-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fz81Mgf9wDPLfp1CePX+fKBW27PwaR7N4e0RYj630qcdaUOHRxp+aN/zrISXwiP3 tkwvtag4GttNWqeoXO4VyQ== 0000932440-99-000332.txt : 19991221 0000932440-99-000332.hdr.sgml : 19991221 ACCESSION NUMBER: 0000932440-99-000332 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 ITEM INFORMATION: FILED AS OF DATE: 19991220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBS INTERACTIVE INC CENTRAL INDEX KEY: 0001057257 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 133817344 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-24073 FILM NUMBER: 99777525 BUSINESS ADDRESS: STREET 1: 2 RIDGEDALE AVE STREET 2: STE 350 CITY: CEDAR KNOLLS STATE: NJ ZIP: 07927 BUSINESS PHONE: 9732852600 MAIL ADDRESS: STREET 1: 2 RIDGEDALE AVE STREET 2: STE 350 CITY: CEDAR KNOLLS STATE: NJ ZIP: 07927 8-K 1 REPORT ON FORM 8-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): June 30, 1999 IBS INTERACTIVE, INC. (Exact Name of Registrant as Specified in Charter) Delaware 0-24073 13-3817344 (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.) 2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (973) 285-2600 ================================================================================ CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS STATEMENTS IN THIS REPORT ON FORM 8-K THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING STATEMENTS REGARDING THE COMPANY'S (AS HEREINAFTER DEFINED) EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE: THE PLANS AND OBJECTIVES OF THE COMPANY FOR FUTURE OPERATIONS AND TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ALL FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE THIS REPORT IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, (I) A DECLINE IN GENERAL ECONOMIC CONDITIONS OR A LOSS OF MAJOR CUSTOMERS, (II) THE UNAVAILABILITY OR MATERIAL INCREASE IN THE PRICE OF TELECOMMUNICATIONS SERVICES AND FACILITIES, (III) AN ADVERSE JUDGMENT IN PENDING OR FUTURE LITIGATION, (IV) TECHNOLOGICAL DEVELOPMENTS AND INCREASED COMPETITIVE PRESSURE FROM CURRENT COMPETITORS AND FUTURE MARKET ENTRANTS AND (V) THE FACTORS DISCUSSED 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." THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY FUTURE REVISIONS IT MAY MAKE TO FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ITEM 5. OTHER EVENTS. On June 30, 1999, IBS Interactive, Inc. (the "Company" or "IBS") completed the acquisition of Spencer Analysis, Inc. ("Spencer"), which provided for the exchange of all of the issued and outstanding stock of Spencer for 260,005 shares of IBS common stock (subject to certain adjustments). Such combination has been accounted for as a pooling-of-interests (the "Spencer Merger"). The Company's consolidated financial statements have been retroactively restated as of December 31, 1997 and 1998, and for the years then ended to reflect the consummation of the Spencer Merger. The consolidated financial statements included herein give retroactive effect to the Spencer Merger, which has been accounted for using the pooling-of-interests method and, as a result, the financial position, results of operations and cash flows are presented as if Spencer had been consolidated for all periods presented. The consolidated statements of stockholders' equity reflect the accounts of IBS as if the common stock issued in connection with the Spencer Merger had been issued for all periods presented. The consolidated balance sheets of IBS as of December 31, 1998 and 1997 have been combined with those of Spencer for the same periods. The consolidated statements of operations combine the results of IBS for the years ended December 31, 1998 and 1997 with those of Spencer for the same periods. The consolidated financial statements, including the notes thereto, should be read in conjunction with the historical consolidated financial statements of IBS included in its Annual Report on Form 10-KSB for the year ended December 31, 1998, its Current Report on Form 8-K dated June 7,1999, and the consolidated financial statements of Spencer included in the Company's Form 8-K/A dated September 14, 1999. The Management's Discussion and Analysis of Financial Condition and Results of Operations which follows is reflective of the consolidated financial statements referred to above. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO SUCH STATEMENTS APPEARING ELSEWHERE HEREIN. OVERVIEW The Company provides a broad range of computer networking, programming, applications development and Internet services primarily to businesses and organizations. The Company's revenues are derived principally from consulting fees earned in connection with the performance of systems integration services, recurring monthly Internet connectivity fees and consulting 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. Since April 1996, the Company has acquired Interactive Networks, Inc., Mordor International, AllNet Technology Services, Inc., Entelechy, Inc. ("Entelechy"), JDT WebwerX LLC, DesignFX Interactive, LLC ("DesignFX"), MBS, Inc. ("MBS"), Halo Network Management, LLC ("Halo"), Mainsite Communications, the Renaissance Internet Services division of PIVC, LLC, EZ Net, Inc., the ADViCOM division of Multitronics, Inc., Realshare, Inc., Millennium Computer Applications, Inc., Planet Access, Inc., Spectrum Information Systems Inc., ("Spectrum") and Spencer Analysis Inc. ("Spencer"). The Company began to provide Systems Integration and Programming and Applications Development services in April 1996 and has increasingly emphasized such services. The Company's consulting services generally produce higher profit margins than the Company's Internet services. For the year ended December 31, 1998, Systems Integration, Programming and Applications Development and Internet Services & Training accounted for approximately 77%, 15% and 8%, respectively, of the Company's revenues as compared to 78%, 12% and 10%, respectively, for the year ended December 31, 1997. The Company expects that operating expenses will increase significantly in connection with expansion activities that the Company anticipates undertaking, including those related to: potential acquisitions of systems integrators, programming and applications development firms and Internet Service Providers, further development and upgrade of the Company's network and increased marketing activities. Utilizing proceeds from the initial public offering (the "Offering"), the Company began, during the second quarter of 1998, to increase its expenditures in connection with network development and marketing efforts that resulted in increased operating expenses during subsequent periods. Accordingly, the Company's future profitability will depend on corresponding increases in revenues from operations. The Company's projected expense levels are based on its expectations concerning future revenues and are fixed to a large extent. Any decline in demand for the Company's services or increases in expenses that are not offset by corresponding increases in revenue could have a material adverse effect on the Company. The Company also expects to incur charges of approximately $197,000, $197,000 and $17,000 related to the acquisition of Entelechy in the years ending December 31, 1999, 2000 and 2001; and charges of approximately $99,000, $28,000, $28,000 and $6,000 in the years ended December 31, 1999, 2000, 2001 and 2002, respectively, in connection with the 1998 award of a restricted stock grant to an executive officer and an option grant to directors. The value of these grants will be expensed ratably over the respective periods that the stock is earned and the options vest. The Company anticipates that growth in its client and subscriber base will increase operating costs (including expenses related to network infrastructure and client support) and will require the Company to hire additional network engineers, programmers and technical personnel. The Company currently has 254 full-time employees. The Company has entered into employment agreements with 46 of its employees, including its executive officers, which provide for aggregate salaries of $6,385,000 through and including year-end December 31, 2002. ACQUISITIONS In January 1998, the Company acquired all of the issued and outstanding capital stock of Entelechy in consideration of the issuance of an aggregate of 277,434 shares of Common Stock, of which 147,310 shares were issued at the closing and 130,124 shares are to be issued ratably on each of the first, second and third anniversary of the acquisition closing date, provided that, the former Entelechy stockholders to whom such shares are issuable remain employees of the Company on each respective anniversary. The Company incurred a charge of approximately $180,000 relating to the issuance of such Common Stock in 1998 and expects to incur charges of $197,000, $197,000 and $17,000 relating to the issuance of such Common Stock in each of the years ending December 31, 1999, 2000 and 2001, respectively. The acquisition was accounted for as a purchase. On November 4, 1998, Entelechy was formally merged into the Company. 2 In January 1998, the Company acquired substantially all of the assets of JDT WebwerX LLC (consisting primarily of computer equipment and intangible assets) in consideration for a $35,000 cash payment. The acquisition was accounted for as a purchase. On September 24, 1998, the Company entered into a Membership Interest Purchase Agreement with all of the members of DesignFX, a Web-design, programming and hosting company located in Cherry Hill, New Jersey, whereby the Company acquired all of the issued and outstanding membership interests of DesignFX in exchange for $1,251,000 of unregistered shares of Common Stock valued by the parties at $6.25 per share. The combination has been accounted for as a pooling-of-interests. Accordingly, the Company's financial statements have been restated for all periods presented to include the results of operations and financial position of DesignFX. On December 9, 1998, DesignFX was formally merged into the Company. On December 1, 1998, the Company acquired substantially all of the assets of MBS, a Huntsville, Alabama-based Microsoft Certified Technical Education Provider - Partner Level, for approximately $50,000 of cash, the issuance of 4,493 shares of Common Stock and the assumption of approximately $150,000 in liabilities. On December 10, 1998, the Company entered into the Acquisition Agreement with Halo. Pursuant to the terms of the Acquisition Agreement, the Company acquired all of the issued and outstanding membership interests of Halo in exchange for $1,425,000 of unregistered shares of Common Stock valued by the parties at $6.50 per share. The combination has been accounted for as a pooling-of interests. Accordingly, the Company's financial statements have been restated for all periods presented to include the results of operations and financial position of Halo. On January 29, 1999, the Company acquired substantially all of the assets of Mainsite Communications for approximately $53,000 in cash. Mainsite is an Internet Service Provider based in Bridgeport, New Jersey. On February 22, 1999, the Company acquired substantially all of the assets of the Renaissance Internet Services Division of PIVC, LLC, for $365,000, a one-year promissory note of $228,000 and the issuance of 44,046 shares of common stock, subject to certain adjustments. Renaissance is an Internet Service Provider headquartered in Huntsville, Alabama. Also, see "Subsequent Events." On March 1, 1999, the Company acquired substantially all of the assets of EZ Net, Inc., a Yorktown, Virginia-based Internet Service Provider with approximately 3,100 consumer dial-up and 40 corporate accounts, in exchange for $300,000 in cash and the issuance of 33,289 shares of Company common stock, subject to certain adjustments. Also, see "Subsequent Events." On March 25, 1999, the Company acquired substantially all of the assets of the ADViCOM division of Multitronics, Inc., for approximately $118,000 in cash and the issuance of 4,424 shares of common stock. ADViCOM is an Internet Service Provider based in Huntsville, Alabama. Also, see "Subsequent Events." On March 31, 1999, the Company entered into an Exchange Agreement with 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 valued by the parties at $22.00 per share. The combination has been accounted for as a pooling-of-interests. Accordingly, the Company's financial statements have been restated for all periods presented to include the results of operations and financial position of Spectrum. On April 30, 1999, the Company acquired Realshare, Inc., a Cherry Hill, New Jersey-based Web-site design and programming company for approximately 6,000 shares of Common Stock. On April 30, 1999, Millennium Computer Applications, Inc. was merged into the Company pursuant to the laws of the States of Delaware and North Carolina, respectively. Millennium Computer Applications, Inc. is an Internet Service Provider based in Shallotte, North Carolina for approximately $200,000 in cash and the issuance of 19,673 shares of Common Stock. On May 7, 1999, the Company acquired substantially all of the consumer dial-up and ISDN accounts from the owners of Planet Access, Inc. and related computer equipment from Planet Access, a Stanhope, New Jersey-based Internet Service Provider for approximately $379,500 in cash and the issuance of 19,117 shares of Common Stock. On June 30, 1999, the Company entered into an agreement and plan of merger with Spencer, and Spencer's shareholder. Spencer provides network consulting services to a wide array of commercial businesses, including financial, pharmaceutical and insurance companies located in the New York City metropolitan area. Pursuant to the terms of the agreement, IBS acquired all of the issued and outstanding shares of Spencer in exchange for $5,551,000 (subject to certain adjustments) of unregistered shares of IBS common stock valued by the parties at $23.08 per share. The combination has been accounted for as a pooling-of-interests. Accordingly, and as discussed earlier, the Company's financial statements included in this Current Report on Form 8-K have been restated for all periods presented to include the results of operations and financial position of Spencer. On July 30, 1999, the Company acquired Jaguar Systems, Inc. ("Jaguar"), a Salem, New Jersey-based Internet Service Provider for approximately $121,000 in cash and the issuance of 37,471 shares of Common Stock. On August 26, 1999, the Company acquired Florence Business Net ("Florence"), a Florence, South Carolina-based Internet Service Provider for approximately $69,000 in cash and the issuance of 3,145 shares of Common Stock. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of the Company's revenues represented by certain items reflected in the Company's consolidated statement of operations data: YEARS ENDED DECEMBER 31, ------------------------ 1997 1998 ------------ --------- Revenues............................................. 100.0% 100.0% Cost of services..................................... 57.8 67.1 Gross Profit......................................... 42.2 32.9 Selling, general and administrative expense.......... 41.4 32.3 Amortization expense................................. 0.1 1.1 Non-cash compensation expenses....................... 1.3 1.9 Merger expenses...................................... -- .7 Operating loss....................................... (.6) (3.1) Interest and other expenses (income)................. 1.3 (.9) Loss before income taxes............................. (1.9) (2.2) Income tax provision................................. (1.4) (0.2) Net loss............................................. (3.3) (2.4) YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998 REVENUES. Revenues increased by $5,749,000, or 61%, from $9,464,000 for the year ended December 31, 1997, to $15,213,000 for the year ended December 31, 1998. Of the increase, $2,223,000, or 39%, was generated by the operations of DesignFX, Halo Spectrum, and Spencer. The Company's evolving consulting relationship with 3 Aetna accounted for $1,969,000, or 34%, of the increase in revenues. Expansion of the Company's network and the corresponding increase in dial-up accounts accounted for $310,000, or 5%, of the increase in revenues. The remaining $1,247,000, or 22%, of the increase in revenues was attributable to an increase in the number of clients of the Company, the revenue generated as a result of the Entelechy acquisition in 1998, as well as an increase in the scope of consulting and network integration projects undertaken during 1998 as compared with 1997. Halo's revenues for 1998 were $1,952,000 as compared with $1,848,000 for 1997, an increase of $104,000. The increase of $104,000 is principally due to an increase in new 1998 business volume and customer growth of approximately $748,000 offset by the loss of three customers whose revenues in 1997 totaled approximately $700,000. Management believes that it will be able to grow revenues derived from the provision of systems information services through cross-selling opportunities created by its other businesses, as well as increased sales and marketing efforts. DesignFX's revenues for 1998 were $1,585,000 as compared with $572,000 for 1997, an increase of $1,013,000. This increase was due mainly to an increase in clients; an increase in the number, size and complexity of new projects; and increased revenues from the further development of a significant Web-site project. Management believes that it will be able to continue the growth of its Web-site design and programming services through cross-selling opportunities created by its other businesses, as well as increased sales and marketing efforts. Spectrum's revenues for 1998 were $1,674,000, as compared with $411,000 in 1997, an increase of $1,263,000. This increase was due to: (i) the commencement of full-time operations in December 1997 (ii) and an increase in its client base. Management believes that it will be able to grow revenues derived from network and systems integration solutions through cross-selling opportunities created by its programming development and Internet services, as well as increased sales and marketing efforts. Spencer's revenues for 1998 were $3,734,000, as compared with $3,892,000 in 1997, a decrease of $158,000. The decline in revenues was associated with a decline in the billing rate of a segment of Spencer's network consulting services. 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 engaged for client projects. Cost of services increased by $4,736,000, or 87%, from $5,471,000 for 1997 to $10,207,000 for 1998. Growth in the Company's direct payroll expense accounted for $1,726,000, or 36%, of the increase in cost of services. Additional expenses (largely depreciation) relating to the expansion of the Company's network accounted for $504,000, or 11%, of the increase in cost of services. Halo, DesignFX, Spectrum and Spencer accounted for $1,702,000, or 36%, of the increase in cost of services. The remaining $904,000, or 19%, of the increase in cost of services was attributable to the increase in the number of engineers employed by the Company due to the growth in its client base and an increase in the cost of equipment sold to such clients. Costs of services for Halo were $1,379,000 for 1998 as compared with $1,153,000 for 1997, an increase of $226,000. This increase was due mainly to an increase in the value of equipment sales to clients and subcontracted labor costs. Cost of services for DesignFX were $926,000 for 1998 as compared with $565,000 in 1997, an increase of $361,000. This increase was due to costs associated with new revenue growth and increases in the cost of equipment sales to clients. Cost of services for Spectrum were $1,405,000 for 1998 as compared with $390,000 in 1997, an increase of $1,015,000. This increase was due to costs associated with new revenue growth, increases in the value of equipment sold to customers and commencement of full-time operations in December 1997. Cost of services for Spencer were $2,364,000 for 1998 as compared with $2,264,000 in 1997, an increase of $100,000. The increase in cost of services is largely attributable to increase in cost of compensation for Spencer's consulting professionals. GROSS PROFIT. The Company's gross profit decreased from 42.2% to 32.9% of revenues. In addition to the increased rates of spending for cost of services when measured against the increase in revenues, gross profits were also negatively impacted by a decrease in negotiated billing rates on major long term consulting projects. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses consist primarily of salaries and costs associated with marketing literature, advertising, direct mailings and the Company's management, accounting, finance and administrative functions. Selling, general and administrative expenses increased by $990,000, or 25%, from $3,915,000 in 1997 to $4,905,000 for 1998. Such increase was primarily attributable to the Company's expanded promotional and marketing activities, the hiring of additional marketing personnel, the hiring of additional administrative personnel to support the increase in the Company's professionals and client base and additional administrative and professional costs associated with operating as a public company. Selling, general and administrative expenses for Halo for 1998 were $303,000 as compared to $704,000 in 1997, a decrease of $401,000. This decrease was due mainly to reduced facility costs and lower depreciation expenses. Selling, general and administrative expenses for DesignFX for 1998 were $454,000 as compared to $850,000 in 1997, a decrease of $396,000. This decrease was due mainly to lower marketing and advertising expenses, decreased professional fees and decreased depreciation expenses. Selling, general and administrative expenses for Spectrum for 1998 were $653,000 as compared to $41,000 in 1997, an increase of $612,000. This increase was due to the hiring of additional sales and administrative personnel during 1998. Selling, general and administrative expenses for Spencer for 1998 were $1,251,000 as compared to $1,064,000 in 1997, an increase of $187,000. This increase was due to the hiring of additional sales and administrative personnel during 1998 and an increase of $45,000 in compensation to the Spencer shareholder. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased by $161,000, from $12,000 for 1997 to $173,000 for 1998. This increase is primarily attributable to the amortization of intangible assets (customer lists and goodwill), related to the purchases of Entelechy and MBS. NON-CASH COMPENSATION EXPENSE. The Company expects to incur charges in the amount of approximately $197,000, $197,000 and $17,000 in each of the years ending December 31, 1999, 2000 and 2001, respectively, in connection with the issuance of 130,124 shares of Common Stock to the former Entelechy stockholders. The acquisition of Entelechy occurred in January 1998; there was no related non-cash compensation expense related to this agreement for 1997. An April 1998 restricted stock award to an officer and 1998 option grants to outside directors resulted in compensation charges of $24,000 and $79,000, respectively. Assuming continued employment by these individuals, the Company expects charges of $99,000, $28,000, $28,000 and $6,000 in the years ending December 31, 1999, 2000, 2001 and 2002 for such awards and grants. Non-cash compensation expense of $120,000 and $7,000 was recognized in 1997 and 1998 for the value of services provided by Spectrum stockholders (with no cash compensation) in 1997 and the effects of a restricted stock grant to an employee that vested through February 1998. MERGER RELATED EXPENSES. The Company incurred charges of $109,000 for fees and costs associated with the acquisitions of DesignFX and Halo. Such amounts, for transactions accounted for as a pooling-of-interests, are expensed as services are rendered and costs are incurred. Costs to be incurred in connection with the Spectrum and Spencer acquisitions will be expensed in the year ending December 31, 1999. INTEREST EXPENSE. Interest expense consists of interest on indebtedness and capital leases and financing charges in connection with the issuance of the 1997 Notes. Interest expense was $129,000 for the year ended December 31, 1998 as compared to $81,000 for the year ended December 31, 1997. Excluding the nonrecurring interest charge of $35,000 associated with the amortization of warrants granted to the 1997 Note holders, interest expense for 1998 approximated $94,000, compared to $81,000 for 1997. This increase is due to the effects of Spectrum financing costs of $45,000, offset by the effects of debt repayments totaling $558,000 in 1998, the majority of which was funded with proceeds from the Company's Offering. INTEREST INCOME. Interest income of $185,000 for fiscal 1998 relates to investment income generated by the Company's increased cash position due to proceeds from the Offering in May of 1998. The Company has invested excess proceeds from the Offering in short-term commercial paper and U.S. government obligations. OTHER (INCOME) EXPENSE, NET. In 1997, Halo recorded losses on disposals of fixed assets of $45,000 offset by miscellaneous income of $32,000. In 1998, the Company recognized, as a change in estimate, the effects of reducing $55,000 of liabilities accrued in previous years. NET LOSS. As a result of the foregoing, the Company recognized a net loss of $366,000 for the year ended December 31, 1998 compared to a net loss of $313,000 for the year ended December 31, 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's primary operating cash requirements have been to fund expenses in connection with providing consulting services to clients and 5 Internet access to subscribers. The Company has historically satisfied its working capital requirements principally through the issuance of debt and equity securities. At December 31, 1998, the Company had working capital of $7,011,000, compared to working capital of $1,075,000 at December 31, 1997. During the period from May to August 1995, the Company received net proceeds in the amount of $100,000 in connection with the issuance and sale of 48,980 shares of Common Stock and twenty $5,000 face amount promissory notes. The 1995 Notes accrued interest at a rate of 6% and were payable in July 1998. Interest expense for each of the years ended December 31, 1996 and 1997 amounted to $6,000. Interest expense for 1998 amounted to $2,000. All principal and accrued interest on the 1995 Notes were paid in full in June 1998. The proceeds of the 1995 Notes were used for working capital and general corporate purposes. The Company received net proceeds of $200,000 in connection with the issuance and sale of promissory notes and warrants to purchase an aggregate of 48,872 shares of Common Stock at an exercise price of $3.54 per share. The 1997 Notes accrued interest at the rate of 8% and were payable in full upon the closing of the Offering. In June 1998, the Company repaid the outstanding principal, aggregating $200,000, and accrued interest, aggregating $10,000, on the 1997 Notes. The proceeds of the 1997 Notes were used for working capital and general corporate purposes. On May 14, 1998, the Company's registration statement on Form SB-2, as amended (file number 333-47741), 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 discount, 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 sold by the Company to the underwriter for $100. The warrants are exercisable for a four-year period commencing on May 14, 1999 at a price of $8.10 per share. Further, upon consummation of the Offering, $150,000 in debt that the Company assumed in its acquisition of Entelechy was converted into 25,000 shares of Common Stock. From the effective date of the Offering through December 31, 1998, the Company incurred expenses in connection with the issuance and distribution of securities in the Offering in the actual amount of $1,638,000. Such expenses include underwriting discounts and commissions in the amount of $828,000, expenses paid to or for the underwriter in the amount of $248,400 and other expenses in the amount of $561,600. The Company believes that none of these payments were made, directly or indirectly, to (i) directors or officers of the Company or their affiliates, (ii) persons owning 10% or more of the Common Stock or (iii) affiliates of the Company. Net cash provided by (used in) operating activities increased from $(403,000) for 1997 to $411,000 for 1998. This change was primarily attributable to (i) an increase in non cash losses and charges of $99,000, (ii) increased depreciation and amortization expense of $352,000, (iii) decreases in accounts receivable in the amount of $2,492,000, offset by (iv) decreases in accounts payable of $698,000 and deferred revenue in the amount of $734,000. Net cash used in investing activities increased from $377,000 for 1997 to $867,000 for 1998. The change was attributable, in part, to an increase in capital expenditures of $449,000, principally related to the expansion and enhancement of the Company's network operations center, as well as to expenditures for office equipment to support additional employees hired during 1998. Net cash provided by financing activities increased from $766,000 in 1997 to $5,711,000 in 1998. This change is primarily attributable to the net proceeds of $6,667,000 received in connection with the Offering offset by debt repayments of $666,000 and increased capital distributions of $233,000 to the Spencer shareholder. From the effective date of the Offering through December 31, 1998, the Company has applied an aggregate of $507,000 of the net proceeds of the Offering for the full repayment of debt and $115,000 for acquisitions. In May 1998, the Company paid in full all of its outstanding indebtedness to Interchange State Bank, consisting of $9,000 in principal. 6 In October 1998, the Company repaid $200,000 of outstanding indebtedness of DesignFX, and exercised the purchase option on an equipment lease for $186,000 with Equity National Bank and Commerce Bank. In December 1998, the Company paid in full all of the outstanding principal and interest of Halo in the aggregate amount of $35,000 to Tinton Falls National Bank. At December 31, 1998, the Company had obligations pursuant to capital lease obligations in the aggregate amount of $72,000. These capital lease obligations are secured by the personal guarantees of Messrs. Loglisci, Frederick and Altieri and, in addition, certain of these capital lease agreements are secured by the equipment that is the subject of the capital lease. In March 1999, the Company paid in full all outstanding notes payable of Spectrum ($84,000 outstanding at December 31, 1998). 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. In June 1998, the Company obtained a $1.5 million line of credit from First Union National Bank. The line of credit is for a one-year period effective July 1, 1998. As of December 31, 1998, the Company had no outstanding indebtedness under such line of credit. The line was subsequently terminated in 1999. The Company's working capital at December 31, 1998 approximated $7.0 million. The Company believes that operating cash flow generated through existing customers and business activities, current cash and cash equivalents, available credit through equipment vendor arrangements, and proceeds from the sale of common stock are sufficient to fund operating cash flow needs, capital expenditures (principally network improvements) and acquisitions. The Company's current estimate of capital expenditures for the year ending December 31, 1999 approximates $2.3 million. For the period from January 1, 1999 through September 30, 1999, the Company has utilized cash of approximately $1,574,000 to fund acquisitions. FLUCTUATIONS IN OPERATING RESULTS The Company's operating results may fluctuate significantly from period to period as a result of the length of the Company's sales cycle, as well as from client budgeting cycles, the introduction of new products and services by competitors, the timing of expenditures, pricing changes in the industry, technical difficulties, and general economic conditions. The Company's business is generally subject to lengthy sales cycles that require the Company to make expenditures and use significant resources prior to receipt of corresponding revenues. Historically, the Company's revenues have been higher in the fourth quarter as a result of client budgeting and expenditure cycles. INFLATION Inflation has not had a significant impact on the Company's results of operations. YEAR 2000 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 December 1, 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 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. 7 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. SUBSEQUENT EVENTS Acquisitions All of the following business combinations have been accounted for as purchases and the respective results of operations will be reflected in the Company's future operations. On January 29, 1999, the Company acquired substantially all of the assets of Mainsite Communications ("Mainsite") for approximately $53,000 in cash. Mainsite is an Internet Service Provider based in Bridgeport, New Jersey. On February 22, 1999, the Company acquired substantially all of the assets of the Renaissance Internet Services Division ("Renaissance") of PIVC, LLC, for $912,377 in cash, a promissory note and Common Stock. Renaissance is an Internet Service Provider headquartered in Huntsville, Alabama. On March 1, 1999, the Company acquired substantially all of the assets of EZ Net, Inc., a Yorktown, Virginia-based Internet Service Provider with approximately 3,100 consumer dial-up and 40 corporate accounts, in exchange for $800,000 in cash and Common Stock, subject to certain adjustments. On March 25, 1999, the Company acquired substantially all of the assets of the ADViCOM division of Multitronics, Inc., for approximately $193,000 in cash and Common Stock. ADViCOM is an Internet Service Provider based to Huntsville, Alabama. On April 30, 1999, the Company acquired Realshare, Inc., a Cherry Hill, New Jersey-based Web-site design and programming company for approximately 6,000 shares of common stock. On April 30, 1999, Millennium Computer Applications, Inc. was merged into the Company pursuant to the laws of the States of Delaware and North Carolina, respectively. Millennium Computer Applications, Inc., an Internet Service Provider based in Shallotte, North Carolina, was acquired for approximately $200,000 in cash and the issuance of 19673 shares of common stock. On May 7, 1999, the Company acquired substantially all of the consumer dial-up and ISDN accounts from the owners of Planet Access, Inc. and related computer equipment from Planet Access, a Stanhope, New Jersey-based Internet Service Provider, for approximately $379,500 in cash and the issuance of 19,114 shares of common stock. On July 30, 1999, the Company acquired Jaguar Systems, Inc. ("Jaguar"), a Salem, New Jersey-based Internet Service Provider, for approximately $121,000 in cash and the issuance of 37,471 shares of common stock. On August 26, 1999, the Company acquired Florence Business Net ("Florence"), a Florence, South Carolina-based Internet Service Provider, for approximately $69,000 in cash and the issuance of 3,145 shares of common stock. On March 31, 1999, the Company entered into an Exchange Agreement with 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 valued by the parties at $22.00 per share. The combination has been accounted for as a pooling-of-interests. Accordingly, the Company's financial statements have been restated for all periods presented to include the results of operations and financial position of Spectrum. On June 30, 1999, the Company entered into an agreement and plan of merger with Spencer, and Spencer's shareholder. Spencer provides network consulting services to a wide array of commercial businesses, including financial, pharmaceutical and insurance companies located in the New York City metropolitan area. Pursuant to the terms of the agreement, IBS acquired all of the issued and outstanding shares of Spencer in exchange for $5,551,000 (subject to certain adjustments) of IBS common stock valued by the parties at $23.08 per share. The combination has been accounted for as a pooling-of-interests. Accordingly, and as discussed earlier, the Company's financial statements have been restated for all periods presented to include the results of operations and financial position of Spencer. Dispositions 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, an 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. Private Placements & Warrants In November 1999, the Board of Directors of the Company approved private two placements of up to $10 million of defined units which consist of 1,000,000 shares of common stock and 250,000 warrants to purchase common stock. As of December 8, 1999, the Company had raised $5.2 million in connection with these private placements. In October 1999, the Company entered into a consulting agreement with an investment advisory firm in which the Company agreed to issue: (a) warrants to purchase 50,000 shares of Common Stock at an exercise price of $10.25 per share and (b) warrants to purchase 50,000 shares of Common Stock at an exercise price of $11.25 per share upon the closing of certain mergers or acquisitions to be identified. In the event the warrants are issued, the Company will realize a non-cash charge to operations for the fair value of these warrants. The period(s) that such charge will be recognized over will be determined based upon the nature of the merger or acquisition involved, if any (that is whether the merger is accounted for as a purchase or a pooling of interest). Convertible Debt In the third and fourth quarter of 1999, the Company raised $600,000 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. The Company will exercise its option to convert such instruments in December of 1999. When 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. The Company expects to incur a non-cash charge relating to the conversion of the Convertible Debentures. The ultimate amount of such charge will be subject to a formal analysis of the fair value of the consideration received by the Convertible Debenture holders upon conversion. Such charge could be material to the Company's operations. 8 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized. IBS INTERACTIVE, INC. Dated: December 20, 1999 By: /s/ Nicholas R. Loglisci, Jr. ----------------------------------- Nicholas R. Loglisci, Jr. President and Chief Executive Officer (Principal Executive Officer) 9 IBS INTERACTIVE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND EXHIBITS The following are the consolidated financial statements and exhibits of IBS Interactive, Inc. and Subsidiaries, which are filed as part of this report. PAGE Reports of Independent Certified Public Accountants................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998.......... F-4 Consolidated Statements of Operations for the years ended December 31, 1997 and 1998........................................ F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997 and 1998.................................. F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1998.................................. F-7 Notes to Consolidated Financial Statements............................ F-8 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders IBS Interactive, Inc. Cedar Knolls, New Jersey We have audited the accompanying consolidated balance sheets of IBS Interactive, Inc. and Subsidiaries (formerly known as Internet Broadcasting System, Inc.) as of December 31, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Spectrum Information Systems, Inc. as of and for the year ended December 31, 1997, which were combined with the Company's financial statements as of December 31, 1997 and for the year then ended, which financial statements reflect total assets of $147,000 as of December 31, 1997 and total revenues of $411,000 for the year ended December 31, 1997. Those financial statements were audited by another auditor whose report has been furnished to us, and our opinion, insofar as it related to the 1997 amounts included for Spectrum Information Systems, Inc. is based solely on the report of the other auditor. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits and the report of the other auditor provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditor, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IBS Interactive, Inc. and Subsidiaries as of December 31, 1997 and 1998 and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/BDO Seidman, LLP BDO Seidman, LLP Woodbridge, New Jersey December 9, 1999 F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Spectrum Information Systems, Inc. We have audited the accompanying balance sheet of Spectrum Information Systems, Inc., as of December 31, 1997, and the related statements of operations and accumulated deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Spectrum Information Systems, Inc., as of December 31, 1997 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Barfield, Murphy, Shank & Smith, P.C. Barfield, Murphy, Shank & Smith, P.C. Birmingham, Alabama May 13, 1999 F-3 IBS INTERACTIVE, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1998 December 31, ------------------------------ 1997 1998 ------------------------------ ASSETS Current Assets: Cash and cash equivalents.................. $ 277,000 $5,532,000 Accounts receivable (net of allowance for 3,211,000 2,678,000 doubtful accounts of $116,000 in 1997 and $73,000 in 1998)........................ Prepaid income taxes....................... - 54,000 Prepaid expenses and other current assets.. 29,000 184,000 Deferred income tax asset.................. 50,000 126,000 ------------------------------ Total current assets.................... 3,567,000 8,574,000 Property and equipment, net................... 718,000 983,000 Intangible assets, net........................ 56,000 1,418,000 Deferred income tax asset..................... - 5,000 Deferred offering costs....................... 45,000 - Advance to related party...................... - 70,000 Other assets.................................. 72,000 126,000 ------------------------------ TOTAL ASSETS $ 4,458,000 $11,176,000 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt....... $ 624,000 $ 79,000 Accounts payable........................... 414,000 696,000 Deferred revenue........................... 503,000 45,000 Accrued salaries and related expenses...... 71,000 206,000 Accrued project costs...................... 305,000 - Accrued professional fees.................. - 60,000 Customer deposits.......................... 80,000 59,000 Accrued interest payable................... 14,000 - Income taxes payable....................... 25,000 - Accrued warranty expense................... - 90,000 Deferred Income Tax Liability.............. 92,000 84,000 Other current liabilities.................. 364,000 244,000 ------------------------------ Total current liabilities............... 2,492,000 1,563,000 Long-term debt, less current maturities....... 281,000 277,000 Deferred compensation......................... - 705,000 Pension obligation............................ 151,000 208,000 Deferred income tax liabilities............... 34,000 - ------------------------------ Total liabilities............................. 2,958,000 2,753,000 ------------------------------ Commitments and contingencies Stockholders' Equity: Preferred Stock - $.01 par value; authorized 1,000,000 shares, no shares issued and outstanding.......................... - - Common Stock - $.01 par value; authorized 11,000,000 shares, issued and outstanding 2,445,738 shares - 1997 and 4,002,541 shares - 1998............................ 24,000 39,000 Additional paid in capital................. 1,723,000 9,280,000 Unearned compensation...................... (7,000) - Accumulated deficit........................ (240,000) (896,000) ------------------------------ Total Stockholders' Equity................. 1,500,000 8,423,000 ------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,458,000 $11,176,000 ============================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 IBS INTERACTIVE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 December 31, ------------------------------ 1997 1998 ------------------------------ Revenues........................................ $9,464,000 $15,213,000 Cost of services................................ 5,471,000 10,207,000 ------------------------------ Gross Profit.................................... 3,993,000 5,006,000 Operating expenses: Selling, general and administrative ......... 3,915,000 4,905,000 Amortization of intangible assets............ 12,000 173,000 Non-cash compensation expenses............... 120,000 290,000 Merger related expenses...................... - 109,000 ------------------------------ 4,047,000 5,477,000 ------------------------------ Operating loss.......................... (54,000) (471,000) Interest expense................................ 81,000 129,000 Interest income................................. - (185,000) Other (income) expense, net..................... 48,000 (75,000) ------------------------------ Loss before income taxes........................ (183,000) (340,000) Income tax provision............................ (130,000) (26,000) ------------------------------ Net loss........................................ $ (313,000) $ (366,000) ============================== Loss per share Basic and Diluted............................ $ (.13) $ (.10) ============================== Weighted average number of common stock and equivalents..................................... 2,436,621 3,509,380 ============================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 IBS INTERACTIVE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
Common Stock --------------------- Additional Total Number of Paid in Unearned Subscription Accumulated Stockholders' Shares Amount Capital Compensation Receivable Deficit Equity ----------------------------------------------------------------------------------------------- Balance - January 1, 1997, as previously reported 1,679,975 $17,000 $1,088,000 $(47,000) $(54,000) $ (283,000) $ 721,000 Adjustments in connection with pooling of interests - DesignFX 176,944 2,000 (2,000) - - (45,000) (45,000) Adjustments in connection with pooling of interests - Halo 180,866 2,000 (2,000) - - 17,000 17,000 Adjustments in connection with pooling of interests - Spectrum 145,456 1,000 (1,000) - - - - Adjustments in connection with pooling of interests - Spencer 240,505 2,000 44,000 - - 432,000 478,000 ---------------------------------------------------------------------------------------------- Balance, January 1, 1997, as restated 2,423,746 24,000 1,127,000 (47,000) (54,000) 121,000 1,171,000 Shares issued in connection with acquisition - AllNet 15,883 - 52,000 - - - 52,000 Payment of common stock subscription receivable - - - - 54,000 - 54,000 Amortization of unearned compensation - - - 40,000 - - 40,000 Shares issued in connection with private placement 6,109 - 20,000 - - - 20,000 Spectrum stockholders' compensation - - 160,000 - - - 160,000 Issuance and amortization of warrants associated with 1997 Notes - - 54,000 - - - 54,000 Distribution to Spectrum and Spencer shareholders - - - - - (48,000) (48,000) Capital contributions - - 310,000 - - - 310,000 Net loss - - - - - (313,000) (313,000) ---------------------------------------------------------------------------------------------- Balance - December 31, 1997 2,445,738 24,000 1,723,000 (7,000) - (240,000) 1,500,000 Net proceeds from initial public offering 1,380,000 14,000 6,628,000 - - - 6,642,000 Issuance and amortization of directors' options - - 79,000 - - - 79,000 Shares issued in connection with acquisition - Entelechy 147,310 1,000 670,000 - - - 671,000 Conversion of Entelechy demand note 25,000 - 150,000 - - - 150,000 Shares issued in connection with acquisition - MBS 4,493 - 30,000 - - - 30,000 Amortization of unearned compensation - - - 7,000 - - 7,000 Distribution to Spectrum and Spencer shareholders - - - - - (290,000) (290,000) Net loss - - - - - (366,000) (366,000) ---------------------------------------------------------------------------------------------- Balance - December 31, 1998 4,002,541 $39,000 $9,280,000 $ - $ - $ (896,000) $8,423,000 ==============================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 IBS INTERACTIVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 December 31, ----------------------------- 1997 1998 ----------------------------- Cash flows from operating activities: Net loss................................... $ (313,000) $ (366,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........... 315,000 667,000 Loss on disposals of fixed assets....... 69,000 18,000 Bad debt expense........................ 5,000 40,000 Non-cash interest expense............... 24,000 49,000 Compensation expense - Entelechy........ - 180,000 Non-cash compensation................... 200,000 110,000 Deferred income tax provision (benefit). 87,000 (123,000) Changes in operating assets and liabilities (net of effects of purchase acquisitions): Accounts receivable........................ (1,876,000) 616,000 Prepaid expenses and other assets.......... - (210,000) Accounts payable and accrued expenses...... 676,000 (34,000) Deferred revenue........................... 276,000 (458,000) Income taxes............................... 25,000 (79,000) Deposits and other......................... 63,000 (57,000) Pension Obligation......................... 46,000 58,000 ----------------------------- Net cash provided by (used in) operating activities.............................. (403,000) 411,000 ----------------------------- Cash flows from investing activities: Capital expenditures - property and equipment (302,000) (751,000) Asset acquisitions and related costs....... (75,000) (116,000) ----------------------------- Net cash used in investing activities. (377,000) (867,000) ----------------------------- Cash flows from financing activities: Proceeds from initial public offering...... - 8,280,000 Private sales of common stock.............. 74,000 - Capital contributions...................... 310,000 - Capital distributions...................... (48,000) (290,000) Offering costs............................. (25,000) (1,613,000) Repayments of notes payable................ (239,000) (396,000) Proceeds from notes payable................ 445,000 65,000 Repayments from (advances to) related parties 79,000 (70,000) Proceeds from (repayment of) 1997 Notes.... 200,000 (200,000) Payments of capital lease obligations...... (30,000) (65,000) ----------------------------- Net cash provided by financing activities 766,000 5,711,000 ----------------------------- Net increase (decrease) in cash and cash (14,000) 5,255,000 equivalents................................... Cash and cash equivalents, at beginning of year 291,000 277,000 ----------------------------- Cash and cash equivalents, at end of year..... $ 277,000 $ 5,532,000 ============================= SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 NOTE 1- ORGANIZATION AND BACKGROUND IBS Interactive, Inc. (the "Company") and its subsidiaries provides a broad range of computer networking, programming, applications development, Internet subscriber access, Internet Web-site development, network consulting and network installation services. Services are primarily rendered to businesses and organizations, including governmental and not-for-profit entities. The Company was incorporated under the name Internet Broadcasting System, Inc. and changed its name to IBS Interactive, Inc. on March 10, 1998. The Company, a Delaware corporation, has its main administrative office in Cedar Knolls, New Jersey, along with regional offices throughout New Jersey, New York, Alabama and Virginia. RESTATEMENTS Previously issued consolidated financial statements and notes thereto of the Company have been restated, as required by Accounting Principles Board Opinion No. 16, "Business Combinations," to reflect the 1998 and 1999 business combinations accounted for as poolings-of-interests (DesignFX Interactive, LLC ("DesignFX"), Halo Network Management, LLC ("Halo"), Spectrum Information Systems, Inc. ("Spectrum") and Spencer Analysis, Inc. ("Spencer") (see Note 3). NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Revenue is recognized as services are provided to clients and subscribers. In the event that there are significant performance obligations yet to be fulfilled on consulting, design and installation projects, revenue recognition is deferred until such conditions are removed. For the years ended December 31, 1997 and 1998, the Company recognized revenues of $252,000 and $29,000 respectively, on projects in process. Such unbilled amounts are included in accounts receivable, net, at December 31, 1997 and 1998, respectively. STOCK BASED COMPENSATION The Company accounts for its stock option awards to employees under the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company provides pro forma disclosures of net income (loss) and earnings (loss) per share as if the fair value based method of accounting had been applied, as required by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The values ascribed to restricted stock awards are based on the fair value of the Company's common stock at the date of the grant. The intangible asset related to the value of the stock awards is amortized on a straight line basis over the required service periods. The Company's liability related to such awards will be converted to common stock and additional paid in capital upon the formal issuance of the common stock. WARRANTS The fair values ascribed to warrants that were granted in connection with the 1997 Notes (see Note 6) have been capitalized and amortized, as interest expense, over the expected life of the underlying debt. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory rates F-8 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Valuation allowances are established against deferred tax assets when management concludes that the realization of such deferred tax assets cannot be considered more likely than not. Through their acquisition dates, the owners of DesignFX, Halo, Spectrum and Spencer elected, under the applicable provisions of the Internal Revenue Code and applicable state code, to report their respective income for federal and state income tax purposes as a limited liability or "S" corporation. Under those regulations, the owners individually received the income tax provision or benefit of their respective share of DesignFX's, Halo's, Spectrum's and Spencer's net income or loss. Accordingly, the Company has not recorded a provision or benefit for federal and state income taxes for the year ended December 31, 1997 and from January 1, 1998 through the respective acquisition dates of DesignFX and Halo. For purposes of reporting local income taxes, Spencer was recognized as a cash basis taxpayer. In future periods, the Company's consolidated income tax provision or benefit will include the operating results of DesignFX, Halo, Spectrum and Spencer. As such, the historical tax provision of the Company, as reflected in the accompanying consolidated 1997 and 1998 statements of operations, is not necessarily indicative of the tax provision or benefit that would have been recorded had DesignFX, Halo, Spectrum and Spencer been acquired at the beginning of 1997. CASH EQUIVALENTS The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity date of three months or less from the purchase date to be cash equivalents. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to credit risk consist primarily of a concentration of unsecured trade accounts receivables. At December 31, 1997, three customers accounted for 46%, 14%, and 13% of total net accounts receivable and at December 31, 1998, two customers accounted for 29% and 11% of total net accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company monitors the allowance for potential credit losses and adjusts the allowance accordingly. During the year ended December 31, 1998, the Company's allowance for doubtful accounts was reduced by $43,000. The decrease was comprised of charged off accounts totaling $39,000 and a reduction in the allowance (based on the results of an assessment of the collectibility of outstanding balances) of $4,000. At December 31, 1998, cash equivalents of $4,982,000 and $443,000 represent investments in GE Capital Corporation commercial paper and short-term obligations of the United States government, respectively. The Company maintains substantially all of the machinery and communications network equipment utilized in providing Internet access to customers at one location. SOURCES OF SUPPLIES AND VENDORS The Company has multiple vendors, which provide data communications and Internet access services to customers. Although management believes alternative telecommunications and access facilities could be found in a timely manner, any disruption or termination of these services could have a short-term adverse effect on operating results. In addition, the Company is also dependent on third-party manufacturers of hardware components to be used for resale. Failure by manufacturers to deliver this equipment on a timely basis, or any inability to obtain alternative sources, could have an adverse effect on operating results. Although the Company attempts to maintain multiple vendors for required products, its modems, terminal servers and high-performance routers, which are important components of its network, are currently acquired from limited sources. In addition, some of the Company's suppliers have limited resources and F-9 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 production capacity. If the suppliers are unable to meet the Company's needs as it builds out its network infrastructure, then delays and increased costs in the expansion of the Company's network infrastructure could result, which could have an adverse effect on operating results. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed primarily under the straight-line method over the assets estimated useful lives, generally three years for computer equipment, five years for office equipment and seven years for furniture and fixtures. Leasehold improvements are amortized over the term of the related lease, generally three to five years. Equipment under capital leases is amortized on a straight-line basis over the terms of the leases, generally three years. LONG-LIVED ASSETS The Company follows SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed of" ("SFAS 121"). In accordance with SFAS 121, the carrying values of long-lived assets are periodically reviewed by the Company and impairments would be recognized if the expected future operating non-discounted cash flows derived from an asset were less than its carrying value. There were no impairment losses recorded in the years ended December 31, 1997 and 1998. INTANGIBLE ASSETS Intangible assets are comprised primarily of goodwill, customer lists and other intangibles arising from various acquisitions and deferred compensation arrangements. Such asset values are amortized over periods of five to ten years, and for deferred compensation arrangements over the period that such services are rendered. PENSION ACCOUNTING The Company has adopted SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits as it relates to a Spencer pension plan. The provisions of SFAS No. 132 revise employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of these plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and notes payable approximate the instruments' fair values due to the immediate or short-term maturity of these financial instruments. EARNINGS (LOSS) PER SHARE Basic loss per share has been computed using the weighted average number of shares of common stock outstanding for the period. The Company's diluted loss per share includes the effect, if any, of unissued shares under options, warrants and stock awards computed using the treasury stock method. In all periods presented, there were no differences between basic and diluted loss per common share because the assumed exercise of common share equivalents was antidilutive. The assumed exercise of stock options and warrants, as well as the issuance of common stock under compensation and acquisition agreements (aggregating 674,549 shares at December 31, 1998), could potentially dilute basic earnings per share. The Company's 1998 pro forma basic loss per share (which assumes that the proceeds from the initial public offering of common stock and repayments of certain borrowings occurred on January 1, 1998), totaled $.09 per share. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. F-10 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 Actual results could differ from these estimates. Significant estimates include the assumptions utilized in the development of the Company's allowance for doubtful accounts, given its concentration of accounts receivable balances with a limited number of customers. In addition, many of the Company's estimates and assumptions used in the consolidated financial statements relate to the Company's continued ability to deliver state-of-the-art technical and subscriber services, which are subject to competitive market and technology changes. It is reasonably possible that changes may occur in the near term that would affect management's estimates with respect to the values of accounts receivable, intangibles and fixed assets. EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments and hedging activities. The Company is currently reviewing the effects of SFAS 133, if any. This statement will be adopted by the Company no later than its year ending December 31, 2000. NOTE 3 - BUSINESS COMBINATIONS (Also, see Note 16) POOLINGS-OF-INTERESTS On September 24, 1998, December 10, 1998, March 31, 1999 and June 30, 1999 the Company acquired DesignFX, Halo, Spectrum and Spencer respectively, in business combinations accounted for as poolings-of-interests. DesignFX, which engages in the development and maintenance of Web-sites on the Internet, became a wholly-owned subsidiary of the Company through the exchange of 176,944 shares of the Company's common stock (exclusive of the reserved shares discussed below) for all of the outstanding membership interests of DesignFX. On December 9, 1998, DesignFX was formally merged into the Company. Halo, which engages in full-service network solutions, including planning, installation and maintenance services, became a wholly-owned subsidiary of the Company through the exchange of 180,866 shares of the Company's common stock (exclusive of the reserved shares discussed below) for all of the outstanding membership interests of Halo. Spectrum, which is a full-service provider of network and systems integration solutions, became a wholly-owned subsidiary of the Company through the exchange of 145,456 shares of the Company's common stock (exclusive of the reserved shares discussed below) for all of the outstanding shares of Spectrum. Spencer, which is a provider of network consulting to a wide array of businesses, became a wholly-owned subsidiary of the company through the exchange of 240,505 shares of the Company's common stock(exclusive of the reserved shares discussed below) for all of the outstanding shares of Spencer. The ultimate number of shares to be issued to the former owners of DesignFX, Halo, Spectrum and Spencer is contingent upon the resolution of specific and, to a lesser extent, general financial matters. The Company has reserved 23,216, 38,365, 10,909 and 19,500 of common shares for issuance to the owners of DesignFX, Halo, Spectrum and Spencer respectively, pending the outcome of such matters. With respect to DesignFX and Halo, the Company expects to reach agreement on the ultimate number of shares to be issued in the year ending December 31, 1999. The accompanying financial statements are based on the assumption that the Company, DesignFX, Halo, Spectrum and Spencer were combined as of January 1, 1997 and, accordingly, financial statements of prior years have been restated to give effect to the combinations. Summarized results of operations of the Company, DesignFX, Halo, Spectrum and Spencer for the period January 1, 1997 through December 31, 1997 are as follows: Company DesignFX Halo Spectrum Spencer ------- -------- ----- ---------- --------- Net revenues $2,741,000 $572,000 $1,848,000 $411,000 $3,892,000 Net income (loss) 198,000 (825,000) (67,000) (100,000) 481,000 Summarized unaudited results of operations of the Company and DesignFX through September 30, 1998 (the closest practical date to the date of the DesignFX acquisition) are as follows: Company DesignFX --------- ---------- Net revenues $6,091,000 $1,181,000 Net income 52,000 42,000 F-11 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 Summarized unaudited results of operations of the Company and Halo through December 31, 1998 (the closest practical date to the date of the Halo acquisition) are as follows: Company Halo ----------- ---------- Net revenues $7,853,000 $1,952,000 Net income (loss) (326,000) 266,000 Summarized unaudited results of operations of the Company and Spectrum through December 31, 1998 are as follows: Company Spectrum ---------- ---------- Net revenues $9,805,000 $1,674,000 Net loss (60,000) (419,000) Summarized unaudited results of operations of the Company and Spencer through December 31, 1998 are as follows: Company Spencer ---------- ---------- Net revenues $11,479,000 $3,734,000 Net income (loss) (479,000) 113,000 There were no material adjustments to conform the accounting policies of DesignFX, Halo, Spectrum and Spencer to the accounting policies used by the Company. The Company incurred charges of $109,000 for fees and costs associated with the acquisitions of DesignFX and Halo. Such amounts, for transactions accounted for as a pooling-of-interests, are expensed as services are rendered and costs are incurred. Costs related to the Spectrum and Spencer acquisitions will be expensed in the year ending December 31, 1999. PURCHASES ALLNET TECHNOLOGY SERVICES, INC. On March 1, 1997, the Company acquired certain assets of AllNet Technology Services, Inc. ("AllNet"), an Internet Service Provider, in exchange for $75,000 of cash and 13,378 shares of Company common stock in a business combination accounted for as a purchase. The fair value of the shares issued in connection with the acquisition approximated $52,000 and was based, in part, on the fair market value of shares sold in the Company's 1996 private placement of common stock (see Note 7). Of the total purchase price of $127,000, $65,000 was allocated to equipment and the balance was assigned to various intangible assets. The results of operations of AllNet are included in the accompanying financial statements from the acquisition date forward. With respect to this acquisition, the results of operations from January 1, 1997 through the acquisition date were not material and, accordingly, pro forma operating results are not presented. JDT WEBWERX LLC On January 1, 1998, the Company acquired certain assets of JDT WebwerX LLC ("JDT"), a business providing programming and applications development and Internet access, for $35,000 cash, in a business combination accounted for as a purchase. Of the total purchase price of $35,000, $9,000 was allocated to equipment and the balance was assigned to various intangible assets. The results of operations of JDT are included in the accompanying financial statements for the entire year ended December 31, 1998. With respect to this acquisition, the results of operations for the year ended December 31, 1997 through the acquisition date were not material and, accordingly, pro forma operating results are not presented. ENTELECHY, INC. On January 31, 1998, the Company acquired substantially all the assets of Entelechy, Inc. ("Entelechy"), in exchange for 277,434 shares of Company common stock in a business combination accounted for as a purchase. The Company issued 147,310 shares at closing, and will issue an additional 130,124 shares (the "Contingent Shares") over a three-year period on each of January 31, 1999, 2000 and 2001 to the former Entelechy stockholders. The issuance of such shares is contingent upon the former Entelechy stockholders remaining in the continuous employ of the Company. The total purchase price for Entelechy was based upon the value of shares issued at closing and related acquisition costs. Goodwill F-12 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 arising from the Entelechy acquisition totaled $828,000, and is being amortized over a period of five years. The values ascribed to the Contingent Shares will result in a charge to operations as such shares are earned through the Company's years ending December 31, 2001. The related charge to operations for the year ended December 31, 1998 totaled $180,000. Assuming the former Entelechy stockholders remain in the continuous employ of the Company, the Company is expected to incur a charge to operations of $197,000, $197,000 and $17,000 in each of the years ending December 31, 1999, 2000 and 2001, respectively. The Company's liability for the values ascribed to these shares approximates $591,000 and is included in "Deferred Compensation" in the accompanying December 31, 1998 consolidated balance sheet. Such liability will be reduced if and when the shares are formally issued. Entelechy had an outstanding demand note of $150,000 to a relative of one of Entelechy's principals. The demand note did not bear interest and was converted, subsequent to the consummation of the Company's initial public offering, into 25,000 shares of the Company's common stock. The following summarized, unaudited pro forma information for the year ended December 31, 1997 assumes that the acquisition of Entelechy had occurred on January 1, 1997: Unaudited ------------ Net revenues $ 9,788,000 Operating loss (456,000) Net loss (625,000) Loss per share: Basic and diluted $ (.24) ============ The pro forma operating results reflect estimated pro forma adjustments for the amortization of intangibles $(156,000) and compensation expense $(197,000) related to the issuance of the Contingent Shares over a one-year period. Pro forma results of operations information is not necessarily indicative of the results of operations that would have occurred had the acquisition been consummated at the beginning of 1997, or of future results of the combined companies. MBS, INC. On December 1, 1998, the Company acquired certain assets of MBS, Inc. ("MBS"), a Certified Technical Education Center-Partner Level (providing training on MicroSoft Solutions) for cash of $50,000, the issuance of 4,493 shares of Company common stock and an assumption of liabilities totaling $150,000. This business combination was accounted for as a purchase. The purchase price was allocated to the fair market values of tangible and intangible assets acquired. Goodwill arising from the MBS acquisition totaled $181,000, and is being amortized over a period of ten years. The results of operations of MBS are included in the accompanying financial statements from the acquisition date forward. With respect to this acquisition, the results of operations from January 1, 1998 through the acquisition date were not material and, accordingly, pro forma operating results are not presented. NOTE 4 - PROPERTY AND EQUIPMENT Major classes of property and equipment, net, consist of the following: December 31, --------------------------- 1997 1998 ------------ ------------ Network equipment $1,123,000 $1,661,000 Office equipment, fixtures and vehicles 342,000 427,000 Leasehold improvements 1,000 86,000 ------------ ------------ 1,466,000 2,174,000 Less: accumulated depreciation (748,000) (1,191,000) ------------ ------------ $ 718,000 $ 983,000 ============ ============ F-13 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 At December 31, 1997 and 1998, equipment subject to capital leases, less accumulated depreciation, amount to $98,000 and $60,000, respectively. Depreciation expense for the years ended December 31, 1997 and 1998 amounted to $301,000 and $492,000, respectively, which includes depreciation of equipment subject to capital lease agreements of $19,000 and $38,000, respectively. NOTE 5 - INTANGIBLE ASSETS Intangible assets, net, are comprised of the following: December 31, --------------------------- 1997 1998 ------------ ------------ Goodwill - Entelechy $ - $ 828,000 Goodwill - MBS - 181,000 Goodwill - JDT - 26,000 Deferred compensation - 705,000 Customer lists 67,000 67,000 Organizational costs 2,000 2,000 ------------ ------------ 69,000 1,809,000 Less: accumulated amortization (13,000) (391,000) ------------ ------------ $ 56,000 $1,418,000 ============ ============ Amortization expense was $12,000 and $378,000 for the years ended December 31, 1997 and 1998, respectively. NOTE 6 - BORROWINGS At December 31, 1997 and 1998, the Company's outstanding borrowings were comprised of the following: 1997 1998 ------------ ------------ 1997 Notes $ 200,000 $ - DesignFX - development loan 175,000 200,000 DesignFX - bank loan 200,000 - Halo - line of credit 35,000 - Halo - vehicle loan 16,000 - Spectrum - notes payable 49,000 84,000 Other debt 107,000 - Capital leases 123,000 72,000 ------------ ------------ 905,000 356,000 Less: current portion (624,000) (79,000) ------------ ------------ Total-long term borrowings $ 281,000 $ 277,000 ============ ============ 1997 NOTES On October 31, 1997, the Company entered into a series of financing agreements with eight individual investors (collectively, the "1997 Notes"). The 1997 Notes accrued interest at a rate of 8% and were paid in full after the closing of the Company's initial public offering of common stock. The outstanding principal balance of the 1997 Notes amounted to $200,000 at December 31, 1997. F-14 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 In connection with the issuance of the 1997 Notes, investors also received warrants to an aggregate of purchase up to 48,872 shares of the Company's common stock at an exercise price of $3.54 per share through October 2000 (see Note 7). The Company capitalized the fair values ascribed to the warrants, which included a value reflective of the excess of the initial public offering price less the exercise price, as a deferred financing cost of $35,000 (included in "Other Assets" in the accompanying December 31, 1997 balance sheet). Such costs were amortized over the life of the 1997 Notes. Interest expense for the years ended December 31, 1997 and 1998, including the amortization of the value ascribed to warrants, totaled $22,000 and $45,000, respectively. The effective interest rate on the 1997 Notes, which includes the amortization of the value of the warrants, approximated 68% per annum. DESIGNFX - DEVELOPMENT LOAN In March 1997, DesignFX entered into an agreement with a bank to develop and design the software and hardware for the bank's sites on the Internet and the worldwide web. Provisions of the agreement provided for various advances to DesignFX in order to provide working capital for expenses incurred with the design and development of such web sites. In September 1998, this agreement was terminated and a new agreement was executed. Terms of the new agreement provide for the advances to be repaid in monthly installments equal to 50% of DesignFX's defined revenues received through the bank's web-site. Based on the negotiated terms in the settlement of this obligation, management does not anticipate that any repayments of this loan will be due during the year ending December 31, 1999. In addition, the Company will accrue, in the form of a royalty, 10% of defined revenues. Upon repayment in full of this advance, the accrued royalties, without interest, shall be paid over a period of one year in twelve equal monthly installments. Obligations under this loan totaled $175,000 and $200,000 at December 31, 1997 and 1998, respectively. DESIGNFX - BANK LOAN In July 1997, DesignFX borrowed $200,000 from a bank. Repayment terms provided for interest only payments through January 1999, with interest based on 1% over the bank's prime rate of interest (9 3/4% at December 31, 1997). Remaining principal and unpaid interest were due in monthly installments through December 2001. The outstanding balance was paid off in November 1998. HALO - LINE OF CREDIT Halo had a credit line with a bank that accrued interest (9 1/2% at December 31, 1997) at a rate indexed to the bank's prime rate. The outstanding balance at December 31, 1997 totaled $35,000. The outstanding balance was repaid by the Company in the year ended December 31, 1998 and the credit line was terminated. HALO - VEHICLE LOAN In 1997, Halo entered into a borrowing agreement with a bank to finance the purchase of a vehicle. The secured note accrued interest at a rate of 8.85% and was payable in full in May of 2001. The outstanding balance at December 31, 1997 totaled $16,000. The outstanding balance was paid off during 1998. SPECTRUM - NOTES PAYABLE Spectrum notes payable of $49,000 and $84,000 at December 31, 1997 and 1998, respectively, bear interest at rates of 8.25% to 12%. The notes are payable in installments through November 2003 and are secured in the related equipment and vehicles. OTHER DEBT In 1995, the Company issued three-year promissory notes in the original aggregate principal amount of $100,000 of which, notes with an aggregate original principal amount of $95,000 remained outstanding at December 31, 1997. F-15 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 These notes accrued interest at a rate of 6%. Interest expense for the years ended December 31, 1997 and 1998 amounted to $6,000 and $2,000, respectively. Bank borrowings assumed in connection with the acquisition of Interactive Networks, Inc. ("INI") in 1996, accrued interest at the rate of 10%. Outstanding borrowings assumed from INI amounted to $12,000 as of December 31, 1997. Such borrowings were secured by the Company's assets. Interest expense for each of the years ended December 31, 1997 and 1998 amounted to $2,000 and $1,000, respectively. The promissory notes and the INI bank borrowings were paid off with proceeds from the Company's initial public offering of common stock. In addition, a demand note of $150,000 assumed in the Entelechy acquisition was converted into 25,000 shares of Company common stock in 1998. LINE OF CREDIT In October 1998, the Company entered into a promissory note agreement with a bank for a line of credit. Borrowings are limited to the lower of $1,500,000 or defined accounts receivable, and outstanding amounts are secured by the Company's assets. At the Company's option, the interest rate is based on the London Interbank Offering Rate ("LIBOR") plus 2% or the bank's prime rate plus .25%. The agreement requires the Company to comply with certain operational and financial covenants. There were no outstanding borrowings under this line of credit at December 31, 1998 and the agreement expired on September 30, 1999. CAPITAL LEASES The Company leases certain equipment in the normal course of operations which are accounted for as capital leases. Outstanding obligations at December 31, 1997 and 1998 totaled $123,000 and $72,000, respectively. Interest expense related to such agreements was $7,000 and $18,000 for the years ended December 31, 1997 and 1998, respectively. DEBT AND LEASE MATURITIES At December 31, 1998, aggregate required principal payments, including the present value of amounts owed under capital leases, are as follows: YEAR ENDING DECEMBER 31, Amount ----------- 1999 $ 79,000 2000 244,000 2001 15,000 2002 10,000 2003 8,000 ----------- Total $356,000 =========== NOTE 7 BENEFIT PLANS DEFERRED COMPENSATION PLAN Substantially all Spencer employees who meet certain requirements of age and length of service are covered by Spencer sponsored non-qualified, non-contributory defined benefit pension plan. The benefits become fully vested upon the employees retirement from Spencer. Benefits paid to retirees are based upon age at retirement, compensation levels and years of credited service. Plan assets are stated at fair value and are comprised of stocks and bonds. Net periodic pension cost for this plan includes the following components: DECEMBER 31, 1998 1997 ------------------------------------------------------- Components of net periodic pension cost: Service cost $185,000 $122,000 Interest cost 26,000 9,000 Actual return on plan assets (27,000) (13,000) Recognized net actuarial loss 13,000 7,000 ------------------------------------------------------- Net periodic pension cost $197,000 $125,000 ======================================================= The following provides a reconciliation of benefit obligations, plan assets, the funded status of the plan and the amounts recorded in the Company's balance sheets: DECEMBER 31, 1998 1997 ------------------------------------------------------- Changes in benefit obligation: Benefit obligation, beginning of year $370,000 $123,000 Service cost 186,000 122,000 Interest cost 26,000 9,000 Actuarial loss 187,000 116,000 ------------------------------------------------------- Benefit obligation, end of year 769,000 370,000 ------------------------------------------------------- Changes in plan assets: Fair value of plan assets, beginning of year 133,000 - Actual return on plan assets 26,000 13,000 Employer contribution 140,000 120,000 ------------------------------------------------------- Fair value of plan assets, end of year 299,000 133,000 ------------------------------------------------------- Unfunded status (470,000) (237,000) Unrecognized net actuarial loss 262,000 86,000 ------------------------------------------------------- Accrued benefit cost $(208,256) $(151,000) ======================================================= Assumptions used in these actuarial valuations were: DECEMBER 31, 1998 1997 ------------------------------------------------------- Discount rate 7.0% 7.5% Expected long-term rate of return 8.0% 8.5% ======================================================= 401(K) PLAN The Company sponsors a defined contribution benefit plan covering substantially all employees. Eligible employees are allowed to contribute up to 6% of their compensation. Company contributions are at the sole discretion of management. There were no contributions for the years ended December 31, 1998 and 1997. NOTE 8 - STOCKHOLDERS' EQUITY (ALSO, SEE NOTE 16) In May 1998, the Company completed an initial public offering of its common stock. 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. The proceeds to the Company (net of underwriting discounts, commissions and other expenses payable by the Company) totaled approximately $6,642,000. Additionally, the Company registered 120,000 shares of common stock underlying warrants, which were sold to the underwriter ("Underwriter Warrants"). The warrants are exercisable for a four-year period commencing on May 14, 1999 at a price of $8.10 per share. F-16 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 The Company incurred costs in connection with the issuance and distribution of securities in the offering in the amount of $1,638,000. Such costs include underwriting discounts and commissions in the amount of $828,000, expenses paid to or for the underwriting in the amount of $248,000 and other expenses in the amount of $562,000. STOCK SPLITS On March 9, 1998, the Company effected a 1,029.1 for 1 stock split and on April 21, 1998, a 1.187 for 1 stock split. All share and per share data have been restated for all periods presented to reflect the splits. CAPITAL STOCK At December 31, 1998, 218,872 shares of common stock were reserved for the exercise of stock warrants, comprised of the aforementioned Underwriter's Warrants, 48,872 reserved shares for the 1997 Note investors and 50,000 for an investment advisory firm (see Warrants below). On March 9, 1998 the Company's Board of Directors approved an increase in the number of shares of authorized capital stock to 12,000,000, of which 1,000,000 shares were designated as "blank check" preferred stock and 11,000,000 shares were designated as common stock. PRIVATE PLACEMENT During 1997, the Company sold 6,109 shares of common stock for net proceeds of approximately $20,000. At December 31, 1996, a subscription receivable of $54,000 was owed to the Company. Such amount was received in January 1997. WARRANTS As discussed in Note 6, the 1997 Note investors also received warrants to purchase up to 48,872 shares of the Company's common stock. The 1997 Note investors may exercise the warrants at any time through October 2000 at an exercise price of $3.54 per share. In November 1998, the Company entered into an agreement with an investment advisory firm who will directly assist the Company in future acquisition efforts. In return for services to be rendered, the Company has issued 50,000 warrants to such firm. The warrants will vest over the period of service if the requisite number of acquisitions are consummated. The exercise prices of the warrants were based, in part, on the fair market value of the Company's common stock at the date of the agreement. The values ascribed to the warrants will be capitalized. Such acquisitions were consummated in the first quarter of 1999. STOCK AWARDS In February 1996, the Company entered into an employment agreement with an individual which provided for compensation that included the issuance of 24,436 shares of common stock to be issued ratably over a two-year period. Compensation expense associated with such shares (computed using the per share price of the 1996 private placement) was $40,000 and $7,000 for the years ended December 31, 1997 and 1998, respectively. In April 1998, the Company agreed to issue 20,000 shares of restricted stock to an officer. The stock award vests over a four-year period; however, if certain events occur, the unvested portion of the award will automatically vest. The value ascribed to the stock award ($114,000) was based, in part, on the per share price of the Company's common stock in its initial public offering. Compensation expense for the year ended December 31, 1998 totaled $24,000. The Company's liability for the values ascribed to these shares approximates $114,000 and is included in "Deferred Compensation" in the accompanying December 31, 1998 consolidated balance sheet. Such liability will be reduced if and when the shares are formally issued. F-17 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 STOCKHOLDER COMPENSATION During the year ended December 31, 1997, the Spectrum stockholders did not receive cash compensation for services rendered. The Company recognized a non-cash compensation charge of $160,000 ($80,000 classified in "Cost of revenues" and $80,000 in "Selling, general and administrative expenses") for the estimated value ascribed to such services. Such values were derived, in part, from the stockholders' compensation levels for the year ended December 31, 1998. The Company increased additional paid in capital in 1997 for the amount of this charge. STOCK OPTION PLAN As of March 10, 1998, the Board of Directors adopted the 1998 Stock Option Plan. Under the terms of this plan, the Company has reserved 330,000 shares of common stock for future grants (see Note 16). Under the Company's 1998 Stock Option Plan, the Company may grant incentive stock options to certain officers, employees and directors. The options expire five or ten years from the date of grant. Accelerated vesting occurs following a change in control of the Company and under certain other conditions. At December 31, 1998, the Company could grant an aggregate of 62,850 shares under the plan. During the year ended December 31, 1998, the Company issued options to outside members of their Board of Directors, which vest over a one-year period. The exercise prices of such options were based on the fair market values of the Company's stock at the grant dates. The related compensation charge totaled $79,000 in 1998. The following table summarizes information about stock options outstanding at December 31, 1998: Options Outstanding Options Exercisable ------------------------------------------------------ Weighted average Weighted Weighted remaining average average Number contractual exercise Number exercise Exercise Price Outstanding life (years) price exercisable price ------------------------------------------------------------------------------ $6.00 215,500 9.5 $6.00 26,938 $6.00 $6.25 to $6.38 23,950 9.7 6.26 1,496 6.26 $7.25 to $7.97 16,950 9.8 7.50 706 7.50 $8.09 to $8.63 10,750 9.5 8.18 1,344 8.18 -------- ------------ 267,150 9.5 6.14 30,484 6.14 -------- ------------ There were no option grants in the year ended December 31, 1997. Transactions under the 1998 Stock Option Plan are summarized as follows: Year ended December 31, -------------------- 1998 -------------------- Weighted average exercise Shares price --------------------------------------------------------- Outstanding at beginning - - of year Granted 267,150 $6.14 Exercised - - Canceled - - --------------------------------------------------------- Outstanding at end of year 267,150 6.14 --------------------------------------------------------- Options exercisable at 30,484 6.14 year end --------------------------------------------------------- Options available for grant 62,850 --------------------------------------------------------- F-18 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 Under the accounting provisions of SFAS 123, the Company's 1998 pro forma net loss and loss per share would have been: -------------------------------------------------------- Net loss $(431,000) Net loss per share; basic and diluted $(.12) -------------------------------------------------------- The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following assumptions: December 31, 1998 -------------------------------------------------------- Dividend yield 0% Expected volatility 46.1% Risk-free interest rate 5.39% Expected life - years 10 Weighted average fair value of options $3.47 granted -------------------------------------------------------- NOTE 9 - TAXES Provisions (benefits) for federal and state income taxes consist of the following: December 31, --------------------------- 1997 1998 ------------ ------------ Current Federal.................................... $ 21,000 $ 102,000 State...................................... 22,000 47,000 ------------ ------------ 43,000 149,000 ------------ ------------ Deferred Federal.................................... 29,000 (91,000) State...................................... 58,000 (32,000) ------------ ------------ 87,000 (123,000) ------------ ------------ Total income tax provision $ 130,000 $ 26,000 ============ ============ Deferred tax assets (liabilities) arise from the following temporary differences and are classified as follows: December 31, --------------------------- 1997 1998 ------------ ------------ Deferred Tax Asset, Current: Accounts receivable allowances........... $ (73,000) $ (90,000) Net operating loss carryforwards......... 2,000 - Accrued compensation..................... - 117,000 Other assets............................. 20,000 - Other, net............................... 9,000 15,000 ------------ ------------ $ (42,000) $ 42,000 ============ ============ Deferred Tax Asset (Liabilities), Non-Current: Intangible assets........................ $ - $ 1,070,000 Valuation allowance...................... - (1,070,000) Property and equipment................... (34,000) 16,000 Other.................................... - (11,000) ------------ ------------ $(34,000) $ 5,000 ============ ============ F-19 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 Differences between the federal benefit computed at a statutory rate and the Company's effective tax rate and provision are as follows: December 31, --------------------------- 1997 1998 ------------ ------------ Statutory benefit.......................... $ (62,000) $ (116,000) State taxes, net of federal benefit........ 53,000 10,000 Results attributed to DesignFX, Halo, Spectrum and Spencer owners................ 171,000 29,000 Amortization of Entelechy goodwill......... - 52,000 Non-deductible expenses.................... 31,000 45,000 Decrease in deferred income tax valuation allowance.................................. (76,000) - Other, net................................. 13,000 6,000 ------------ ------------ $ 130,000 $ 26,000 ============ ============ A current benefit of $12,000 related to Entelechy acquisition costs was recognized in the year ended December 31, 1998. The benefit reduced the carrying value of goodwill arising from the acquisition. Based on historical results of the Company and its acquisitions and estimated 1999 earnings, which includes earnings on certain consulting projects and the effects of integrated operations of the Company, management considers realization of the deferred tax assets generated from operations to be more likely than not. The acquisitions of DesignFX and Halo were deemed to be taxable among the parties and, accordingly, the Company was required to revalue the tax bases of the intangible assets of DesignFX and Halo. This revaluation resulted in an excess of tax bases over carrying values. Based on an assessment of the Company's ability to generate taxable income beyond the year ending December 31, 1999, the Company, upon the acquisitions of DesignFX and Halo, has established a valuation allowance of $1,070,000 against the entire deferred tax asset, since realization of the asset can not be considered to be more likely than not. Management will perform periodic assessments of its ability to generate taxable income and reduce the valuation allowance if realization of the asset is considered more likely than not. For federal and state income tax purposes, the Company will amortize this intangible asset over a period of 15 years. NOTE 10 - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases facilities and equipment under operating leases and subleases expiring through December 2003. Some of the leases have renewal options and most contain provisions for passing through certain incremental costs. At December 31, 1998, future net minimum annual rental payments under non-cancelable leases are as follows: YEAR ENDING DECEMBER 31, AMOUNT - ------------------------- --------- 1999 $ 697,000 2000 576,000 2001 439,000 2002 307,000 2003 178,000 ------------ Total $2,197,000 ============ Total rental expense for the years ended December 31, 1997 and 1998 was approximately $166,000 and $451,000, respectively. F-20 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 EMPLOYMENT AGREEMENTS The Company has entered into employment and consulting contracts with certain officers, employees and stockholders, which provide for minimum annual salaries to be paid over specified terms. Future commitments for such payments were as follows: YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ----------- 1999 $2,657,000 2000 2,305,000 2001 1,008,000 2002 415,000 ----------- TOTAL $6,385,000 ============ FIXED ASSETS At December 31, 1998, the Company had entered into fixed asset purchase commitments of approximately $1,200,000. NOTE 11 - RELATED PARTY TRANSACTIONS FINANCING TRANSACTIONS At December 31, 1997, certain of the Company's stockholders held promissory notes made by the Company in the aggregate original principal amount of $95,000. These notes accrued interest of 6%. Interest expense for each of the years ended December 31, 1997 and 1998 amounted to $6,000 and $2,000, respectively. Certain relatives of the Company's executive officers were 1997 Note investors. The terms of such borrowings are the same as those afforded to other investors (see Note 6). DesignFX had a non-interest bearing demand note payable to an owner. The amount outstanding at December 31, 1997 totaled $15,000, the balance of which was paid in 1998. The imputed interest expense for the years ended December 31, 1997 and 1998 was not material. At December 31, 1998, the Company had advanced $70,000 to an entity controlled by an officer of DesignFX. Repayment terms have yet to be finalized. GUARANTEES Certain executive officers, who are also stockholders of the Company, have provided, at no cost to the Company, personal guarantees of certain obligations of the Company. The amount of obligations subject to these guarantees totaled $117,000 and $72,000 at December 31, 1997 and 1998, respectively. OTHER TRANSACTIONS (ALSO SEE NOTE 8) An entity whose stockholder is also a stockholder of the Company provided management consulting services to the Company. Fees for such services amounted to $14,000 and $0 for the years ended December 31, 1997 and 1998, respectively. An entity, which is owned by certain owners of the Halo, provided managerial and administrative services to Halo. In 1997, Halo was charged $120,000 for such services (included in General and Administrative Expenses in the accompanying December 31, 1997 consolidated statement of operations). Due to the acquisition F-21 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 of Halo by the Company (described in Note 3), there was no allocation of such expenses to Halo in 1998. At December 31, 1997 and 1998, Halo owed $128,000 and $0 to this entity. The related interest expense totaled $7,000 and $0 for the years ended December 31, 1997 and 1998. Cash contributed to the Company from DesignFX and Halo owners totaled $281,000 and $0 for the years ended December 31, 1997 and 1998, respectively. In 1997 and 1998 Spencer and Spectrum distributed an aggregate $49,000 and $290,000, respectively, of cash to its shareholders. NOTE 12 - CASH FLOW INFORMATION As disclosed in Note 3, the Company has consummated various asset acquisitions in 1997 and 1998. In conjunction with such acquisitions, liabilities were assumed as follows: 1997 1998 ------------ ------------ Fair value of assets acquired $127,000 $1,010,000 Cash proceeds 75,000 50,000 Fair value of issued common stock 52,000 700,000 ============ ============ Liabilities assumed $ -0- $ 260,000 ============ ============ Cash paid for interest and income taxes are as follows: 1997 1998 ------------ ------------ Interest $9,000 $ 109,000 Income Taxes 2,000 197,000 ============ ============ In 1997 and 1998, the Company acquired $95,000 and $32,000, respectively, of equipment subject to capital lease obligations. In 1998, a demand note of $150,000 was settled through the issuance of 25,000 shares of Company common stock. NOTE 13 - MAJOR CLIENTS OF THE COMPANY One client accounted 23% of the Company's revenues for the year ended December 31, 1998. One consulting project provided to the same client accounted for 18% of the Company's revenues for the year ended December 31, 1998. NOTE 14 - SEGMENT INFORMATION The Systems Integration, Programming and Applications Development Consulting segment consists primarily of custom programming for Intranet and Internet applications, including distance learning and e-commerce. The Internet Services segment provides dedicated leased line, frame relay and digital subscriber line communications, dial-up access and mail service. The Web Design segment (principally DesignFX) provides Web-site development and maintenance, programming and hosting services. The Network Installations segment (principally Halo and Spectrum) provides full service network solutions including planning, installation and maintenance. The Network Consulting segment (principally Spencer) provides network consulting services to a wide array of commercial businesses, including financial, pharmaceutical, and insurance companies located in the New York City metropolitan area. All segments provide services to customers located in the United States. The Corporate segment provides internal administrative, marketing and treasury services. There are no revenues generated by the Corporate segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2. The Company evaluates segment performance based on net income or loss. There were no intersegment sales and transfers during the years ended December 31, 1997 and 1998. The Company's reportable segments were strategic business units that offer different products and services. They have been managed separately because each business requires different technological and marketing strategies or were subject to autonomous control. F-22 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 Segment information as of and for the years ended December 31, 1997 and 1998 are as follows (in thousands):
Systems Integration, Programming and Applications Development Internet Web Network Network December 31, 1997 Consulting Services Design Installation Consulting Corporate Total - ------------------------------------------------------------------------------------------------------------------------------------ Systems Integration, Programming and Applications Development Internet Web Network Network December 31, 1997 Consulting Services Design Installation Consulting Corporate Total - ------------------------------------------------------------------------------------------------------------------------------ Revenues $1,750 $ 991 $ 572 $2,259 $ 3,892 $ - $ 9,464 Cost of services 208 891 565 1,543 2,264 - 5,471 ------------- --------- --------- -------- -------- ---------- -------- Gross profit 1,542 100 7 716 2,003 - 3,993 Selling, general & administrative 404 663 850 745 689 189 3,915 Amortization of intangible assets - 12 - - - - 12 Non-cash compensation expense 40 - - 80 - 120 ------------- --------- --------- --------- -------- ---------- --------- Operating income (loss) 1,098 (575) (843) (109) 564 (189) (54) Interest expense - - (28) (16) - (37) (81) Other income (expense), net - - 46 (42) (37) (15) (48) Income tax (provision) benefit (330) 173 - - (46) 73 (130) ------------- --------- --------- --------- -------- ---------- --------- Net income (loss) $ 768 $(402) $(825) $ (167) $ 481 $ (168) $ (313) ============= ========= ========= ========= ======== ========== ======== Allocated assets $1,523 $ 616 $ 256 $ 507 $ 1,243 $ 313 $ 4,458 ============= ========= ========= ========= ======== ========== ======== Expenditures for allocated assets $ - $ 152 $ 94 $ 54 - $ 2 $ 302 ============= ========= ========= ========== ======== ========== ======== Systems Integration, Programming and Applications Development Internet Web Network Network December 31, 1998 Consulting Services Design Installation Consulting Corporate Total - ----------------------------------------------------------------------------------------------------------------------------- Revenues $4,967 $1,301 $1,585 $3,626 $ 3,734 $ - $15,213 Cost of services 2,504 1,629 926 2,784 2,364 - 10,207 ------------- --------- ------- --------- -------- -------- --------- Gross profit 2,463 (328) 659 842 1,370 - 5,006 Selling, general & administrative 1,456 280 454 956 1,251 508 4,905 Amortization of intangible assets 154 19 - - - - 173 Non-cash compensation expense 187 - - - - 103 290 Merger expenses - - - - - 109 109 ------------- --------- ------- --------- -------- ------- -------- Operating income (loss) 666 (627) 205 (114) 119 (720) (471) Interest expense - - (18) (50) - (61) (129) Interest income - - - 1 - 184 185 Other income (expense), net - - 31 48 5 (9) 75 Income tax (provision) benefit (464) 251 - - (11) 198 (26) ------------- --------- ------- -------- --------- ------- -------- Net income (loss) $ 202 $ (376) $ 218 $(115) $ 113 $ (408) $ (366) ============= ========= ======= ========= ======== ======= ======== Allocated assets $2,430 $ 550 $ 213 $ 460 $1,130 $6,393 $11,176 ============= ========= ======= ========= ======== ======= ======== Expenditures for allocated assets $ - $ 336 $ 220 $ 24 $ - $ 171 $ 751 ============= ========= ======= ========= ======== ======= ========
NOTE 15 - FOURTH QUARTER ADJUSTMENTS In the fourth quarter of 1998, the Company recognized, as changes in estimates, the pre-tax effects of: (i) reducing liabilities accrued in previous years by $55,000 (included in other (income) expense, net), (ii) reducing the allowance for doubtful accounts by $44,000 and (iii) reducing a current year royalty liability by $37,000. The Company incurred charges of $109,000 for fees and costs associated with the acquisitions of DesignFX and Halo in the fourth quarter of 1998. Management fee expenses allocated to Halo from a related party totaling $90,000 through September 30, 1998 were eliminated in the fourth quarter of 1998. NOTE 16 - SUBSEQUENT EVENTS ACQUISITIONS On January 29, 1999, the Company acquired substantially all of the assets of Mainsite Communications ("Mainsite") for approximately $53,000 in cash. Mainsite is an Internet Service Provider based in Bridgeport, New Jersey. F-23 IBS INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 On February 22, 1999, the Company acquired substantially all of the assets of the Renaissance Internet Services Division ("Renaissance") of PIVC, LLC, for $365,000, a one-year promissory note of $228,000 and the issuance of 44,046 shares of common stock, subject to certain adjustments. Renaissance is an Internet Service Provider headquartered in Huntsville, Alabama. On March 1, 1999, the Company acquired substantially all of the assets of EZ Net, Inc., a Yorktown, Virginia-based Internet Service Provider with approximately 3,100 consumer dial-up and 40 corporate accounts, in exchange for $300,000 in cash and the issuance of 33,289 shares of Company common stock, subject to certain adjustments. On March 25, 1999, the Company acquired substantially all of the assets of the ADViCOM division of Multitronics, Inc., for approximately $118,000 in cash and the issuance of 4,424 shares of common stock. ADViCOM is an Internet Service Provider based in Huntsville, Alabama. 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, Millennium Computer Applications, Inc. was merged into the Company pursuant to the laws of the States of Delaware and North Carolina, respectively. Millennium Computer Applications, Inc. is an Internet Service Provider based in Shallotte, North Carolina. On May 7, 1999, the Company acquired substantially all of the consumer dial-up and ISDN accounts from the owners of Planet Access, Inc. and related computer equipment from Planet Access, a Stanhope, New Jersey-based Internet Service Provider. 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. All of these 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 1999 acquisitions do not represent, individually and in the aggregate, significant subsidiaries. Accordingly, condensed and pro forma financial information is not presented. As discussed in Notes 1 and 3, on March 31, 1999, the Company completed the acquisition of Spectrum which provided for the exchange of all of the outstanding stock of Spectrum for 145,456 shares of IBS common stock. Such combination has been accounted for as a pooling of interests. As discussed in Notes 1 and 3, on June 30, 1999. The Company completed the acquisition of Spencer which provided for the exchange of all of the outstanding stock of Spencer for 240,505 shares of IBS common stock. Such combination has been accounted for as a pooling of interests. Private Placements & Warrants In November 1999, the Board of Directors of the Company approved a private placement of up to $10 million of defined units which consist of 1,000,000 shares of common stock and 250,000 warrants to purchase common stock. As of December 8, 1999, the Company had raised $5.2 million in connection with this private placement. In October 1999, the Company entered into a consulting agreement with an investment advisory firm in which the Company agreed to issue: (a) warrants to purchase 50,000 shares of Common Stock at an exercise price of $10.25 per share and (b) warrants to purchase 50,000 shares of Common Stock at an exercise price of $11.25 per share upon the closing of certain mergers or acquisitions to be identified. In the event the warrants are issued, the Company will realize a non-cash charge to operations for the fair value of these warrants. The period(s) that such charge will be recognized over will be determined based upon the nature of the merger or acquisition involved, if any (that is whether the merger is accounted for as a purchase or a pooling of interest). Convertible Debt In the third and fourth quarter of 1999, the Company raised $600,000 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. The Company will exercise its option to convert such instruments in December of 1999. 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. The Company expects to incur a non-cash charge relating to the conversion of the Convertible Debentures. The ultimate amount of such charge will be subject to a formal analysis of the fair value of the consideration received by the Convertible Debenture holders upon conversion. Such charge could be material to the Company's operations. F-24 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBS INTERACTIVE, INC.'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 5,532 0 2,751 73 0 8,574 2,174 1,191 11,176 1,563 0 0 0 39 8,384 11,176 15,213 15,213 10,207 15,684 (260) 0 129 (340) (26) (366) 0 0 0 (366) (.10) (.10)
EX-27.2 3 FINANCIAL DATA SCHEDULE - 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBS INTERACTIVE, INC.'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 277 0 3,327 116 0 3,567 1,466 748 4,458 2,492 0 0 0 24 1,476 4,458 9,464 9,464 5,471 9,518 48 0 81 (183) (130) (313) 0 0 0 (313) (.13) (.13)
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