U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended November 30, 1999
| | Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission file number 0-13049
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XCEED INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its charter)
DELAWARE 13-3006788
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
488 MADISON AVENUE, NEW YORK, NEW YORK 10022
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(Address of Principal Executive Offices)
(212) 419-1200
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(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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 18,693,390 as of January
12, 2000
XCEED INC. AND SUBSIDIARIES
INDEX
PART I
ITEM 1. Financial Information (Unaudited) Page No.
Condensed Consolidated balance sheets (Restated)
November 30, 1999 and August 31, 1999.......................... 3
Condensed Consolidated statements of operations (Restated)
Three Months Ended November 30, 1999 and 1998.................. 4
Condensed Consolidated statements of cash flows (Restated)
Three Months Ended November 30, 1999 and 1998.................. 5
Notes to condensed consolidated financial statements........... 6-9
ITEM 2. Management's Discussion and Analysis of
the Financial Condition and
Results of Operations.................................. 10-12
PART II
Other Information............................................... 13
Signatures...................................................... 14
2
XCEED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousand, except share and per share data)
(unaudited)
NOVEMBER 30, AUGUST 31,
------------ ----------
ASSETS 1999 1999
- ------ ---- ----
(As restated,
see note 7)
CURRENT ASSETS:
Cash and cash equivalents $ 10,189 $19,754
Investment in marketable securities 847 367
Accounts receivable, net of allowance for
doubtful accounts of $1,790 and $1,190, respectively 12,194 9,868
Program costs and earnings in excess of customer billings 8,081 3,735
Income tax refund receivable 2,437 2,437
Prepaid expenses and other current assets 826 470
Deferred income taxes 212 358
Net assets related to discontinued operations 2,956 2,999
-------- -------
Total current assets 37,742 39,988
PROPERTY AND EQUIPMENT, net 4,048 3,268
DUE FROM OFFICER 1,223 1,223
INTANGIBLE ASSETS,net 53,072 42,999
DEFERRED INCOME TAXES 2,597 1,046
OTHER ASSETS 3,595 3,411
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$102,277 $91,935
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, banks $ 862 $ 862
Accounts payable and accrued expenses 8,972 6,611
Accrued compensation - 2,588
Current portion of long-term debt 389 389
Customer billings in excess of program costs and earnings 7,273 3,538
-------- -------
Total current liabilities 17,496 13,988
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LONG-TERM DEBT 2,526 2,625
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ACCRUED LEASE OBLIGATION 875 875
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DEFERRED REVENUE 288 296
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 30,000,000 shares;
18,570,500 and 17,747,554 issued and 18,735,500 and 17,732,554
outstanding, respectively 186 177
Preferred stock, $.05 par value; authorized 1,000,000
shares; none issued or outstanding - -
Other comprehensive income (loss) 268 (20)
Additional paid-in capital 88,983 78,258
Deferred stock compensation (225) (225)
Treasury stock, at cost; 15,000 shares (71) (71)
Accumulated deficit (8,049) (3,968)
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81,092 74,151
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$ 102,277 $ 91,935
========= ========
See notes to condensed consolidated financial statements.
3
XCEED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED
-----------------
NOVEMBER 30,
-------------
1999 1998
---- ----
(As restated,
see note 7)
REVENUES, net $ 15,495 $ 6,925
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COST AND EXPENSES:
Cost of revenues 11,913 5,251
Selling, general and administrative 8,640 3,737
Research and development 18 113
Depreciation and amortization 1,797 1,305
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22,368 10,406
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OPERATING LOSS (6,873) (3,481)
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OTHER INCOME (EXPENSE):
Interest and dividend income 158 109
Interest expense (72) (49)
Other, net 1 17
----------- -----------
87 77
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAX BENEFIT (6,786) (3,404)
INCOME TAX BENEFIT (2,027) (1,048)
----------- -----------
LOSS FROM CONTINUING OPERATIONS (4,759) (2,356)
INCOME FROM DISCONTINUED OPERATIONS,
net of tax provision of $504 and $492, respectively 678 634
----------- -----------
NET LOSS $ (4,081) $ (1,722)
=========== ===========
NET LOSS PER COMMON SHARE
Loss from continuing operations ($0.26) ($0.17)
Income from discontinued operations 0.04 $ 0.04
----------- -----------
Net loss ($0.22) ($0.13)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING: 18,240,791 13,687,706
=========== ===========
See notes to condensed consolidated financial statements.
4
XCEED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
------------------
November 30,
-----------
1999 1998
---- ----
(As restated,
see note 7)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,081) $(1,722)
------- -------
Adjustment to reconcile net loss to net
cash used in operating activities:
Gain on sale of marketable securities - (5)
Depreciation and amortization 1,840 1,367
Non-cash compensation - 358
Deferred income taxes (1,591) (312)
Provision for doubtful accounts 600 -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (4,272) (2,038)
Inventories 54 (55)
Program costs and earnings in excess of customer billings (2,360) 1,496
Prepaid expenses and other current assets 208 (256)
Other assets 73 (94)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 764 (1,440)
Income taxes payable (5) (249)
Customer billings in excess of program costs and earnings 3,735 1,279
Other liabilities (159) (39)
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Total adjustments (1,113) 12
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Net cash used in by operating activities (5,194) (1,710)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities - (130)
Proceeds from sale of marketable securities - 62
Business acquisitions, net of cash acquired (4,500) (6,286)
Acquisition of property and equipment (933) (234)
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Net cash used in investing activities (5,433) (6,588)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (107) (141)
Proceeds from excercise of warrants and options 1,169 297
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Net cash provided by financing activities 1,062 156
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NET DECREASE IN CASH AND CASH EQUIVALENTS (9,565) (8,142)
CASH AND CASH EQUIVALENTS - beginning of period 19,754 13,789
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CASH AND CASH EQUIVALENTS - end of period $10,189 $ 5,647
======= =======
See notes to condensed consolidated financial statements.
5
XCEED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 1999
(UNAUDITED)
(in thousands, except share and per share data)
1. Basis of Quarterly Presentation:
--------------------------------
The accompanying quarterly financial statements have been prepared in
conformity with generally accepted accounting principles.
The financial statements of the Registrant included herein have been
prepared by the Registrant pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management,
reflect all adjustments, consisting of normal and recurring adjustments,
which are necessary to present fairly the results for the period ended
November 30, 1999.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations; however, management believes that the
disclosures are adequate to make the information presented not
misleading. This report should be read in conjunction with the
financial statements and footnotes therein included in the amended
audited annual report on Form 10-K/A as of August 31, 1999.
2. Principles of Consolidation:
----------------------------
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. Upon consolidation,
all intercompany accounts and transactions are eliminated.
3. Supplemental Information - Statements of Cash Flow:
---------------------------------------------------
Three Months Ended
November 30,
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1999 1998
Interest paid.................. $ 72 $ 49
====== ======
Income taxes paid.............. $ - $ 291
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6
Non-cash Financing and Investing Activities:
--------------------------------------------
Three Months Ended
November 30,
------------------
1999 1998
Common stock issued in
connection with acquisitions..... $8,200 $26,120
====== =======
4. Discontinued Operations
-----------------------
In January 2000, the Company completed the sale of its Water-Jel division
for cash of $4 million to an unrelated Company. The selling price is
subject to certain adjustments, which in the opinion of the Company's
management, should not have a significant impact on the Company's
financial condition or results of operations. As a result, a gain of $1.7
million will be recorded by the Company during the second quarter of
fiscal year ending August 31, 2000.
In January 2000, the Company's Board of Directors approved a plan to
sell its Journeycorp division. Accordingly, the operating results of
Journeycorp for the year ended August 31, 1999 have been segregated from
continuing operations and reported with the Water-Jel results a a
separate line item in the statement of operations.
The Company has restated its prior financial statements to present the
operating results of its Water-Jel and Journeycorp divisions as
discontinued operations. Net assets to be disposed of, at their book
value, have been separately classified in the accompanying balance sheet
at August 31, 1999 and November 30, 1999.
Summarized financial information for Water-Jel and Journeycorp as
discontinued operations for the three months ended November 30, 1999 and
1998 is as follows:
Three Months Ended
November 30,
------------------
1999 1998
Revenues........................... $4,433 $4,363
Income from discontinued
operations, before tax provision... 1,182 1,116
Income from discontinued
operations, net of tax provision... 678 634
5. Basic and diluted net income per common share:
----------------------------------------------
Basic net income per common share is based on the weighted average number
of shares of common stock outstanding during each year. Diluted net
income per common share is based on the weighted average number of shares
of common stock outstanding during each year, adjusted for the dilutive
effect of common potentially issuable shares arising from the assumed
exercise of stock options and warrants and conversion of preferred
shares. Basic loss per common share was computed by dividing net loss by
the weighted average number of shares of common stock outstanding.
Diluted loss per common share does not give effect to the impact of
options, warrants and conversion of preferred shares because their effect
would have been anti-dilutive.
6. Income Taxes:
-------------
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
7
7. Reclassifications:
------------------
Certain reclassifications have been made to the financial statements
for the three months ended November 30, 1998 to conform with the
classifications used in 1999.
8 Restatement:
------------
Subsequent to the issuance of the Company's financial statements for the
three months ended November 30, 1999, management determined that it had
capitalized costs relating to a signing bonus that should have been
expensed when paid. In addition, management determined that it had
excluded the value of stock issued to employees from the calculation of
the purchase price and utilized the incorrect market values of its
publicly-traded common stock to arrive at total stock consideration
issued in connection with certain business combinations accounted for as
purchase transactions. As a result the financial statements for the three
months ended November 30, 1999 have been restated from amounts previously
reported to properly account for these transactions.
A summary of the significant effects of the restatement is as follows:
As
Previously As
Reported Restated
---------- --------
As of November 30, 1999
Goodwill and intangible assets $ 51,306 $ 53,072
Prepaid expenses and other current assets 1,070 826
Total assets 101,158 102,277
Deferred stock compensation (2,868) (225)
Additional paid-in capital 90,104 88,983
Total stockholders' equity 79,570 81,092
For the three months ended November 30, 1999
Selling, general & administrative expense $ 8,253 $ 8,640
Stock-based compensation 349 -
Depreciation & amortization 1,693 1,797
The restatements above to the statement of operations did not have an
impact on loss from continuing operations, net loss or basic or diluted
net loss per share.
9. Business Combinations:
----------------------
During the three month period ended November 30, 1999, the Company
completed the acquisitions of three internet professional services firms
in various transactions accounted for as purchase business combinations.
The aggregate purchase price of these acquisitions was approximately
$12,900, including 434,419 shares of common stock ($8,200) and cash of
$4,700. Certain of the agreements provide for additional
8
consideration in the event certain specific performance criteria are
met.
The acquisition prices were allocated, on an entity-by-entity basis, to
the assets acquired, including tangible and intangible assets and
liabilities assumed based upon the fair values of such assets and
liabilities on the dates of the acquisitions. The historical carrying
amounts of the tangible assets and liabilities approximated their fair
values on the dates of acquisitions. Approximately $12,448 of the
aggregate purchase price was allocated to goodwill and will be amortized
over its estimated useful life of seven years.
9
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
The following discussion and analysis of financial condition and
results of operations of Xceed Inc. should be read in conjunction with the
Company's consolidated financial statements that appear in this document.
Subsequent to the issuance of the Company's financial statements for the
three months ended November 30, 1999, management determined that it had
capitalized costs relating to a signing bonus that should have been expensed
when paid. In addition, management determined that it had inappropriately
excluded the value of stock issued to employees from the calculation of the
purchase price and utilized the incorrect market values of its publicly-traded
common stock to arrive at total stock consideration issued in connection with
certain business combinations accounted for as purchase transactions. As a
result the financial statements for the three months ended November 30, 1999
have been restated from amounts previously reported to properly account for
these transactions.
Overview
- --------
The Company is a leading interactive architect and solutions builder as
well as an integrated marketing and communications company with interactive
services as its core. The Company helps companies develop e-commerce and
e-business solutions, improving people and business performance through
communication tools, techniques and technologies.
10
Results of Operations
The following table sets forth the percentage of revenues to certain items
included in our consolidated statements of operations.
Three months ended
November 30,
---------------------
1999 1998
--------- ---------
Revenues.......................................... 100.0% 100.0%
--------- ---------
Operating expenses:
Cost of revenues................................ 76.9 75.8
Selling, general and
administrative................................. 51.9 54.0
Provision for doubtful
accounts....................................... 3.9 --
Depreciation and
amortization................................... 11.6 18.8
Research and
development.................................... 0.1 1.6
------- ------
Total operating expenses.......................... 144.4 % 150.2 %
Operating loss.................................... (44.4)% (150.2)%
Loss from continuing operations................... (30.7)% (34.0)%
Three Months Ended November 30, 1999 to Three Months Ended November 30, 1998
Revenues for the three months ended November 30, 1999 increased 124% to
$15.5 million from $6.9 million for the three months ended November 30, 1998.
Internet professional services revenues increased 102% to $8.5 million from
$4.2 and revenues from our performance enhancement business increased 159% to
$7.0 million from $2.7 million. The increase in Internet professional services
revenues reflected the continued internal organic growth of our Internet
professional services that increased in both size and the number of client
projects. This increase was also attributable to a series of acquisitions. The
increase in revenues from our performance enhancement business was attributable
to increased sales enhancement programs and the acquisition of Xceed Atlanta in
April 1999.
Cost of revenues includes salaries, benefits and incentive compensation of
billable employees as well as direct costs associated with our performance
enhancement business. Billable employees are full-time employees whose time
spent working on client projects is charged to that client at agreed upon
rates. Billable employees are our primary source of Internet professional
services revenue. Cost of revenues for the three months ended November 30, 1999
increased 127% to $11.9 million from $5.3 million for the three months ended
November 30, 1998. As a percentage of revenues, cost of revenues increased to
76.9% for the three months ended November 30, 1999 from 75.8% for the three
months ended November 30, 1998. The increase in cost of revenues was primarily
attributable to the hiring of additional personnel, salary increases and
personnel costs resulting from our acquisitions.
Selling, general and administrative expense includes promotion and new
business development expenses, salary and benefit costs of non-billable
employees, rent, accounting, legal and human resources costs and costs not
allocated to research and development. Selling, general and administrative
expense for the three months ended November 30, 1999 increased 156% to $8.6
million from $3.7 million for the three months ended November 30, 1998. As a
percentage of revenues, selling, general and administrative expense increased
to 54.0% for the three months ended November 30, 1999 from 48.8% for the three
months ended November 30, 1998. The increase in selling, general and
administrative expense was a direct result of increased selling, marketing and
corporate expenses, including administrative personnel and increased
infrastructure-related costs associated with our provision of Internet
professional services and the expansion of our locations. In addition, we
incurred additional selling, general and administrative expense in connection
with acquisitions.
11
Provision for doubtful accounts includes estimates on losses on all
contracts made during the period in which such losses become probable and can
be reasonably estimated. Provision for doubtful accounts for the three months
ended November 30, 1999 was $600,000. As a percentage of revenues, provision
for doubtful accounts was 3.9% for the three months ended November 30, 1999.
The increase in provision for doubtful accounts reflects the inclusion of
additional startup entities in our Internet services client base.
Depreciation and amortization expense primarily includes depreciation of
technology equipment, furniture and fixtures and leasehold improvements.
Amortization of goodwill expense includes charges for the excess of purchase
price over net tangible book value of acquired companies, and goodwill is
typically amortized over a period of seven to twelve years. Depreciation and
amortization expense for the three months ended November 30, 1999 increased
38% to $1.8 million from $1.3 million for the three months ended November 30,
1998. As a percentage of revenues, depreciation and amortization expense for
the three months ended November 30, 1999 decreased to 11.6% from 18.8% for the
three months ended November 30, 1998. The increase in depreciation and
amortization expense was primarily the result of increased amortization
expenses associated with the fiscal year 1999 decrease in the estimated life of
intangible assets and the amortization of intangible assets from acquisitions
made by us. In addition, we incurred increased depreciation and amortization
expense as a result of increased fixed assets purchases of computer and other
related equipment as well as amortization of leasehold improvements associated
with the increased number of our locations.
Research and development expense includes costs associated with the design,
development, testing, deployment and enhancement of our services. Research and
development expense for the three months ended November 30, 1999 decreased 84%
to $18,000 from $113,000 for the three months ended November 30, 1998. Research
and development expense for the three months ended November 30, 1999 was
primarily incurred in connection with the development of an e-commerce product.
Research and development expense for the three months ended November 30, 1998
was primarily incurred in connection with the development of our performance
enhancement business' Maestro software, which development ended during fiscal
1999.
Other income, net for the three months ended November 30, 1999 increased 14%
to $87,000 from $76,000 reported for the three months ended November 30, 1998,
reflecting interest income on short-term investments in excess of interest
expense on borrowed funds and lease obligations.
An income tax benefit of $2.0 million was recorded for the three months
ended November 30, 1999 compared to an income tax benefit of $1.0 million for
the same period in 1998. Our effective tax rate for the three months ended
November 30, 1999 was 29.9% compared to 36.0% for the three months ended
November 30, 1998, reflecting the impact of the amortization of non-tax
deductible goodwill in connection with certain of our acquisitions.
For the three months ended November 30, 1999, we incurred a loss from
continuing operations of $4.8 million, as compared to a loss from continuing
operations of $2.4 million for three months ended November 30, 1998. Our loss
for the three months ended November 30, 1999 reflects the personnel
requirements and increased corporate infrastructure and related expenses
required for our rapidly growing Internet service business. We believe these
costs are required in order to accommodate the anticipated rapid growth of our
business.
12
Income, net of related taxes, from discontinued operations increased 7% for
the three months ended November 30, 1999 to $678,000 from $634,000 for the
three months ended November 30, 1998. Discontinued operations includes results
from our Water-Jel division, which was sold in January 2000, and our
Journeycorp division that is expected to be sold by the end of fiscal year 2000
based on management's decision to divest assets which are not related to the
provision of Internet professional services.
We reported a net loss of $4.1 million for the three months ended November
30, 1999, compared to a net loss of $1.7 million for the three months ended
November 30, 1998. The net loss was due to the factors described above.
Liquidity and Capital Resources
Historically, we have primarily relied on our cash flow from operations, the
proceeds from private placements of common stock and preferred stock and the
exercise of warrants and options to finance our working capital requirements.
As of November 30, 1999, we had working capital of $20.2 million, a decrease of
$5.8 million from $26.0 million as of August 31, 1999. The decrease was
primarily a result of a decrease in cash and cash equivalents of $9.6 million
used to fund operating activities and acquisitions.
In January 2000, we received cash proceeds of $3.9 million in connection
with the divestiture of the net assets of our Water-Jel division. Also in
January 2000, we received net proceeds of $29.0 million from the sale of 30,000
shares of Series A cumulative convertible preferred stock. We anticipate
selling our Journeycorp division during fiscal 2000.
Net cash used in operating activities for the three months ended November
30, 1999 increased to $5.2 million from $1.7 million for the same period in
1998. This increase of $3.5 million was primarily the result of a $2.9 million
increase in the net loss for the three months ended November 30, 1999. This
increase was also due to an increase in accounts receivable of $4.3 million and
an increase in program costs and earnings in excess of billings of $2.4
million, reflecting our growth in operations and increase in the number and
size of interactive projects.
Net cash used in investing activities decreased to $5.4 million for the
three months ended November 30, 1999 compared to $6.6 million for the same
period in 1998, a decrease of $1.2 million. This was primarily the result of a
$1.8 million decrease in net cash paid in connection with business acquisitions
offset by a $699,000 increase in capital expenditures.
Net cash provided by financing activities for the three months ended
November 30, 1999 increased to $1.1 million from $156,000 for the same period
in 1998. The increase was primarily the result of proceeds from the exercise of
options and warrants.
We anticipate financing our growth strategy through current cash resources,
cash flow from operations and existing and prospective third party credit
facilities, including a bank line of credit in the amount of $5.0 million, all
of which is currently available, as well as through the issuance of equity or
debt securities. We believe the combination of these sources, will be sufficient
to fund our operations and to satisfy our cash requirements for the next 12 to
24 months. There may be circumstances, however, that would accelerate the use of
our liquid resources. If this occurs, we may, from time to time, incur
additional indebtedness or issue, in public or private transactions, equity or
debt securities.
13
PART II - OTHER INFORMATION
---------------------------
ITEM 1 - Legal Proceedings
- ------ -----------------
There is no material litigation currently pending against the
Company, its officers or employees.
ITEM 2 - Changes in Securities
- ------ ---------------------
None
ITEM 3 - Defaults on Senior Securities
- ------ -----------------------------
None
ITEM 4 - Submission to a Vote of Security Holders
- ------ ----------------------------------------
None
ITEM 5 - Other Information
- ------ -----------------
None
ITEM 6 - Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) None
(b) None
14
XCEED INC.
----------
488 MADISON AVENUE
------------------
NEW YORK, N.Y. 10022
--------------------
------------------------
FILE # 0-13049
------------------------
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934,the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BY: /s/ Werner Haase
-----------------
WERNER HAASE,
CEO
DATE: April 11, 2000
15