrence of certain extraordinary company transactions, Spherion has the
right to terminate its nonsolicitation obligations under its Joint Marketing
Agreement with Xceed and the right to take assignment of the customer
agreements entered into jointly with Spherion under the Joint Marketing
Agreement. In connection with the facility, we issued to Spherion a warrant
to purchase up to 3.5 million shares of our common stock at a price of
$1.6875 per share. The warrants may be exercised, in whole or in part, at any
time, until November 2005.
As of November 30, 2000, we had no outstanding balance owing under the
Spherion revolving credit facility. However, on December 29, 2000 we made our
first borrowing under the Spherion revolving credit facility and, as of
January 16, 2001, we have an outstanding balance of $1,000,000 of principal
owed under the Spherion credit facility.
We believe the combination of our current cash resources, cash flow from
operations and the Spherion credit facility will be sufficient to fund our
operations and to satisfy our cash requirements for the next twelve months.
There may be circumstances that would
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accelerate our use of liquidity sources, including, but not limited to, our
inability to implement a profitable business model and complete our
restructuring plan. If this occurs, we may, from time to time, incur additional
indebtedness or issue, in public or private transactions, equity or debt
securities. However, there can be no assurance that suitable debt or equity
financing will be available to us.
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PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
------ -----------------
The Company sued Drinks.com on May 26, 2000 in the supreme court of the state of
New York, in the county of New York, commercial division. The Company's
complaint alleged breach of contract arising from Drinks.com's failure to pay
approximately $1.5 million for services performed by the Company. Drinks.com
counterclaimed on July 21, 2000 for $14 million, alleging that the Company's
poor performance caused Drinks.com to lose projected revenue (not profits). The
Company moved to dismiss the counterclaim and, as of January 16, 2001,
Drinks.com had not filed a response to the Company's motion to dismiss. As a
result, Drinks.com is currently in default on its counterclaim.
ITEM 4 -- SUBMISSION TO A VOTE OF SECURITY HOLDERS
------ ----------------------------------------
A Special Meeting of Stockholders was held on October 5, 2000. An amendment to
the Company's Certificate of Incorporation was approved, changing our name to
Worldwide Xceed Group, Inc. 17,246,003 votes were cast for the approval of the
amendment, 226,284 votes were against approval and there were 36,998
abstentions. The Xceed Inc. Amended and Restated Millennium Stock Option Plan
was approved and ratified. 6,880,564 votes were cast for the approval of the
plan, 2,520,733 votes were against approval and there were 36,463 abstentions.
The issuance of shares of Series A Cumulative Convertible Preferred Stock and
warrants to purchase shares of our common stock and the issuance of shares of
our common stock upon conversion of the Preferred Stock and exercise of the
Warrants were approved and ratified. 8,803,438 votes were cast for the approval
of the issuances, 586,732 votes were against issuance and there were 47,590
abstentions.
ITEM 5 -- OTHER INFORMATION
------ -----------------
The Company approved and adopted Amended and Restated Bylaws on December 14,
2000. Section 2.4(d) of the Amended and Restated By-laws sets forth procedures
to be followed by stockholders of the Company if they desire to nominate
directors or propose business to be brought before any stockholder meeting. If a
stockholder desires to nominate a director or present business, such stockholder
must provide written notice of their intent not later than 120 calendar days
prior to the mailing date the proxy statement for the previous year's annual
meeting of stockholders. Such notice must also include, among other things, the
name and address of the stockholder, a representation that the stockholder is a
holder of record of the Company's stock and such other information regarding
each nominee or each matter of business as is required to be included in the
proxy statement pursuant to the Securities and Exchange Commission proxy rules.
Reference is made to the Amended and Restated By-laws, which are filed herewith
as Exhibit 3.1.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
------ --------------------------------
(a) Exhibits
3.1 Amended and Restated By-laws
(b) Reports on Form 8-K
1. The Company's current report on Form 8-K, as filed with the
Securities and Exchange Commission on November 6, 2000
referencing the agreement with Douglas C. Laux to join the
Company as Chief Financial Officer.
2. The Company's current report on Form 8-K, as filed with the
Securities and Exchange Commission on September 22, 2000
referencing the resignation or termination of six executives, as
well as the resignation of the Company's Chief Financial Officer,
John Gandolfo.
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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/ Howard A. Tullman
---------------------
HOWARD A. TULLMAN,
CHIEF EXECUTIVE OFFICER
DATE: January 16, 2001
/s/ Douglas C. Laux
----------------------
DOUGLAS C. LAUX,
CHIEF FINANCIAL OFFICER
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