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.)
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(Name of Issuer 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
(Address of Principal Executive Offices) (Zip Code)
(212) 753-5511
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock
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(Title of Class)
B Warrant
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(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"
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.
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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.
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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
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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
10
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.
11
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.
12
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.
13
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.
14
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
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
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:
Lease Annual
Location Size and Nature of Facility Expires Rent
- -------- --------------------------- ------- ----
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
17
Lease Annual
Location Size and Nature of Facility Expires Rent
- -------- --------------------------- ------- ----
Glen Rock, NJ Office, 2,800 sq.ft. (TheraCom) 2001 $ 44,600
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
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
Year Ended August 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(in thousands, except per share amounts)
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-
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
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
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
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
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
ITEM 11. EXECUTIVE COMPENSATION
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
- ------------------ ---- ------ ----- ------ ------- ------- ---- ------
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
- ---------
(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 $50,000 or 10% of
compensation as to any person. The Company offers health insurance to all of
its employees. At present time the Company does not have any retirement,
pension, profit sharing, or other similar programs or benefits for its
executive officers.
The Company has not paid cash remuneration for or on account of
services rendered by a director in such capacity. However, during Fiscal 1998,
Norman Doctoroff and Steven Bermingham each received a grant of 50,000 options.
25
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term
----------------- ----------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/ SARs
Underlying Granted to
Options/SARs Employees in Exercise Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ----------- ----------- ------ ---- ------ -------
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
- ---------------
(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 $10.125 for 30 consecutive days. Mr. Haase's
options were granted pursuant to the 1998 Stock Option Plan.
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-ENDED OPTION/SAR VALUES
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ------------ ------------ -------------- ------------- -------------
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)
(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
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
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, 1997, options to acquire
128,125 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, 1997, options to
acquire a total of 170,000 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 A1995 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, 1997 all available options had been
granted under the 1995 Plan and options to acquire a total of 467,000 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
the end of the fiscal year August 31, 1998, there were 950,000 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
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 .005%
81 Two Bridges Road
Fairfield, NJ
John Bermingham (5) 50,000 .004%
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
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
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
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.
WATER-JEL TECHNOLOGIES, 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
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.
33
(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
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
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
X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
August 31,
ASSETS 1998 1997
------ --------- -------
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
========= =========
See notes to consolidated financial statements
F-2
X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years Ended
August 31,
-------------------------------------------------
1998 1997 1996
---------- ---------- -------
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
========= ========= =========
See notes to consolidated financial statements
F-3
X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(Note 11)
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
----------- ---------- ------ ----- -------------- ------------ --------------
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)
=========== ===== ====== ====== ======== ====== ======
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
X-CEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
August 31,
-----------------------------------------
1998 1997 1996
-------- --------- ------
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
======== ========= ========
See notes to consolidated financial statements
F-5
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
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
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
2. Summary of Significant Accounting Policies: (Cont'd)
n. Net income per common share and per common and common equivalent
share (Cont'd)
Year Ended August 31, 1998
---------------------------------------------------
Income Shares Per Share
---------------------------------------------------
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
========= ============ =====
Year Ended August 31, 1997
---------------------------------------------------
Income Shares Per Share
---------------------------------------------------
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
========= ============ =====
Year Ended August 31, 1996
---------------------------------------------------
Income Shares Per Share
---------------------------------------------------
Basic EPS $ 632 7,001,295 $ .09
Effect of dilutive securities'
common stock options 392,717 -
------- ------------ -----
Diluted EPS $ 632 7,394,012 $ .09
======= ============ =====
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
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:
Gross Gross
Unrealized Unrealized
August 31, 1998 Cost Gains Losses Fair Value
--------------- ----------- ----------- ----------- ----------
Securities available-for-sale
equity investments $ 170 $ - $ (73) $ 97
======= ======== =========== ==========
F-10
5. Investment in Marketable Securities: (Cont'd)
Gross Gross
Unrealized Unrealized
August 31, 1997 Cost Gains Losses Fair Value
--------------- ----------- ----------- ----------- ----------
Securities available-for-sale
equity investments $ 422 $ 347 $ (11) $ 758
======= ======= =========== ==========
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
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
10. Income Taxes: (Cont'd)
The Company's effective tax rates on earnings differs from the Federal
Statutory regular tax rate as follows:
Years Ended
August 31,
--------------------------------------------------------
1998 1997 1996
-------------- ------------- ------------
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%
===== ====== ======
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
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
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
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
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
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