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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 September 30, 1999
(Third 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 of (I.R.S. Employer I.D. No.)
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 November 11, 1999, 4,385,812 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 September 30, 1999
(unaudited)........................................................................
1
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 1999 and 1998 (unaudited).......................... 3
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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 SEPTEMBER 30, 1999
Current Assets
Cash and cash equivalents................................................ $ 114
Accounts receivable (net of allowance for doubtful
Accounts of $102)..................................................... 3,954
Prepaid expenses......................................................... 211
Deferred tax assets...................................................... 154
----------
Total Current Assets.......................................... 4,443
----------
Property and equipment, net..................................................... 1,184
Intangible assets, net.......................................................... 5,495
Intangible assets - deferred compensation, net.................................. 495
Other assets.................................................................... 476
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TOTAL ASSETS.................................................. $ 12,083
==========
1
See Accompanying Notes to Condensed Consolidated Financial Statements.
IBS INTERACTIVE, INC.
Condensed Consolidated Balance Sheet
(unaudited, in thousands, except share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY September 30, 1999
------------------
Current Liabilities
Long-term debt and capital lease obligations, current portion............... $ 151
Accounts payable and accrued expenses....................................... 1,644
Deferred revenue............................................................ 406
-----------
Total Current Liabilities............................................... 2,201
-----------
Convertible debt................................................................ 400
Long-term debt and capital lease obligations.................................... 164
Deferred compensation........................................................... 900
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Total Liabilities...................................................... 3,665
-----------
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,
4,322,499 shares issued and outstanding................................... 43
Additional paid in capital.................................................. 11,910
Accumulated deficit......................................................... (3,535)
-----------
Total Stockholders' Equity.............................................. 8,418
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 12,083
===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
IBS INTERACTIVE, INC.
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 1999 and 1998
(unaudited, in thousands, except share and per share amounts)
For the nine months ended September 30, For the three months ended September 30,
1999 1998 1999 1998
------------- ------------- ------------- -----------
Revenues..................................... $ 13,620 $ 11,296 $ 4,866 $ 4,301
Cost of services............................. 8,932 7,415 3,554 2,809
------------- ------------- ------------- -----------
Gross profit................................. 4,688 3,881 1,312 1,492
Operating expenses:
Selling, general and administrative....... 7,099 3,450 2,610 1,398
Amortization of intangible assets......... 386 126 160 48
Compensation expense - non-cash........... 260 195 72 99
Merger expenses........................... 223 0 86 0
------------- ------------- ------------- -----------
Operating income (loss)...................... (3,280) 110 (1,616) (53)
Interest expense (income), net............... (70) (35) (6) (53)
Other expenses............................... (75) 0 (75) 0
------------- ------------- ------------- -----------
Income (loss) before income taxes............ (3,285) 145 (1,685) 0
Tax benefit (provision)...................... 27 (130) (50) (10)
Net income (loss)............................ $ (3,258) $ 15 $ (1,735) $ (10)
============= ============ ============ ==========
Earnings (loss) per share
Basic and diluted............................ $ (0.78) $ -- $ (0.41) $ --
============= ============ ============ ==========
Weighted average common shares outstanding
Basic........................................ 4,191,285 3,331,200 4,277,348 4,042,911
Diluted...................................... 4,191,285 3,448,571 4,277,348 4,042,911
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
IBS INTERACTIVE, INC.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998
(unaudited, in thousands)
Nine months ended September 30,
1999 1998
--------- --------
Cash Flows (used in) provided by Operating Activities.................. $ (3,545) $ 269
Cash Flows used in Investing Activities................................ (1,926) (563)
Cash Flows provided by Financing Activities............................ 53 6,630
------ -------
NET INCREASE (DECREASE) IN CASH
and CASH EQUIVELENTS................................................... (5,418) 6,336
CASH and CASH EQUIVALENTS
AT BEGINNING OF PERIOD................................................. 5,532 277
--------- -------
CASH and CASH EQUIVALENTS
AT END OF PERIOD....................................................... $114 $ 6,613
===== =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
1. Financial Statement Presentation
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 Forms 8-K dated June 7, 1999, July 15, 1999 and September 13, 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.
Previously issued consolidated financial statements and notes thereto for the
three and nine month periods ended September 30, 1998 have been restated, as
required, to reflect the December 1998 and 1999 business combinations accounted
for as poolings-of-interests: Halo Network Management, LLC ("Halo"), Spectrum
Information Systems, Inc. ("Spectrum") and Spencer Analysis, Inc. ("Spencer").
The results of operations and cash flows for the three and nine months ended
September 30, 1999 presented herein are not necessarily indicative of the
results of operations and cash flows expected for the year ending December 31,
1999.
2. BUSINESS COMBINATIONS
PURCHASE ACQUISITIONS (SEE NOTE 6)
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 or in the aggregate, significant subsidiaries. Accordingly,
condensed and pro forma financial information is not presented. Results of
operations for the three and nine month 1999 periods include the results of the
acquired companies from the acquisition dates through September 30, 1999.
On July 30, 1999, the Company acquired Jaguar Systems, Inc. ("Jaguar"),
a Salem, New Jersey-based Internet Service Provider.
On August 26, 1999, the Company acquired Florence Business Net
("Florence"), a Florence, South Carolina-based Internet Service Provider.
5
Merger Expenses
For the three and nine months ended September 30, 1999, the Company
recognized $86,000 and $223,000, respectively, of costs related to the Halo,
Spectrum and Spencer business combinations. Such costs are principally comprised
of professional fees and transaction costs incurred during these periods.
3. INCOME TAXES.
The Company has not recognized an income tax benefit for its
operating loss generated in the three-month period ended September 30, 1999
based on uncertainties concerning its ability to generate sufficient taxable
income in future periods. The tax provision for the three-month and nine-month
period ended September 30, 1999 is comprised of a valuation allowance
established against certain deferred tax assets, the realization of which could
not be considered more likely than not, and for state and local taxes on certain
subsidiaries. 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 September 30, 1999 of $154,000 are
comprised of principally 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 September 30, 1999, the Company has applied an
aggregate of $854,000 of the net proceeds of the Offering for the full repayment
of certain indebtedness; $665,000 towards the purchase of equipment; $1,689,000
towards the purchase of assets of, or the outright acquisition of, companies;
$1,260,000 towards sales and marketing; and $2,174,000 towards general
administrative expenses.
5. CONVERTIBLE DEBT
In September 1999, the Company raised $400,000 ($600,000 through
November 12, 1999) through sales of convertible debt instruments (the
"Convertible Debt"). The Convertible Debt is convertible at the option of the
Company at a price equal to the price of the Company's next equity offering. If
converted, holders of the Convertible Debt would be entitled to receive warrants
to purchase common stock equal to 25% of any unpaid principal and accrued
interest divided by the average closing price (as defined) of the Company's
common stock. If the Company exercises its option to convert this debt, the
Company will incur an interest change (principally composed of the fair value of
such warrants) in the period of conversion.
6. STOCKHOLDERS' EQUITY
In July 1999, the Company consummated the acquisitions of Jaguar and in
connection therewith issued up to 44,965 shares of its common stock (subject to
certain adjustments). In August 1999, the Company consummated the acquisition of
6
Florence and in connection therewith issued up to 3,145 shares of its common
stock (subject to certain adjustments.)
During the quarter ended September 30, 1999, the Company has received
proceeds of $330,000 from the exercise of certain warrants and options, the
underlying common stock of which is eligible for resale under the Company's
current Registration Statement on Form S-3.
In addition, during the three-month period ended September 30, 1999,
the Company granted 21,450 options to employees pursuant to its 1999 Stock
Option Plan.
7. SUBSEQUENT EVENTS
In October 1999, the Company approved a plan related to the sale of its
local Internet access business in Huntsville, Alabama to HiWAAY Information
Services, the leading Internet service provider (ISP) in Huntsville. Such sale
was consummated on October 22, 1999. The Company received $875,000 in connection
with this sale. The estimated loss on the sale of these assets is expected to
approximate $175,000 which will be recorded in the fourth quarter of 1999.
In November 1999, the Board of Directors of the Company approved a
private placement of up to $5 million of defined units which consist of common
stock and warrants to purchase common stock. As of November 12, 1999, the
Company had raised $2 million in connection with this private placement.
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 and in the Company's filing of
Form 8-K dated June 7, 1999 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.
7
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
access services. The Company began to provide Internet and information
technology consulting and network 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 acquired (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.
In the third quarter of 1999, the Company continued to make strategic
acquisitions, acquiring (i) Jaguar Systems, Inc., a Salem, New Jersey-based
Internet Service Provider, and (ii) Florence Business Net, a Florence, South
Carolina-based Internet Service Provider.
The Company plans to continue to make strategic acquisitions of
companies that provide Internet programming and applications development
services, Internet and information technology consulting and network services.
The Company may pursue the sale of its other Internet access services in order
to focus on Internet and information technology professional services.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES:
Revenues increased by $565,000, or 13%, from $4,301,000 for the three
months ended September 30, 1998 ("1998") to $4,866,000 for the three months
ended September 30, 1999 ("1999"). Revenues for 1999 increased primarily due to
an increase in Internet connectivity service revenues and, to a lesser extent,
increases in network service revenues and Internet programming and applications
service revenues. In addition, the Company realized training revenue in 1999
8
from an acquisition that was completed during the fourth quarter of 1998 under
the purchase method of accounting. The Company's largest customer, Aetna (which
engaged the Company in October 1997), accounted for 15% of the Company's
consolidated revenues for 1998 and 14% for 1999. Thus, non-Aetna revenues
increased 15% in 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
engineering, programming and technical personnel and fees paid to outside
consultants. Cost of services increased by $745,000, or 27%, from $2,809,000 in
1998 to $3,554,000 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 72% in 1999 as opposed to
65% 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 $1,212,000, or 87%, from $1,398,000 in 1998 to $2,610,000 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; and (iii) increased rent and
utilities associated with acquisitions.
AMORTIZATION OF INTANGIBLE ASSETS:
Amortization of intangible assets increased by $112,000, from $48,000
in 1998 to $160,000 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.,
Planet Access, Inc., Jaguar Systems, Inc., and Florence Business Net, all of
which were consummated subsequent to September 30, 1998.
NON-CASH COMPENSATION EXPENSE
Non-cash compensation expense decreased from $99,000 in 1998 to
$72,000 in 1999. This decrease is primarily attributable to the timing and
related amortization periods of awarded grants.
MERGER EXPENSES:
Merger expenses increased $86,000 in 1999. This increase is primarily
due to the acquisition of Spencer.
9
INTEREST EXPENSE/(INCOME), NET:
Interest expense consists of interest on indebtedness, capital leases
and financing arrangements in connection with the Company's borrowings which is
offset by interest income earned on cash equivalents. The Net Total
decreased by $47,000 from approximately $53,000 of income in 1998 to $6,000 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 in the second and third quarter of
1999.
OTHER EXPENSE:
The increase in other expenses from $0 in 1998 to $75,000 in 1999 is
principally related to professional fees and related non-operating costs for
financial and strategic advisory services in 1999.
TAX BENEFIT (PROVISION):
The Company recognized a tax provision in 1999 of $50,000 compared
to a tax provision of $10,000 in 1998. The 1999 provision is principally
composed of a valuation allowance established against certain deferred tax
assets, the realization of which could not be considered more likely than not.
At September 30, 1999, based on the Company's 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
($154,000) to be more likely than not.
NET INCOME (LOSS):
As a result of the foregoing, the Company had a net loss of
$1,735,000 for 1999 compared to net loss of $10,000 for 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES:
Revenues increased by $2,324,000, or 21%, from $11,296,000 for the
nine-month period ended September 30, 1998 to $13,620,000 for the nine months
ended September 30, 1999. Revenues for the nine-month period ended September 30,
1999 increased primarily due to increases in Internet connectivity service
revenues and, to a lesser extent, increases in network services, programming and
application development revenues. In addition, the Company realized training
revenue in 1999 from an acquisition that was completed during the fourth quarter
of 1998 under the purchase method of accounting. The Company's largest customer,
Aetna (which engaged the Company in October 1997), accounted for 28% of the
Company's consolidated revenues for the nine-month period ended September 30,
1998 and 15% for the nine-month period ended September 30, 1999; thus, non-Aetna
revenues increased by 41% for the nine-month period ended September 30, 1999
over levels in the nine-month period ended September 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
10
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 $1,517,000, or 21%, from $7,415,000
in the nine-month period ended September 30, 1998 to $8,932,000 in the
nine-month period ended September 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 65% in the
nine-month period ended September 30, 1999 as opposed to 66% in the nine-month
period ended September 30, 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 $3,649,000, or 106%, from $3,450,000 in the nine-month period ended
September 30, 1998 to $7,099,000 in the nine-month period ended September 30,
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; and (iii) increased rent and
utilities associated with acquisitions.
AMORTIZATION OF INTANGIBLE ASSETS:
Amortization of intangible assets increased by $260,000, from $126,000
in the nine-month period ended September 30, 1998 to $386,000 in the nine-month
period ended September 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.,
Planet Access, Inc., Jaguar and Florence, all of which were consummated
subsequent to September 30, 1998.
NON-CASH COMPENSATION EXPENSE
Non-cash compensation expense increased from $195,000 in the nine-month
period ended September 30, 1998 to $260,000 in the nine-month period ended
September 30, 1999. This decrease in primarily attributable to primarily
attributable to the timing and related amortization periods of awarded grants.
INTEREST EXPENSE/(INCOME), NET:
Interest expense (income) consists of interest on indebtedness, capital
leases and financing arrangements in connection with the Company's borrowings
which is offset by interest income earned on cash equivalents and investments.
The Net Total increased by $35,000 to $70,000 of income in the nine-month
period ended September 30, 1999. This increase 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.
11
OTHER EXPENSE
The increase in other expenses of $75,000 in the nine-month period
ended September 30,1999 is principally related to professional fees and related
non-operating costs for financial and strategic advisory services undertaken in
the third quarter of 1999.
TAX BENEFIT (PROVISION):
The Company recognized a tax benefit of $27,000 in the nine-month
period ended September 30, 1999 compared to a tax provision of $130,000 in the
nine-month period ended September 30, 1998. The 1999 benefit includes the
effects of a provision established against certain deferred tax assets, the
realization of which could not be considered more likely than not. At September
30, 1999, based on the Company's 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 ($154,000) to be more
likely than not.
NET INCOME (LOSS):
As a result of the foregoing, the Company had net a net loss of
$3,258,000 for the nine-month period ended September 30, 1999 compared to net
income of $15,000 for the nine-month period ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements have been to (i) fund expenses
in connection with providing Internet and IT consulting and network services,
Internet connectivity services, and Internet programming and applications
development services to its clients and (ii) fund acquisitions. The Company has
historically satisfied its working capital requirements principally through the
issuance of equity and debt securities and borrowings.
At September 30, 1999, the Company had working capital of $2,232,000.
Net cash used in operating activities increased from $269,000
provided for the nine-month period ended September 30, 1998 to $3,545,000 used
in the nine-month period ended September 30, 1999. This change was primarily
attributable to decreased operating results that resulted in a net loss in the
amount of $3,258,000 for the period ended September 30, 1999, compared to net
income in the amount of $15,000 for the nine-month period ended September 30,
1998.
Net cash used in investing activities increased from $563,000 for the
nine-month period ended September 30, 1998 to $1,926,000 for the nine-month
period ended September 30, 1999 due to an increase in cash used in acquisitions.
Net cash provided by financing activities was $6,630,000 for the
nine-month period ended September 30, 1998, compared to $53,000 provided for the
nine-month period ended September 30, 1999. This change is primarily
attributable to the Company's completion of its initial public offering in the
second quarter of 1998.
In September 1999, the Company raised $400,000 ($600,000 through
November 12, 1999) in financing through the sale of Convertible Debt. The
Convertible Debt is convertible at the option of the Company at a defined price
equal to the price of the Company's next equity offering. If converted,
holders of the Convertible Debt would be entitled to receive warrants to
12
purchase common stock equal to 25% of any unpaid principal and accrued interest
divided by the average closing price (as defined) of the Company's common stock.
If the Company exercises its option to convert this debt, the Company will incur
an interest charge (principally composed of the fair value of such warrants) in
the period of conversion.
As of September 30, 1999, the Company paid down and terminated its
credit line in its entirety. The Company does not have a credit line at this
time but continues to pursue replacement bank financing.
At September 30, 1999, the Company had capital lease obligations in the
aggregate amount of $56,000, of which $31,000 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 November 1999, the Board of Directors of the Company approved a
private placement of up to $5 million of defined units consisting of common
stock and warrants. As of November 12, 1999, the Company had raised $2
million in connection with this private placement.
In May 1998, the Company secured equipment lines of credit from Ascend
Credit Corp. (now Lucent Technologies, Inc.) and Cisco Systems Capital Corp.,
each in the amount of $500,000. At September 30, 1999, the Company had no
outstanding indebtedness under any such line of credit.
The Company expects that its working capital will be sufficient to meet
the operating and capital requirements of its current business plan for the next
several months. As discussed earlier, the Company is in the process of raising
additional equity capital. If the Company is not successful in raising
additional equity capital or obtaining long-term debt financing in the near
term, it will be required to make adjustments to its anticipated business plan.
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 November 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 for fiscal 1999, which are likely to be funded
through the use of available internal resources. At this time, the Company
13
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 on or 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.
14
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 Jaguar Systems Inc., on July 30,
1999 the Company issued 37,471 shares of its common stock (and may
issue an additional 7,494 shares of its common stock) as partial
consideration for all of the issued and outstanding capital stock of
Jaguar Systems, Inc. The exchange of the Company's common stock with
the stockholders of Jaguar Systems, Inc. was exempt from registration
under the Securities Act pursuant to Section 4(2).
ii. As part of its acquisition of Florence Business Net on August 25,
1999 the Company issued 2,516 shares of its common stock (and may
issue an additional 629 shares of its common stock) in exchange for
all of the issued and outstanding capital stock of Florence Business
Net. The exchange of the Company's common stock with the stockholders
of Florence Business Net. was exempt from registration under the
Securities Act pursuant to Section 4(2).
iii. As part of its acquisition of DesignFX Interactive, LLC on
September 24, 1998 the Company released 20,016 shares of its common
stock pursuant to the terms of the Membership Interest Purchase
Agreement. This release of common stock was exempt from registration
under the Securities Act pursuant to Section 4(2).
iv. As part of its acquisition of Halo Network Management, LLC on
December 10, 1998 the Company released 16,442 shares of its common
stock pursuant to the terms of the Membership Interest Acquisition
Agreement. This release of common stock was exempt from registration
under the Securities Act pursuant to Section 4(2).
v. As part of its acquisition of Spectrum Information Services,
Inc. on March 31, 1999 the Company released 31,818 shares of its
common stock pursuant to the terms of the Exchange Agreement. This
release of common stock 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 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
September 30, 1999, the Company has applied an aggregate of $854,000
of the net proceeds of the Offering for the full repayment of certain
indebtedness; $665,000 towards the purchase of equipment; $1,689,000
towards the purchase of assets of, or the outright acquisition of,
15
companies; $1,260,000 towards sales and marketing; and $2,174,000
towards general administrative expenses. The Company believes that
none of the proceeds used in the third 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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
-------------- ----------------------
3.2 Amended and Restated By-Laws of IBS.
10.1 Amendment 1 to IBS Interactive, Inc.
Deferred Compensation Plan, effective
August 1, 1999.
27.1 Financial Data Schedule for the
nine-month period ended September 30,
1999.
(b) Reports on Form 8-K.
On July 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 Agreement and Plan
of Merger (the "Agreement") with Spencer Analysis, Inc., a New York corporation
("Spencer"), and SAI Acquisition Corp ("SAI"). Spencer is a network services
consulting firm based in New York, New York. Pursuant to the terms of the
Agreement, Spencer merged with SAI and became the surviving entity. In exchange
for all of the issued and outstanding shares of Spencer, IBS issued 240,505
shares of its Common Stock, par value $.01 per share, (the "Common Stock"), and
reserved an additional 19,500 shares of Common Stock for potential later
16
issuance, valued by the parties at $23.08 per share. The Company filed the
financial statements required by Items 7(a) and 7(b) of Form 8-K/A on September
13, 1999.
17
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: November 15, 1999 By: /s/ Nicholas R. Loglisci, Jr.
___________________________________
Name: Nicholas R. Loglisci, Jr.
Title: President and Chief
Operating Officer
Principal Executive Officer)
Date: November 15, 1999 By: /s/ Howard B. Johnson
___________________________________
Name: Howard B. Johnson
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.2 Amended and Restated By-Laws of IBS.
10.1 Amendment 1 to IBS Interactive, Inc.
Deferred Compensation Plan, effective
August 1, 1999.
27 Financial Data Schedule for the
nine-month period ended
September 30, 1999.