U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
/x/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended February 28, 1998
/ / Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission file number 0-13049
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X-CEED, INC.
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(Exact Name of registrant as specified in its charter)
NEW YORK 13-3006788
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(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) 753-5511
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(Issuer's Telephone Number, Including Area Code)
WATER-JEL TECHNOLOGIES, INC.
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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 _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 7,111,921 as of April 14,
1998
X-CEED INC. AND SUBSIDIARIES
(Formerly Water-Jel Technologies, Inc. and Subsidiaries)
INDEX
PART I
ITEM 1. Financial Information Page No.
Consolidated balance sheets . . . . . . . . . . . . . . . 3
Consolidated statements of operations
Six and Three Months Ended
February 28, 1998 and 1997 . . . . . . . . . . . . . . . 4
Consolidated statements of cash flows
Six and Three Months Ended
February 28, 1998 and 1997 . . . . . . . . . . . . . . . 5
Notes to consolidated financial statements . . . . . . . . 6-8
ITEM 2. Management's Discussion and Analysis of
the Financial Condition and
Results of Operations . . . . . . . . . . . . . 9-11
PART II
Other Information . . . . . . . . . . . . . . . . . . . . . 12
Signatures . . . . . . . . . . . . . . . . . . . . . . . 13
2
X-CEED, INC. AND SUBSIDIARIES
(Formerly Water-Jel Technologies, Inc. and Subsidiaries)
CONSOLIDATED BALANCE SHEETS
ASSETS FEBRUARY 28, AUGUST 31,
------ ------------ ----------
1998 1997
---- ----
(unaudited)
-----------
CURRENT ASSETS:
Cash and cash equivalents $10,211,983 $7,230,314
Investment in marketable securities 135,704 758,373
Accounts receivable, net of allowance for
doubtful accounts of $154,000 5,966,915 3,713,709
Program costs and earnings in excess of customer billings 1,825,352 2,039,682
Inventories 1,125,248 1,364,510
Prepaid expenses and other current assets 212,274 334,589
--------------------- ---------------------
TOTAL CURRENT ASSETS 19,477,476 15,441,177
Property and equipment, net 1,434,986 1,354,070
Investment in X-Ceed Motivations Atlanta Inc. 673,538 355,394
Due from officer 1,222,483 1,222,483
Deferred income taxes 480,287 231,000
Other assets 339,876 195,956
--------------------- ---------------------
$23,628,646 $18,800,080
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $5,628,178 $4,041,907
Current portion of long-term debt 39,200 39,200
Income taxes payable, current 445,607 358,933
Customer billings in excess of program costs 3,420,359 914,561
Deferred income tax liability - 44,500
--------------------- ---------------------
TOTAL CURRENT LIABILITIES 9,533,344 5,399,101
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LONG-TERM DEBT 31,900 51,500
--------------------- ---------------------
ACCRUED LEASE OBLIGATIONS 816,000 816,000
--------------------- ---------------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 30,000,000
shares; 7,044,051 and 7,043,180 shares issued and
outstanding, respectively 70,441 70,432
Preferred stock, $.05 par value; authorized 1,000,000
shares; -0- issued and outstanding - -
Net unrealized gain on marketable securities 1,190 216,175
Additional paid-in capital 10,475,328 10,210,592
Unearned compensation (202,000) -
Retained earnings 2,958,073 2,091,910
--------------------- ---------------------
13,303,032 12,589,109
Treasury stock, 10,000 shares (55,630) (55,630)
--------------------- ---------------------
13,247,402 12,533,479
$23,628,646 $18,800,080
===================== =====================
See notes to consolidated financial statements.
3
X-CEED, INC. AND SUBSIDIARIES
(Formerly Water-Jel Technologies, Inc. and Subsidiaries)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
FEBRUARY 28, FEBRUARY 28,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES, net $26,155,106 $31,755,271 $15,872,878 $21,947,939
----------------- ------------------ ----------------- ------------------
COST AND EXPENSES:
Cost of revenues 15,433,195 20,189,279 10,218,130 15,987,846
Selling, general and administrative 8,953,396 9,124,864 4,663,729 4,618,374
Research and development 463,583 - 258,181 -
----------------- ------------------ ----------------- ------------------
24,850,174 29,314,142 15,140,040 20,606,219
----------------- ------------------ ----------------- ------------------
OPERATING INCOME 1,304,931 2,441,129 732,837 1,341,720
----------------- ------------------ ----------------- ------------------
OTHER INCOME (EXPENSE):
Interest and dividend income 256,133 165,324 135,209 75,317
Interest expense (6,954) (8,096) (4,526) (5,204)
Gain on sale of investment in
marketable securities 358,243 12,249 11,582 -
Equity gain on investment 12,810 31,547 56,616 90,001
----------------- ------------------ ----------------- ------------------
620,232 201,024 198,881 160,114
----------------- ------------------ ----------------- ------------------
INCOME BEFORE INCOME TAXES 1,925,163 2,642,153 931,718 1,501,834
PROVISION FOR INCOME TAXES 1,059,000 1,408,000 512,500 810,000
----------------- ------------------ ----------------- ------------------
NET INCOME $866,163 $1,234,153 $419,218 $691,834
================= ================== ================= ==================
NET INCOME PER COMMON SHARE
Basic $0.12 $0.18 $0.06 $0.10
================= ================== ================= ==================
Diluted $0.11 $0.17 $0.06 $0.10
================= ================== ================= ==================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 7,043,494 7,021,180 7,044,095 7,021,180
================= ================== ================= ==================
Diluted 7,582,692 7,374,436 7,469,576 7,243,656
================= ================== ================= ==================
See notes to consolidated financial statements.
4
X-CEED, INC. AND SUBSIDIARIES
(Formerly Water-Jel Technologies, Inc. and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
----------------
February 28,
------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $866,163 $1,234,152
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Adjustment to reconcile net income to net
cash provided by operating activities:
Gain on sale of marketable securities (358,244) (12,249)
Depreciation and amortization 301,841 259,402
Equity gain on investment (12,810) (31,547)
Deferred Income Taxes (249,287) 11,010
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (2,253,206) (1,623,692)
Inventories 239,262 (159,737)
Program costs and earnings in excess of billings 214,330 -
Prepaid expenses and other current assets 122,315 127,424
Other assets (143,920) 34,932
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 1,586,271 1,445,829
Income taxes payable 86,674 1,057,261
Customer billings in excess of program costs 2,505,798 (374,705)
Other Current liabilities - (8,654)
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Total adjustments 2,039,024 725,274
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Net cash provided by operating activities 2,905,187 1,959,426
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities (96,026) (23,296)
Proceeds from sale of marketable securities 792,176 21,999
(Increase) in notes receivable - (100,000)
Acquisition of property and equipment (297,479) (177,338)
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Net cash provided by (used in) investing activities 398,671 (278,635)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (19,600) (19,600)
Repayment of notes payable - (1,065,000)
Advances to affiliate (305,334) (48,627)
Proceeds from excercise of warrants and options 2,745 3,000
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Net cash used in financing activities (322,189) (1,130,227)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 2,981,669 550,564
CASH AND CASH EQUIVALENTS - beginning of period 7,230,314 7,333,168
------------------ ---------------
CASH AND CASH EQUIVALENTS - end of period $10,211,983 $7,883,732
================== ===============
See notes to consolidated financial statements.
5
X-CEED, INC. AND SUBSIDIARIES
(Formerly Water-Jel Technologies, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 28,1998
1. BASIS OF QUARTERLY PRESENTATION:
The accompanying quarterly financial statements have been prepared in
conformity with generally accepted accounting principles.
The financial statements of the Registrant included herein have been
prepared by the Registrant pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management,
reflect all adjustments which are necessary to present fairly the
results for the period ended February 28, 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-KSB as of August 31, 1997.
2. PRINCIPLE OF CONSOLIDATATION:
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.
Investments in affiliates, representing 20% to 50% of the ownership of
such companies, are 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.
The Company has a 50% equity interest in X-Ceed Motivation/ Atlanta
which organizes and operates recognition group travel programs for
major corporations in the southeast.
3. INVENTORIES CONSISTED OF THE FOLLOWING:
February 28, 1998 August 31, 1997
-------- --- ---- ------ --- ----
(unaudited)
Raw Materials $ 765,499 $ 962,976
Finished goods 359,749 401,534
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$1,125,248 $1,364,510
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6
4. NOTES RECEIVABLE
In March 1998, the Company loaned $335,000 to a corporation which is
affiliated with two of the Company's directors. This loan is evidenced
by a note, bearing interest at 1% above the Company's lead bank prime
rate, payable on November 2, 1998. As additional consideration for the
loan, the Company received warrants to purchase a minimum of 335,000
shares of common stock of the borrower at an exercise price of $2.00
per warrant. The borrower has the right to extend the loan until
February 1, 1999. In consideration for such extension the Company shall
continue to receive interest at the same stated rate, and will be
entitled to additional warrants equivalent to 50% of the total dollars
of the loan. In addition, the Company was granted a one-year option to
acquire a continuing license for a proprietary browser based E-Mail
technology for a licensing fee of $35,000. The Company believes that
the borrower's software can be of significant assistance with the
Company's Maestro software.
5. DUE FROM OFFICER:
Due from officer represents a loan to the Company's President. The loan
is payable in annual installments of $100,000 commencing in December
1997. These annual payments shall be 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.
Commencing December 1, 1996, the loan bears interest at 7.0% per annum.
The principal balance has been classified as a non-current asset in
the accompanying financial statements.
6. SUPPLEMENTARY INFORMATION - STATEMENTS OF CASH FLOW:
Six Months Ended
February 28,
-------------------------
1998 1997
Interest paid.................. $ 6,954 $ 8,096
======== ========
Income taxes paid.............. $945,394 $357,605
======== ========
7. STOCKHOLDERS' EQUITY:
a. Common Stock
In February 1998 the stockholders voted to amend the Company's
certificate of incorporation to increase the authorized Common Stock to
30,000,000 shares, par value $.01 per share, and the authorized
Preferred to 1,000,000 shares, par value $.05 per share. The
accompanying balance sheet for August 31, 1997 has been retroactively
restated to give effect to this change.
7
b. Warrants
During the six months ended February 28, 1998 the Company entered into
consulting agreements with two financial advisors. Consideration under
these agreements included warrants to purchase an aggregate of 200,000
shares of common stock at exercise prices ranging from $2,00 - $2.19.
The fair value of the warrants ($262,000) is being charged to
operations over the lives of the respective agreements.
c. Earnings Per Share
During the quarter ended February 28, 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 options and warrants which are considered to be
dilutive common stock equivalents. Treasury shares 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:
Six Months Ended Three Months Ended
---------------- ------------------
February 28, February 28,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
Basic 7,043,494 7,021,180 7,044,095 7,021,180
effect of dilutive
securities 539,198 353,256 425,481 222,476
--------- --------- --------- ---------
Diluted 7,582,692 7,374,436 7,469,576 7,243,656
========= ========= ========= =========
8. INCOME TAXES:
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
8
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
- -------------------------------------------------------------
OPERATIONS
- ----------
RESULTS OF OPERATIONS:
- ----------------------
Net revenues for the six months ended February 28, 1998 and 1997,
respectively, were $26,155,000 and $31,755,000, representing an 18% decrease in
net revenues. Net revenues for the three months ended February 28, 1998 and
1997, respectively, were $15,873,000 and $21,948,000 representing a 28% decrease
in net revenue. The decrease in revenues for the six and three months ended
February 28, 1998 was principally attributable to three factors. 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 recognized revenue and cost on
certain calendar year programs ratably as certain performance criteria
occurred. The effect of this refinement for the year ended August 31, 1997
was not material. Revenues recorded by Theracom approximated $4,187,000 and
$5,717,000 for the six months ended February 28, 1998 and 1997, respectively,
and $2,387,000 and $5,534,000 for the three months ended February 28, 1998 and
1997. The decreases recorded by the Theracom division for the six and three
months ended February 28, 1998 were $1,530,000 and $3,147,000, representing 27%
and 52% of the overall decrease, respectively. During the six and three months
ended February 28, 1997, the Company's X-Ceed Performance Group division
recognized revenues of $3,800,000 from a one time marketing communications
program which it had provided for an established customer. Revenues recorded by
the X-ceed Performance Group division approximated $13,500,000 and $17,700,000
for the six months ended February 28, 1998 and 1997, respectively, and
$9,758,000 and $12,500,000 for the three months February 28, 1998 and 1997. The
decreases recorded by the X-Ceed Performance Group division for the six and
three months ended February 28, 1998 were $4,200,000 and $2,742,000,
representing 75% and 45% of the overall decrease, respectively. In addition,
the Company's Journeycorp division generated lower than expected net revenues
for the six and three months ended February 28, 1998 as a result of additional
airline commission reductions on international ticketing. Revenues recorded by
the Journeycorp division approximated $5,517,000 and $5,652,000 for the six
months ended February 28, 1998 and 1997, respectively, and $2,369,000 and
$2,752,000 for the three months ended February 28, 1998 and 1997. The decreases
recorded by the Journeycorp division for the six and three months ended February
28, 1998 were $135,000 and $383,000, representing 2% and 6% of the overall
decrease, respectively. In February 1998, the Company instituted a
management fee program which should offset a portion of the reduction in
commissions.
9
Cost of revenues for six months ended February 28, 1998 and 1997 were
$15,433,000 and $20,189,000, respectively, (representing 59% and 64% of net
revenues). Cost of revenues for the three months ended February 28, 1998 and
1997 were $10,218,000 and $15,988,000,respectively,(representing 64% and 73% of
net revenues). During the six and three months ended February 28, 1998 cost of
revenues decreased primarily due to the refinement of Theracom's revenue
recognition policy, fewer merchandising programs, which traditionally generate
higher cost of revenues. Selling, general and administrative expenses for the
six months ended February 28, 1998 and 1997 was $8,953,000 and $9,125,000,
representing 34% and 29% of net revenues, respectively. Selling,general and
administrative expenses for the three months ended February 28, 1998 and 1997
was $4,664,000 and $4,618,000, representing 29% and 21% of net revenues,
respectively. Selling, general and administrative expenses for the six and three
months ended February 28, 1998 increased as a percentage of net revenues as a
result of decreased revenues. Research and development expenses for the six and
three months ended February 28, 1998 were $464,000 and $258,000, incurred in
connection with the 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 six months ended February 28, 1998 was $620,000 as
compared to $201,000 for the corresponding prior period. Other income for the
three months ended February 28, 1998 and 1997 was $199,000 as compared to
$160,000 for the corresponding prior period. The increase during the six months
ended February 28, 1998 reflects a gain on sales of investments of $358,000 as
compared to $12,000 for the corresponding prior period.
Net income for the six months ended February 28, 1998 and 1997 was
$866,000 as compared to $1,234,000, respectively, representing a 30% decrease.
Net income for the three months ended February 28, 1998 and 1997 was $419,000
and $692,000, respectively, representing a 39% decrease.
LIQUIDITY AND CAPITAL RESOURCES:
At February 28, 1998 the Company had working capital of $9,944,000 as
compared to $10,042,000 at August 31, 1997. During the six months ended February
28, 1998, the Company received net proceeds of $792,000 from the sale of
marketable securities.
The consolidated statement of cash flows for the six months ended
February 28, 1998 reflects net cash provided by operating activities of
$2,905,000 resulting from net income of $866,000, an increase in accounts
payable and accrued expenses of $1,586,000 and an increase in customer billings
in excess of programs costs of 2,506,000. Cash provided by investing activities
was $398,000,
10
consisting principally of proceeds from sale of marketable securities of
$792,000. Cash used in financing activities approximated $322,000 which
included advances to X-ceed Motivations (Atlanta) of $305,000 for working
capital.
The Company believes that it has adequate working capital for at least
the next twelve months of operations at current levels. As of April 15, 1998 the
Company had approximately $9,284,000 in cash and cash equivalents.
11
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
- ------ ---------------------
On February 20, 1998 the shareholders voted to amend the Company's
certificate of incorporation to increase the authorized Common Stock to
30,000,000 shares, par value $.01 per share, and the authorized
Preferred Stock to 1,000,000 shares, par value $.05 per share.
ITEM 3 - Defaults on Senior Securities
- ------ -----------------------------
None
ITEM 4 - Submission to a Vote of Security Holders
- ------ ----------------------------------------
On January 9, 1998 a notice of annual shareholders meeting and related
proxy materials were submitted to the Company's shareholders. The
annual meeting was held on February 20, 1998. The matters submitted to
vote were: (1) re-election of the Company's directors, Werner Haase
votes received for: 6,723,676 against 45,322, Norman Doctoroff votes
received for: 6,723,726 against 45,272, John Bermingham votes received
for: 6,723,714 against 45,284 (2) to approve the creation of a new 1998
Stock Option Plan, votes received for: 4,768,180, against 164,151 and
abstain 43,829 (3) to approve the merger into a Delaware subsidiary of
the Company in order to effect the change of the Company's state of
incorporation from New York to Delaware, votes received for: 4,895,278,
against 49,707 and abstain 31,174 (4) to approve the change of the
Company's name to X-Ceed Inc., votes received for: 6,681,445, against
37,767 and abstain 49,786 (5) to approve the amendment of the
certificate of incorporation to increase the authorized Common Stock to
30,000,000 shares, par value $.01 per share and the authorized
Preferred to 1,000,000 shares, par value $.05 per share, votes received
for: 5,003,048, against 131,620 and abstain 39,003 and (6) to ratify
the appointment of independent public accountants for the current
fiscal year, votes received for: 6,719,936, against 23,088 and abstain
25,974.
ITEM 5 - Other Information
- ------ -----------------
None
ITEM 6 - Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) None
(b) None
12
X-CEED INC.
-----------
(Formerly Water-Jel Technologies, Inc.)
---------------------------------------
488 MADISON AVENUE
------------------
NEW YORK, N.Y. 10022
------------------------
FILE # 0-13049
------------------------
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BY: /s/ Werner Haase
-------------------
WERNER HAASE,
CEO
DATE: JULY 31, 1998
----------------
13