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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended June 30, 1999 (Second quarter of
fiscal 1999)
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the
transition period from_____________ to _____________
Commission File No. 0-24073
IBS INTERACTIVE, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 13-3817344
(State or Other Jurisdiction (I.R.S. Employer I.D. No.)
of Incorporation or Organization)
2 RIDGEDALE AVENUE
SUITE 350
CEDAR KNOLLS, NJ 07927
(Address of Principal Executive Offices)
(973) 285-2600
(Issuer's Telephone Number, Including Area Code)
_____________________________________________________
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of August 9, 1999, 4,281,667 shares of the issuer's common stock,
par value $.01 per share, were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
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IBS INTERACTIVE, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of June 30, 1999
(unaudited).................................................... 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999
and 1998 (unaudited)........................................... 3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998
(unaudited).................................................... 4
Notes to Condensed Consolidated Financial Statements........... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................... 15
ITEM 3. DEFAULT UPON SENIOR SECURITIES................................. 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 16
ITEM 5. OTHER INFORMATION.............................................. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 17
SIGNATURES.............................................................. 19
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
IBS INTERACTIVE, INC.
Condensed Consolidated Balance Sheet
(unaudited, in thousands)
ASSETS JUNE 30, 1999
Current Assets
Cash and cash equivalents................................................ $ 2,152
Accounts receivable (net of allowance for doubtful
accounts of $99)...................................................... 3,803
Prepaid expenses......................................................... 404
Deferred tax assets...................................................... 204
------------
Total Current Assets.......................................... 6,563
-----------
Property and equipment, net..................................................... 1,073
Intangible assets, net.......................................................... 4,038
Intangible assets - deferred compensation, net.................................. 590
Other assets.................................................................... 219
------------
TOTAL ASSETS.................................................. $ 12,483
=========
See Accompanying Notes to Condensed Consolidated Financial Statements.
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IBS INTERACTIVE, INC.
Condensed Consolidated Balance Sheet
(unaudited, in thousands, except share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY JUNE 30, 1999
-------------
Current Liabilities
Long-term debt and capital lease obligations, current portion............. $ 949
Accounts payable and accrued expenses..................................... 1,248
Deferred revenue.......................................................... 527
---------
Total Current Liabilities........................................... 2,724
---------
Deferred compensation.......................................................... 895
Long-term debt and capital lease obligations................................... 203
---------
Total Liabilities......................................................... 3,822
---------
Stockholders' Equity
Preferred Stock, $.01 par value, authorized 1,000,000 shares, none issued and
outstanding........................................................... --
Common Stock, $.01 par value, authorized 11,000,000 shares,
4,211,848 shares issued and outstanding............................... 42
Additional paid in capital................................................ 10,419
Accumulated deficit....................................................... (1,800)
--------
Total Stockholders' Equity................................................ 8,661
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $ 12,483
=========
See Accompanying Notes to Condensed Consolidated Financial Statements.
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IBS INTERACTIVE, INC.
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 1999 and 1998
(unaudited, in thousands, except share and per share amounts)
For the six months ended June 30, For the three months ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Revenues................................... $ 8,753 $ 6,995 $ 4,737 $ 3,383
Cost of services........................... 5,572 4,606 3,122 2,299
-------- -------- -------- --------
Gross profit............................... 3,181 2,389 1,615 1,084
Operating expenses:
Selling, general and administrative... 4,199 2,055 2,537 1,142
Amortization of intangible assets..... 224 83 155 50
Compensation expense - non-cash....... 188 89 105 56
Merger expenses....................... 137 0 109 0
-------- -------- -------- --------
Operating income (loss).................... (1,567) 162 (1,291) (164)
Interest expense (income), net............. (47) 17 (22) (29)
-------- -------- -------- --------
Income (loss) before income taxes.......... (1,520) 145 (1,269) (135)
Tax benefit (provision).................... 77 (120) (45) 0
-------- -------- -------- --------
Net income (loss).......................... $ (1,443) $ 25 $ (1,314) $ (135)
========== ======== ========= =========
Earnings (loss) per share
Basic and Diluted.......................... $ (0.35) $ 0.01 $ (0.31) $ (0.04)
========== ======== ========= =========
Weighted average common shares outstanding
Basic...................................... 4,144,507 2,963,078 4,195,532 3,339,648
Diluted.................................... 4,144,507 3,116,103 4,195,532 3,485,185
See Accompanying Notes to Condensed Consolidated Financial Statements.
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IBS INTERACTIVE, INC.
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 1999 and 1998
(unaudited, in thousands)
Six months ended June 30,
1999 1998
-------- -------
Cash Flows (used in) provided by Operating Activities.................. $ (2,297) $ 1,022
Cash Flows used in Investing Activities................................ (1,573) (334)
Cash Flows provided by Financing Activities............................ 490 6,546
-------- -------
NET INCREASE (DECREASE) IN CASH
and CASH EQUIVELENTS................................................. (3,380) 7,234
CASH and CASH EQUIVALENTS
AT BEGINNING OF PERIOD................................................. 5,532 277
-------- -------
CASH and CASH EQUIVALENTS
AT END OF PERIOD....................................................... $2,152 $ 7,511
======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
a. The condensed consolidated interim financial statements of IBS Interactive,
Inc. ("IBS," or the "Company") included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission with respect to Form 10-QSB. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made herein
are adequate to make the information contained herein not misleading. These
condensed consolidated interim financial statements should be read in
conjunction with the Company's audited financial statements for the year
ended December 31, 1998 and the notes thereto included in the Company's
Annual Report on Form 10-KSB and the Company's reports on Form 8-K dated
April 15, 1999, June 2, 1999 and June 7, 1999. In the Company's opinion,
all adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of the information shown herein have been included.
As discussed in Note 2, the Company acquired Spencer Analysis, Inc.
("Spencer") in a business combination accounted for as a
pooling-of-interests.
Previously issued consolidated financial statements and notes thereto for
the three and six month periods ended June 30, 1998 have been restated, as
required, to reflect the 1998 and 1999 business combinations accounted for
as poolings-of-interests (DesignFX Interactive, LLC ("Design FX"), Halo
Network Management, LLC ("Halo") and Spectrum Information Systems, Inc.
("Spectrum")) as well as the Spencer business combination).
b. The results of operations and cash flows for the six months ended June 30,
1999 presented herein are not necessarily indicative of the results of
operations and cash flows expected for the year ending December 31, 1999.
c. Basic earnings (loss) per share have been computed using the weighted
average number of shares of common stock outstanding, which includes the
shares issued in connection with the Spencer combination. Diluted earnings
per share for the six-month period ended June 30, 1998 include the assumed
exercise of stock options, warrants and convertible debt (using the
treasury stock method). For the three- and six-month period ended June 30,
1999 and the three-month period ended June 30, 1998, there was no
difference between basic and diluted loss per common share because the
assumed exercise of common share equivalents was anti-dilutive.
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2. BUSINESS COMBINATIONS
POOLING-OF-INTERESTS
On June 30, 1999, the Company signed an agreement with Spencer to issue
260,005 shares of its common stock (subject to certain adjustments) in exchange
for all of the issued and outstanding capital stock of Spencer, a full-service
provider of network and systems integration solutions. The business combination
has been accounted for as a pooling-of-interests. As such, the accompanying
consolidated financial statements are based on the assumption that the Company
and Spencer were combined as of January 1, 1998, and accordingly, financial
statements of prior periods have been restated to give effect to the Spencer
combination. There were no material adjustments necessary for the Company and
Spencer to conform to consistent accounting policies. Through the acquisition
date, the shareholders of Spencer elected, as permitted, to report income for
federal and state income tax purposes as an "S" corporation. Under those
regulations, the shareholders individually received the income tax provision or
benefit of their respective share of Spencer's net income or loss. Accordingly,
the Company has not recorded a federal and state tax provision or benefit for
the three and six months ended June 30, 1999 and 1998. However, Spencer is
subject to local income taxes, such provisions are reflected in the accompanying
statements of operations. The fiscal year end of Spencer also conforms to that
of the Company. Unaudited net revenues and net income (loss) and earnings (loss)
per share for the Company and Spencer for the six months ended June 30, 1999 and
1998 and the year ended December 31, 1998 are as follows:
IBS SPENCER COMBINED
Six Months Ended
June 30, 1999
Revenues $7,076 $1,677 $ 8,753
Net income (loss) (1,578) 135 (1,443)
Loss per share -- -- $ (0.35)
IBS SPENCER COMBINED
Six Months Ended
June 30, 1998
Revenues $5,401 $1,594 $ 6,995
Net income (loss) (20) 45 25
Earnings per share -- -- $0.01
IBS SPENCER COMBINED
Year Ended
December 31, 1998
Revenues $11,479 $3,734 $ 15,213
Net income (loss) (479) 114 365
Loss per share -- -- $(0.10)
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PURCHASE ACQUISITIONS
All of the following business combinations have been accounted for as
purchases. The ultimate values ascribed to the purchases are subject to certain
adjustments between the parties. The Company's acquisitions do not represent,
individually and in the aggregate, significant subsidiaries. Accordingly,
condensed and pro forma financial information is not presented.
On April 30, 1999, the Company acquired Realshare, Inc., a Cherry Hill,
New Jersey-based Web-site design and programming company.
On April 30, 1999, the Company acquired Millenium Computer
Applications, Inc., a Shallote, North Carolina-based Internet Service Provider.
On May 7, 1999, the Company acquired substantially all of the consumer
dial-up and ISDN accounts and related computer equipment of Planet Access, Inc.
and the owners of Planet Access, Inc., a Stanhope, New Jersey-based Internet
Service Provider.
MERGER EXPENSES
For the three and six months ended June 30, 1999, the Company
recognized $109,000 and $137,000, respectively, of costs related to the Spectrum
and Spencer business combinations. Such costs are principally comprised of
professional fees incurred during the periods.
3. INCOME TAXES.
The Company has not recognized an income tax benefit for the
three-month period ended June 30, 1999 based on uncertainties concerning its
ability to generate sufficient taxable income in future periods. The tax
provision for the three-month period ended June 30, 1999 related to state taxes
on certain subsidiaries and local income taxes incurred by Spencer. In future
periods, tax benefits and related deferred tax assets will be recognized when
management considers realization of such amounts to be more likely than not.
Deferred tax assets at June 30, 1999 of $204,000 are comprised of temporary
differences and tax loss carrybacks, the realization of which, at present, is
considered to be more likely than not.
4. 1998 INITIAL PUBLIC OFFERING
On May 14, 1998, the Company's registration statement on Form SB-2, as
amended (the "Registration Statement"), relating to its initial offering of
common stock, was declared effective by the SEC (the "Offering"). Whale
Securities Co., L.P. acted as the underwriter in connection with the Offering
which was consummated on May 20, 1998. In connection with the Offering, the
Company registered, issued and sold 1,380,000 shares of common stock, including
180,000 shares of common stock issued in connection with the exercise in full of
the underwriter's over-allotment option at an initial public offering price of
$6.00 per share resulting in proceeds to the Company (net of underwriting
discount, commissions and other expenses payable by the Company) in the
aggregate approximate amount of $6,642,000. From the effective date of the
Registration Statement through June 30, 1999, the Company has applied an
aggregate of $717,000 of the net proceeds of the Offering for the full repayment
of certain indebtedness; $451,000 towards the purchase of equipment; $1,489,000
towards the purchase of assets of, or the outright acquisition of, companies;
$830,000 towards sales and marketing; and $1,703,000 towards general
administrative expenses. The remaining net proceeds of the Offering in the
amount of $1,452,000 remain unused and are invested in short-term cash
equivalents.
5. STOCKHOLDERS' EQUITY
In April 1999, the Company consummated the acquisitions of Millennium
Computer Applications, Inc. and Realshare, Inc., and in connection therewith
issued up to 19,673 and 6,000 shares of its common stock (subject to
adjustments), respectively. In May 1999, the Company acquired certain assets of
Planet Access, Inc. and in connection therewith issued up to
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19,114 shares of its common stock (subject to certain adjustments). In June
1999, the Company consummated the acquisition of Spencer and in connection
therewith issued up to 260,005 share of its common stock (subject to certain
adjustments.)
On June 25, 1999, the Company's registration statement on Form S-3
relating to the resale of 202,440 shares of the Company's common stock was
declared effective by the SEC. Through June 30, 1999, the Company has received
proceeds of $330,000 from the exercise of certain warrants, the underlying
common stock of which is eligible for resale under the registration statement.
In addition, during the three-month period ended June 30, 1999, the
Company granted 217,432 options to employees pursuant to its 1999 Stock Option
Plan.
6. SUBSEQUENT EVENTS
On July 31, 1999, the Company acquired Jaguar Systems, Inc., a southern
New Jersey-based Internet Service Provider. This business combination has been
accounted for as a purchase. The ultimate values ascribed to the purchase are
subject to certain adjustments between the parties. This acquisition does not
represent, individually and in the aggregate, significant subsidiaries.
Accordingly, condensed and pro forma financial information is not presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report on Form 10-QSB contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Actual results, events and circumstances (including future
performance, results and trends) could differ materially from those set forth in
such statements due to various factors, risks and uncertainties including those
set forth in the Company's Form 10-KSB for 1998 in "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Certain Factors Which May Affect the Company's Future Performance." Except as
otherwise required to be disclosed in periodic reports required to be filed by
companies registered under the Exchange Act by the rules of the SEC, the Company
has no duty and undertakes no obligation to update such statements.
OVERVIEW
The Company provides a range of Internet and information technology
consulting, training and networking planning, design and implementation
services, Internet connectivity services, and Internet programming and
applications development services, primarily to businesses and organizations.
The Company's revenues are derived principally from fees earned in connection
with the performance of consulting and networking services, recurring Internet
connectivity fees and fees earned in connection with programming and
applications development services.
The Company commenced operations in June 1995 as an Internet Service
Provider offering Web-site hosting services. In 1996 and 1997, the Company
acquired Interactive Networks, Inc., Mordor International and Allnet Technology
Services, Inc., each an Internet Service Provider principally offering dial-up
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access services. The Company began to provide Internet and information
technology consulting and networking services in April 1996 and has increasingly
emphasized such services.
In January 1998, the Company began to provide Internet programming and
applications development services through the acquisition of Entelechy, Inc., a
provider of programming and applications development services, and also acquired
substantially all of the assets of JDT Webwerx LLC (consisting primarily of
computer equipment and intangible assets). In September 1998, the Company
acquired all of the outstanding membership interests of DesignFX Interactive,
LLC, a Cherry Hill, New Jersey-based provider of Web-design, programming and
hosting services. In December 1998, the Company acquired substantially all of
the assets of MBS, Inc., a Huntsville, Alabama-based Microsoft Certified
Technical Education Provider Partner Level and also acquired Halo Network
Management, LLC, an Eatontown, New Jersey-based network services company that
offers complete network solutions including planning, installation and
maintenance.
In the first quarter of 1999, the Company acquired (i) substantially
all of the assets of Mainsite Communications, a Bridgeport, New Jersey-based
Internet Service Provider, (ii) substantially all of the assets of the
Renaissance Internet Services Division of PIVC, LLC, an Internet Service
Provider headquartered in Huntsville, Alabama, (iii) substantially all of the
assets of EZ Net, Inc., a Yorktown, Virginia-based Internet Service Provider,
(iv) substantially all of the assets of the ADViCOM division of Multitronics,
Inc., an Internet Service Provider headquartered in Huntsville, Alabama, and (v)
Spectrum, a Huntsville, Alabama-based network services company.
In the second quarter of 1999, the Company continued to make strategic
acquisitions, acquiring (i) the consumer Internet dial-up assets of the Planet
Access Network group of companies., a Stanhope, New Jersey-based Internet
Service Provider, (ii) Millenium Computer Applications, Inc., a Shallote, North
Carolina-based Internet Service Provider, (iii) Realshare, Inc., a Cherry Hill,
New Jersey-based Web-site design and programming company and (iv) Spencer, a
full-service provider of network and systems integration solutions.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES:
Revenues increased by $1,354,000, or 40%, from $3,383,000 for the three
months ended June 30, 1998 ("1998") to $4,737,000 for the three months ended
June 30, 1999 ("1999"). Revenues for 1999 increased primarily due to an increase
in Internet connectivity service revenues and, to a lesser extent, increases in
Internet and information technology consulting and network service revenues and
Internet programming and applications service revenues. The Company's largest
customer, Aetna (which engaged the Company in October 1997), accounted for 28%
of the Company's consolidated revenues for 1998 and only 16% for 1999; thus,
non-Aetna revenues increased 65% for 1999 as compared to 1998.
COST OF SERVICES:
Cost of services consists primarily of expenses relating to the
operation of the network, including telecommunications and Internet access
costs, costs associated with monitoring network traffic and quality and
providing technical support to clients and subscribers, cost of equipment and
applications sold to clients and subscribers, salaries and expenses of
-9-
engineering, programming and technical personnel and fees paid to outside
consultants. Cost of services increased by $823,000, or 36%, from $2,299,000 in
1998 to $3,122,000 in 1999. This increase was due to additional personnel and
network costs associated with expansion of the Company's client and subscriber
base. Cost of services as a percentage of sales was 66% in 1999 as opposed to
68% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses consist primarily of
salaries and costs associated with sales personnel, marketing literature,
advertising, direct mailings and the Company's management, accounting, finance
and administrative functions. Selling, general and administrative expenses
increased by $1,395,000, or 122%, from $1,142,000 in 1998 to $2,537,000 in 1999.
This increase is primarily attributed to: (i) the hiring of additional
marketing, sales and administrative personnel; (ii) costs associated with
increased marketing and promotional activities; (iii) additional administrative
and professional costs associated with operating as a public company; (iv)
increased rent and utilities associated with acquisitions; and (v) increased
depreciation related to acquisitions and equipment purchases.
AMORTIZATION OF INTANGIBLE ASSETS:
Amortization of intangible assets increased by $105,000, from $50,000
in 1998 to $155,000 in 1999. This increase is primarily attributed to the
amortization of intangible assets, including customer lists and goodwill,
acquired by the Company in connection with its purchase of Micro Business
Solutions Inc., Mainsite Communications Inc., the Renaissance Internet Access
Division of PIVC, LLC, EZ Net Inc., the ADViCOM Internet Access Division of
Multitronics Inc., Realshare, Inc., Millenium Computer Applications, Inc. and
Planet Access, Inc. all of which were consummated subsequent to June 30, 1998.
INTEREST EXPENSE/(INCOME), NET:
Interest expense consists of interest on indebtedness, capital leases
and financing arrangements in connection with the Company's borrowings. Interest
income consists of money earned on cash equivalents. Interest income decreased
by $7,000 from approximately $29,000 of income in 1998 to $22,000 of income in
1999. This decrease is primarily due to a decrease in funds available for
investment in 1999 relative to 1998 and, to a lesser extent, increased
borrowings under the Company's line of credit.
TAX BENEFIT (PROVISION):
The Company recognized a tax provision of $45,000 in 1999 compared to a
tax provision of $0 in 1998. At June 30, 1999, based on estimated 1999 taxable
income, its ability to carry-back operating losses against previous tax
payments, and an assessment of all available evidence, management considers
realization of the unreserved deferred tax asset ($204,000) to be more likely
than not.
-10-
NET INCOME:
As a result of the foregoing, the Company had net a net loss of
$1,314,000 for 1999 compared to net loss of $135,000 for 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES:
Revenues increased by $1,758,000, or 25%, from $6,995,000 for the
six-month period ended June 30, 1998 to $8,753,000 for the six months ended June
30, 1999. Revenues for the six-month period ended June 30, 1999 increased
primarily due to an increase in Internet connectivity service revenues and, to a
lesser extent, increases in Internet programming and applications service
revenues and Internet and information technology consulting and network service
revenues. The Company's largest customer, Aetna (which engaged the Company in
October 1997), accounted for 35% of the Company's consolidated revenues for the
six-month period ended June 30, 1998 and only 16% for the six-month period ended
June 30, 1999; thus, non-Aetna revenues increased 63% for the six-month period
ended June 30, 1999 as compared to the six-month period ended June 30, 1998.
COST OF SERVICES:
Cost of services consists primarily of expenses relating to the
operation of the network, including telecommunications and Internet access
costs, costs associated with monitoring network traffic and quality and
providing technical support to clients and subscribers, cost of equipment and
applications sold to clients and subscribers, salaries and expenses of
engineering, programming and technical personnel and fees paid to outside
consultants. Cost of services increased by $966,000, or 21%, from $4,606,000 in
the six-month period ended June 30, 1998 to $5,572,000 in the six-month period
ended June 30, 1999. This increase was due to additional personnel and network
costs associated with expansion of the Company's client and subscriber base.
Cost of services as a percentage of sales was 64% in the six-month period ended
June 30, 1999 as opposed to 66% in the six-month period ended June 30, 1998. The
decline in cost of services as a percentage of sales was due to an increase in
revenues related to higher margin services and lower telecommunications costs.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses consist primarily of
salaries and costs associated with sales personnel, marketing literature,
advertising, direct mailings and the Company's management, accounting, finance
and administrative functions. Selling, general and administrative expenses
increased by $2,144,000, or 104%, from $2,055,000 in the six-month period ended
June 30, 1998 to $4,199,000 in the six-month period ended June 30, 1999. This
increase is primarily attributed to: (i) the hiring of additional marketing,
sales and administrative personnel to maintain and manage the rate of growth of
the Company's business; (ii) costs associated with increased marketing and
promotional activities; and (iii) additional administrative and professional
costs associated with operating as a public company.
-11-
AMORTIZATION OF INTANGIBLE ASSETS:
Amortization of intangible assets increased by $141,000, from $83,000
in the six-month period ended June 30, 1998 to $224,000 in the six-month period
ended June 30, 1999. This increase is primarily attributed to the amortization
of intangible assets, including customer lists and goodwill, acquired by the
Company in connection with its purchase of Micro Business Solutions Inc.,
Mainsite Communications Inc., the Renaissance Internet Access Division of PIVC,
LLC, EZ Net Inc., the ADViCOM Internet Access Division of Multitronics Inc.,
Realshare, Inc., Millenium Computer Applications, Inc. and Planet Access, Inc.
all of which were consummated subsequent to June 30, 1998.
INTEREST EXPENSE/(INCOME), NET:
Interest expense consists of interest on indebtedness, capital leases
and financing arrangements in connection with the Company's borrowings. Interest
income consists of money earned on cash equivalents. Interest income increased
by $64,000 from approximately $17,000 of expense in the six-month period ended
June 30, 1998 to $47,000 of income in the six-month period ended June 30, 1999.
This decrease is primarily due to an increase in funds available for investment
in 1999 relative to 1998 due to the Company's initial public offering being
completed in May 1998.
TAX BENEFIT (PROVISION):
The Company recognized a tax benefit of $77,000 in the six-month period
ended June 30, 1999 compared to a tax provision of $120,000 in the six-month
period ended June 30, 1998. At June 30, 1999, based on estimated taxable income,
its ability to carryback operating losses against previous tax payments, and an
assessment of all available evidence, management considers realization of the
unreserved deferred tax asset ($204,000) to be more likely than not.
NET INCOME:
As a result of the foregoing, the Company had net a net loss of
$1,443,000 for the six-month period ended June 30, 1999 compared to net income
of $25,000 for the six-month period ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements have been to fund expenses in
connection with providing Internet and information technology consulting and
network services, Internet connectivity services, and Internet programming and
applications development services to its clients. The Company has historically
satisfied its working capital requirements principally through the issuance of
equity and debt securities and borrowings.
At June 30, 1999, the Company had working capital of $3,839,000.
Net cash used in operating activities decreased from $1,022,000
provided for the six-month period ended June 30, 1998 to $2,297,000 used in the
six-month period ended June 30, 1999. This change was primarily attributable to
decreased operating results that resulted in a net loss in the amount of
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$1,443,000 for the period ended June 30, 1999, compared to net income in the
amount of $25,000 for the six-month period ended June 30, 1998.
Net cash used in investing activities increased from $334,000 for the
six-month period ended June 30, 1998 to $1,573,000 for the six-month period
ended June 30, 1999 due to an increase in cash used in acquisitions.
Net cash provided by financing activities was $6,546,000 for the
six-month period ended June 30, 1998, compared to $490,000 provided for the
six-month period ended June 30, 1999. This change is primarily attributable to
the Company's completion of its initial public offering in the second quarter of
1998.
At June 30, 1999, the Company had capital lease obligations in the
aggregate amount of $52,000 that are secured by the personal guarantees of each
of Nicholas R. Loglisci, Jr., the Company's President and Chief Operating
Officer; Clark D. Frederick, the Company's Chief Technical Officer; and Frank R.
Altieri, Jr., the Company's Chief Information Officer. In addition, certain of
these capital lease agreements are secured by the equipment that is the subject
of the capital lease.
In June 1998, the Company secured a line of credit in the amount of
$1.5 million from First Union National Bank. The line of credit has been
extended through September 30, 1999. As of June 30, 1999, the Company had
$700,000 of outstanding indebtedness under such line of credit.
Additionally, in May 1998, the Company secured equipment lines of
credit from Ascend Credit Corp., Cisco Systems Capital Corp. and PAM Financial
Corp., each in the amount of $500,000. At June 30, 1999, the Company had no
outstanding indebtedness under any such line of credit.
The Company expects that its working capital and borrowing potential
under its various lines of credit will be sufficient to meet its planned
operating and capital requirements for the foreseeable future.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This situation could result in a system
failure or miscalculations causing disruptions of operations, including
inability to process transactions or engage in normal business activities.
Management has evaluated the Company's computer software and hardware
systems, and, based on currently available information, believes that it will
not have to replace or modify any of its hardware but has, and will have, to
modify its software so that its systems will function properly with respect to
dates in the year 2000 and thereafter. It is believed that the greatest risk to
the Company will be from outside firms that the Company relies on for its
operations as well as the legacy computer systems of its clients. The failure by
outside firms and/or clients' failure to address Year 2000 issues could
interfere with the Company's ability to provide its services, and therefore
impact future revenues. As of August 9, 1999, the Company has contingency plans
in place to remedy these types of problems. Estimated costs associated with such
plans are not expected to exceed $100,000, which are likely to be funded through
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the use of available internal employees and resources. At this time, the Company
believes that the most likely "worst case" scenario involves potential
disruptions in areas in which the Company's operations must rely on outside
firms or clients whose systems may not function properly after January 1, 2000.
While such failures could affect important operations of the Company, either
indirectly or directly, in a significant manner, the Company cannot at present
estimate either the likelihood or the potential cost of such failures.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c)
i. As part of its acquisition of Millennium Computer Applications, Inc., on
April 30, 1999 the Company issued 16,581 shares of its common stock (and
may issue an additional 3,092 shares of its common stock) as partial
consideration for all of the issued and outstanding capital stock of
Millennium Computer Applications, Inc. The exchange of the Company's common
stock with the stockholders of Millennium Computer Applications, Inc. was
exempt from registration under the Securities Act pursuant to Section 4(2).
ii. As part of its acquisition of Realshare, Inc., on April 30, 1999 the
Company issued 5,400 shares of its common stock (and may issue an
additional 600 shares of its common stock) in exchange for all of the
issued and outstanding capital stock of Realshare, Inc. The exchange of the
Company's common stock with the stockholders of Realshare, Inc. was exempt
from registration under the Securities Act pursuant to Section 4(2).
iii. As part of its acquisition of the consumer Internet dial-up accounts and
related computer equipment assets of the Planet Access Network group of
companies, on May 7, 1999 the Company issued 13,380 shares (and may issue
an additional 5,734 shares of its common stock) to the owners of Planet
Access, Inc. as partial consideration for the purchased assets. The
exchange of the Company's common stock with the owners of Planet Access,
Inc. was exempt from registration under the Securities Act pursuant to
Section 4(2).
iv. As part of its acquisition of Spencer Analysis, Inc., on June 30, 1999 the
Company issued 240,505 shares of its common stock (and may issue an
additional 19,500 shares of its common stock) in exchange for all of the
issued and outstanding capital stock of Spencer Analysis, Inc. The exchange
of the Company's common stock with the stockholders Realshare, Inc. was
exempt from registration under the Securities Act pursuant to Section 4(2).
(d) On May 14, 1998, the Company's registration statement on Form SB-2, as
amended (file number 333-47741) (the "Registration Statement"), relating to
the Offering, was declared effective by the SEC. Whale Securities Co., L.P.
acted as the underwriter in connection with the Offering which was
consummated on May 20, 1998. In connection with the Offering, the Company
registered, issued and sold 1,380,000 shares of common stock, including
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180,000 shares of common stock issued in connection with the exercise in
full of the underwriter's over-allotment option at an initial public
offering price of $6.00 per share resulting in proceeds to the Company (net
of underwriting discounts, commissions and other expenses payable by the
Company) in the aggregate approximate amount of $6,642,000. Additionally,
the Company registered 120,000 shares of common stock underlying warrants
to purchase common stock which warrants were sold by the Company to the
underwriter for $100. The warrants are exercisable for a four-year period
commencing on May 14, 1999 at an initial exercise price of $8.10 per share.
From the effective date of the Registration Statement through June 30,
1999, the Company has applied an aggregate of $717,000 of the net proceeds
of the Offering for the full repayment of certain indebtedness; $451,000
towards the purchase of equipment; $1,489,000 towards the purchase of
assets of, or the outright acquisition of, companies; $830,000 towards
sales and marketing; and $1,703,000 towards general administrative
expenses. The Company believes that none of the proceeds used in the second
quarter of fiscal 1999 was paid, directly or indirectly, to (i) directors
or officers of the Company or their affiliates, (ii) persons owning ten
percent or more of the common stock or (iii) affiliates of the Company. To
date, the Company believes that it has used the net proceeds of the
Offering in a manner consistent with the use of proceeds described in the
Registration Statement and the Prospectus dated May 14, 1998. The remaining
net proceeds of the Offering in the amount of $1,452,000 remain unused.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on June 4, 1999.
Proposals presented for a stockholder vote were (i) the election of seven
directors to serve until the next Annual Meeting of Stockholders, (ii) the
approval of IBS' 1999 Stock Option Plan and (iii) the ratification of the
selection of BDO Seidman, LLP as independent auditors for the Company for
the fiscal year 1999.
Each of the incumbent directors nominated by the Company were elected with
the following voting results:
VOTES FOR VOTES WITHHELD
Nicholas R. Loglisci, Jr. 3,403,366 0
Clark D. Frederick 3,403,366 0
Frank R. Altieri, Jr. 3,403,366 0
Susan Holloway Torricelli 3,403,366 0
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VOTES FOR VOTES WITHHELD
Barrett N. Wissman 3,403,366 0
David Faeder 3,403,366 0
Patricia Duff 3,403,366 0
IBS' 1999 Stock Option Plan was approved with the following voting results:
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS
2,374,650 9,944 1,550
The ratification of the selection of BDO Seidman, LLP as the Company's
independent auditors for the fiscal year 1999 was approved with the
following voting results:
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS
3,398,022 2,644 2,700
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits in the following table have been filed as part of this
Quarterly Report on Form 10-QSB:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
10.1 Employment Agreement, dated as of May 3, 1999, by and
between IBS and Nicholas R.Loglisci, Jr.
10.2 Employment Agreement, dated as of May 3, 1999, by
and between IBS and Clark D.Frederick.
10.3 Employment Agreement, dated as of May 3, 1999, by and
between IBS and Frank R. Altieri, Jr.
10.4 Employment Agreement, dated as of May 3, 1999, by
and between IBS and Jeffrey E. Brenner.
10.5 IBS Interactive, Inc. Deferred Compensation Plan,
effective May 1, 1999.
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27.1 Financial Data Schedule for the six-month period ended
June 30, 1999.
(b) Reports on Form 8-K.
On April 15, 1999, the Company filed a Report with the SEC on Form 8-K,
under Item 2, to report that it had entered into an Exchange Agreement (the
"Agreement") with Spectrum Information Services, Inc., an Alabama corporation
("Spectrum"), and all of Spectrum's shareholders. Spectrum is a full-service
provider of network and systems integration solutions based in Madison, Alabama.
Pursuant to the terms of the Agreement, IBS acquired all of the issued and
outstanding shares of Spectrum in exchange for $3,200,000 (subject to certain
adjustments) of unregistered shares of IBS common stock, par value $.01 per
share, valued by the parties at $22.00 per share. The Company filed the
financial statements required by Items 7(a) and 7(b) of Form 8-K/A on June 2,
1999.
On June 7, 1999, the Company filed a Report with the SEC on Form 8-K,
under Item 5, to restate its Annual Financial Statement on Form 10-KSB for
Fiscal Year 1998 filed with the SEC on March 31, 1999, to reflect the
combination of Spectrum Information Systems, Inc. on March 31, 1999.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IBS INTERACTIVE, INC.
Date: May 16, 1999
By: /s/ Nicholas R. Loglisci, Jr.
_______________________________________
Name: Nicholas R. Loglisci, Jr.
Title: President and Chief Operating Officer
(Principal Executive Officer)
Date: May 16, 1999
By: /s/ Howard B. Johnson
_______________________________________
Name: Howard B. Johnson
Title: Chief Financial Officer (Principal
Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
10.1 Employment Agreement, dated as of May 3, 1999, by and
between IBS and Nicholas R.Loglisci, Jr.
10.2 Employment Agreement, dated as of May 3, 1999, by
and between IBS and Clark D.Frederick.
10.3 Employment Agreement, dated as of May 3, 1999, by and
between IBS and Frank R. Altieri, Jr.
10.4 Employment Agreement, dated as of May 3, 1999, by
and between IBS and Jeffrey E. Brenner.
10.5 IBS Interactive, Inc. Deferred Compensation Plan,
effective May 1, 1999.
27.1 Financial Data Schedule for the six-month period ended
June 30, 1999.