<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
Commission File No. 000-26167
iXL ENTERPRISES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 58-2234342
- --------------------------------------------- --------------------------------
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
1900 Emery Street, NW, Atlanta, Georgia 30318
--------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
</TABLE>
(404) 267-3800
---------------------------
(Registrant's telephone number, including area code)
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of each class Outstanding at November 1, 1999,
- ------------------- ----------------------------------
Common Stock, $.01 par value 64,635,978
<PAGE> 2
iXL ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited) .............................................. 1
Consolidated Balance Sheet at September 30, 1999 and
December 31, 1998........................................................................ 1
Consolidated Statement of Operations for the
Three And Nine Months Ended September 30, 1999 and 1998.................................. 2
Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998............................................ 3
Notes to Consolidated Financial Statements.................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations............................................................................ 7
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................................... 13
Item 6. Exhibits and Reports on Form 8-K............................................................ 14
Signatures .............................................................................................. 15
</TABLE>
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
iXL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............................................. $ 79,320 $ 19,259
Marketable securities.................................................. 25,003 --
Accounts receivable, net .............................................. 50,022 17,737
Unbilled revenues ..................................................... 24,144 8,089
Prepaid expenses and other assets ..................................... 7,745 3,355
--------- ---------
Total current assets ........................................ 186,234 48,440
Property and equipment, net ........................................... 45,446 27,975
Intangible assets, net ................................................ 49,476 64,217
Other non-current assets .............................................. 2,236 2,319
--------- ---------
Total assets ................................................ $ 283,392 $ 142,951
========= =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY:
Accounts payable ...................................................... $ 10,840 $ 6,438
Deferred revenues ..................................................... 9,732 6,072
Accrued liabilities ................................................... 17,590 7,943
Current portion of long-term debt ..................................... 566 868
--------- ---------
Total current liabilities ................................... 38,728 21,321
Long-term debt ........................................................ 1,315 20,552
--------- ---------
Total liabilities ........................................... 40,043 41,873
--------- ---------
Mandatorily redeemable preferred stock ................................ -- 65,679
Mandatorily redeemable preferred stock of subsidiary .................. 48,503 9,839
Stockholders' equity
Class A Convertible Preferred Stock .............................. -- 2
Common stock ..................................................... 648 163
Additional paid-in capital ....................................... 304,345 94,820
Accumulated deficit .............................................. (112,853) (65,760)
Accumulated other comprehensive income (loss) .................... 7,062 (10)
Treasury stock at cost ........................................... (888) (888)
Note receivable from stockholder ................................. (900) (900)
Unearned compensation ............................................ (2,568) (1,867)
--------- ---------
Total stockholders' equity .................................. 194,846 25,560
--------- ---------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity ..................................... $ 283,392 $ 142,951
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
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iXL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ....................................... $ 63,731 $ 18,123 $142,639 $ 35,507
Cost of revenues ............................... 36,664 12,628 83,291 25,613
-------- -------- -------- --------
Gross profit .............................. 27,067 5,495 59,348 9,894
Sales and marketing expenses ................... 12,960 4,573 32,418 9,496
General and administrative expenses ............ 19,080 7,021 50,125 15,839
Research and development expenses .............. 1,094 1,244 3,489 3,473
Depreciation ................................... 3,284 1,261 8,499 2,915
Amortization ................................... 4,329 3,101 13,013 5,992
-------- -------- -------- --------
Loss from operations ...................... (13,680) (11,705) (48,196) (27,821)
Other (expense) income, net .................... (69) (13) (183) 40
Loss on equity investment ...................... -- (384) (65) (1,287)
Interest income ................................ 1,447 181 2,180 551
Interest expense ............................... (136) (275) (829) (322)
-------- -------- -------- --------
Loss before income taxes .................. (12,438) (12,196) (47,093) (28,839)
Income tax expense ............................. -- -- -- --
-------- -------- -------- --------
Net loss .................................. (12,438) (12,196) (47,093) (28,839)
Dividends and accretion on mandatorily
redeemable preferred stock ................ (452) (2,618) (20,514) (5,096)
-------- -------- -------- --------
Net loss available to common stockholders . $(12,890) $(14,814) $(67,607) $(33,935)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.20) $ (1.16) $ (1.85) $ (3.28)
======== ======== ======== ========
Weighted average common shares outstanding. 64,539 12,796 36,447 10,348
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 5
iXL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss ............................................... $ (47,093) $(28,839)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation ...................................... 8,499 2,915
Amortization ...................................... 13,013 5,992
Provision for bad debts ........................... 2,571 665
Non-cash investment and losses in equity affili-
ate and amortization ........................... 65 1,012
Stock option and warrant expense .................. 8,292 --
Changes in assets and liabilities, net of effects
from purchase of subsidiaries
Accounts receivable .......................... (34,856) (6,016)
Unbilled revenues ............................ (16,055) (3,476)
Prepaid expenses and other assets ............ (5,579) (3,871)
Accounts payable and accrued liabilities ..... 14,527 3,393
Deferred revenues ............................ 3,660 2,515
--------- --------
Net cash used in operating activities ........ (52,956) (25,710)
--------- --------
Cash flows from investing activities
Purchases of property and equipment ............... (25,733) (13,693)
Purchase of marketable securities ................. (17,704) --
Purchases of subsidiaries, net of cash acquired ... -- (16,611)
Proceeds from sale of fixed and intangible assets . 1,892 --
--------- --------
Net cash used in investing activities ........ (41,545) (30,304)
--------- --------
Cash flows from financing activities
Proceeds from borrowings .......................... -- 14,000
Repayment of borrowings ........................... (19,946) (6,276)
Proceeds from issuance of mandatorily
redeemable preferred stock ..................... -- 40,560
Proceeds from issuance of stock ................... 125,312 4,613
Proceeds from issuance of mandatorily
redeemable preferred stock of subsidiary ....... 49,261 --
Acquisition of treasury stock ..................... -- (888)
--------- --------
Net cash provided by financing activities .... 154,627 52,009
--------- --------
Effect of exchange rate changes on cash and cash
equivalents ......................................... (65) --
Net increase (decrease) in cash and cash
equivalents ............................... 60,061 (4,005)
Cash and cash equivalents at beginning of period ....... 19,259 23,038
--------- --------
Cash and cash equivalents at end of period ............. $ 79,320 $ 19,033
========= ========
Supplemental disclosure of cash flow information
Cash paid for interest ............................ $ 871 $ 377
========= ========
Non-cash investing and financing activities
Acquisition of equipment through capital leases ... $ 407 $ 382
========= ========
Unrealized gain on marketable securities .......... $ 7,137 $ --
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
iXL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
iXL Enterprises, Inc. ("iXL") is a leading Internet services company,
which provides Internet strategy consulting and comprehensive Internet-based
solutions to Fortune 1000 companies and other corporate users of information
technology. iXL helps businesses identify how the Internet can be used to their
competitive advantage and provides expertise in creative design and systems
engineering to design, develop and deploy advanced Internet applications and
solutions. In addition to its Internet services offerings, iXL operates Consumer
Financial Network, Inc. ("CFN"), a sophisticated e-commerce platform for
marketing financial services and employee benefits over corporate intranets and
the Internet, as well as through a telesales center.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by iXL pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly, they do
not contain all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the consolidated financial statements and notes thereto for
the year ended December 31, 1998 included in iXL's Registration Statement filed
on Form S-1 No. 333-71937. In the opinion of management, the accompanying
unaudited consolidated financial statements reflect all adjustments (consisting
of only normal recurring adjustments) considered necessary for a fair
presentation of iXL's financial condition as of September 30, 1999, the results
of its operations for the three and nine month periods ended September 30, 1999
and 1998 and the results of its cash flows for the nine month periods ended
September 30, 1999 and 1998. Operating results for the three and nine month
periods ended September 30, 1999 are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1999.
3. MARKETABLE SECURITIES
Effective August 27, 1996, iXL acquired a 22% equity interest in the
outstanding convertible preferred stock of University Netcasting, Inc. ("UNI").
From August, 1996 until May, 1999 iXL accounted for this investment under the
equity method of accounting. During June 1999, UNI merged with Student
Advantage, Inc. ("Student Advantage") and Student Advantage subsequently
completed its initial public offering. Accordingly, iXL's ownership in UNI was
converted into common stock of Student Advantage. iXL accounts for the
resulting investment in Student Advantage using Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). iXL classifies this investment as an
available-for-sale security and accordingly is reporting the investment on the
balance sheet at its fair value at September 30, 1999. This resulted in the
reporting of an unrealized holding gain of $7.1 million included in accumulated
other comprehensive income in the stockholders' equity section of the balance
sheet.
4. STOCKHOLDERS' EQUITY
Initial Public Offering--On June 8, 1999, iXL completed an initial
public offering of Common Stock that resulted in the issuance of 6,000,000
shares of Common Stock with an initial public offering price of $12.00 per
share. Automatically upon the initial public offering, all of the then
outstanding shares of mandatorily redeemable preferred stock and preferred stock
were reclassified into 37,798,119 shares of Common Stock. In connection with the
initial public offering, iXL offered the underwriters of the offering an option
to purchase an additional 900,000 shares of Common Stock ("Underwriter's
Over-allotment") at the offering's $12.00 per share offering price. This option
was exercised on June 14, 1999. Proceeds to iXL from its initial public offering
and the related
4
<PAGE> 7
Underwriter's Over-allotment, net of underwriting discounts and costs of the
offering, were approximately $71.7 million.
Transactions with General Electric Company--Concurrent with iXL's
initial public offering, iXL also completed a private placement offering of
Common Stock which resulted in the issuance of 2,000,000 shares of Common Stock
at $12.00 per share to affiliates of General Electric Company ("GE"). Proceeds
to iXL from this private placement, net of offering costs, were approximately
$23.3 million.
Also on June 8, 1999, iXL completed a private placement offering which
resulted in the issuance of 16,190,475 shares of CFN's Series B mandatorily
redeemable convertible preferred stock to GE for approximately $49.3 million,
net of offering costs. This investment represents 12.5% of CFN on an as
converted basis which increases GE's investment in CFN to 23% on an as converted
basis.
5. WARRANT ISSUANCES
On June 8, 1999, iXL issued GE warrants to purchase 1,500,000 shares of
iXL's Common Stock at an exercise price of $12 per share. These warrants were
granted in consideration for GE (a) implementing a mutually acceptable marketing
campaign to advertise its relationships with iXL and CFN, and (b) entering into
an agreement to use reasonable efforts to provide access to CFN's platform to
employees of GE Capital Equity Investments, Inc. The fair value of the warrants
to purchase 1,500,000 shares of Common Stock of $12.6 million has been
calculated using the Black Scholes option pricing model. Of the total value
allocated to the warrants, $11.2 million has been allocated to and recorded as a
reduction of mandatorily redeemable preferred stock of subsidiary and an
increase in additional paid-in capital. This amount will be accreted over the
redemption period to increase the carrying value of the CFN Series B convertible
preferred stock to its redemption value of $50 million. The remaining $1.4
million of the warrant value has been allocated to the marketing campaign and
the agreement to provide access to CFN's platform to employees of GE Capital
Equity Investments, Inc. and is being charged to expense over the period
benefited.
On April 7, 1999, iXL issued GE warrants to purchase 1,000,000 shares
of iXL's Common Stock at an exercise price of $15 per share. These warrants
were issued in connection with a services agreement entered into with GE which
provides that GE will purchase $20 million of services from iXL. The fair value
of these warrants of $4.8 million has been calculated using the Black Scholes
option pricing model. The related charge is being recorded as contra revenue
over the period of time that iXL provides services to GE.
6. LONG-TERM DEBT
On June 8, 1999, iXL repaid all outstanding borrowings under its credit
agreement with a portion of the proceeds from its initial public offering.
7. NET LOSS PER SHARE
Net loss per share is calculated following Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 requires
companies to present basic and diluted earnings per share. Basic earnings per
share excludes any dilutive effect of outstanding stock options and warrants to
purchase Common Stock, whereas diluted earnings per share includes the effect of
such items. There is no difference between basic and diluted earnings per share
because the effect of the iXL's common share equivalents would be anti-dilutive.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
During 1998, iXL adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("FAS 130") which establishes standards
for reporting and displaying comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements. The components of comprehensive income are as follows:
5
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net loss $(12,438) $(12,196) $(47,093) $(28,839)
Foreign currency translation adjustment 139 -- (65) --
Unrealized gain on marketable securities 1,259 -- 7,137 --
-------- -------- -------- --------
Comprehensive loss $(11,040) $(12,196) $(40,021) $(28,839)
======== ======== ======== ========
</TABLE>
9. SEGMENT REPORTING
iXL operates in two business segments: strategic Internet services,
which includes Internet strategy consulting, Internet-based business solutions
and Solution Sets(TM); and CFN, an e-commerce platform for marketing financial
services and employee benefits.
iXL's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different technology, strategic competencies, and marketing
strategies.
Information concerning the operations in these reportable segments is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Revenues
Strategic Internet Services $ 63,548 $ 18,172 $141,782 $ 35,534
CFN 342 75 1,201 97
Eliminations (159) (124) (344) (124)
-------- -------- -------- --------
$ 63,731 $ 18,123 $142,639 $ 35,507
======== ======== ======== ========
Gross Profit (Loss)
Strategic Internet Services $ 27,887 $ 6,245 $ 60,972 $ 11,824
CFN (661) (626) (1,280) (1,806)
Eliminations (159) (124) (344) (124)
-------- -------- -------- --------
$ 27,067 $ 5,495 $ 59,348 $ 9,894
======== ======== ======== ========
Loss from operations
Strategic Internet Services $ (5,631) $ (8,166) $(28,468) $(18,774)
CFN (8,049) (3,539) (19,728) (9,047)
-------- -------- -------- --------
$(13,680) $(11,705) $(48,196) $(27,821)
======== ======== ======== ========
Depreciation and amortization
Strategic Internet Services $ 7,080 $ 4,158 $ 20,349 $ 8,433
CFN 533 204 1,163 474
-------- -------- -------- --------
$ 7,613 $ 4,362 $ 21,512 $ 8,907
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
---------------------------------------------
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(in thousands)
<S> <C> <C>
Identifiable assets:
Strategic Internet Services $195,678 $86,207
CFN 49,846 9,696
-------- -------
$245,524 $95,903
======== =======
</TABLE>
10. Subsequent Events
On October 4, 1999, iXL entered into an Agreement and Plan of Merger
with Tessera Enterprise Systems, Inc., a Massachusetts based enterprise
relationship management consulting firm. The purchase price for this acquisition
is expected to be approximately $130 million which will be paid primarily in
common stock of iXL Enterprises, Inc. The majority of the purchase price will be
allocated to intangible assets, which will be amortized over their respective
useful lives.
On October 12, 1999 iXL filed a registration statement on form S-1
offering 2,000,000 shares of common stock. Current iXL stockholders are offering
an additional 5,000,000 shares of common stock for sale. This registration
statement has not yet been declared effective.
On October 13, 1999 CFN acquired iExpert, Inc. for an aggregate
purchase price of approximately $10 million paid in cash and CFN common stock.
This acquisition will be accounted for using the purchase method. The majority
of the purchase price will be allocated to intangible assets, which will be
amortized over their respective useful lives.
On November 1, 1999 iXL's Board of Directors approved the iXL
Enterprises, Inc. 1999B Stock Option Plan. This plan will be presented to iXL's
stockholders for ratification at the next annual stockholder meeting. Options to
purchase no more than ten million shares of common stock may be granted under
this plan.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis Of Financial Condition and Results
Of Operations contains forward-looking statements that involve known and unknown
risks and uncertainties, including statements regarding iXL's strategy,
financial performance, and revenue sources. These risks may cause iXL's actual
results to differ materially from any future results expressed or implied by
these forward-looking statements. For a detailed discussion of such risks, see
the "Risk Factors" section contained in iXL's Registration Statement filed on
Form S-1.
OVERVIEW
iXL is a leading Internet services company which provides Internet
strategy consulting and comprehensive Internet-based solutions to Fortune 1000
companies and other corporate users of information technology. iXL helps
businesses identify how the Internet can be used to their competitive advantage
and uses its expertise in creative design and systems engineering to design,
develop and deploy advanced Internet applications and solutions.
iXL was founded in March 1996, and since that time has acquired a total
of 35 companies. All of iXL's acquisitions have been accounted for using the
purchase method. Therefore, the historical financial data include the results of
operations of companies acquired from their respective acquisition dates. iXL
has incurred substantial losses since its inception and anticipates continuing
to incur substantial losses for the foreseeable future. As of September 30,
1999, iXL had an accumulated deficit of approximately $113 million. Although iXL
has experienced revenue growth, this growth may not be sustainable or indicative
of future results of operations.
iXL's customers generally retain iXL on a project-by-project basis. iXL
typically does not have material contracts that commit a customer to use its
services on a long-term basis. Revenue is recognized primarily using the
percentage of completion method on a contract-by-contract basis. iXL's use of
the percentage of completion method of revenue recognition requires management
to estimate the degree of completion of each project. To the extent these
estimates prove to be inaccurate, the revenues and gross profits reported for
periods during which work on the project is ongoing may not accurately reflect
the final results of the project. Any anticipated losses on projects are charged
to earnings when identified. Historically, iXL has primarily priced its projects
on a fixed-price basis, rather than on a time and materials basis, and has
typically assumed the fixed-price contracts of companies it has acquired. In
order to mitigate risks associated with fixed-price contracts, where possible
iXL is negotiating new contracts on a time and materials basis. iXL has
implemented an internally developed estimation process to determine the fixed
price for an engagement, and has standardized pricing throughout its offices.
This methodology incorporates standard personnel billing rates, project
implementation risks and the overall technical complexity of the project. We
believe that the standardization of pricing throughout our network of offices
will decrease project pricing risk.
Through both acquisitions and its directed marketing efforts, iXL has
established a diversified base of clients in a wide range of industries,
including the industries targeted by iXL's marketing efforts. However, we
derive a significant portion of our revenue from a small number of clients,
including General Electric, which represented approximately 13% of our revenue
in the third quarter of 1999, and may account for a larger portion
of our revenue in the future.
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<PAGE> 10
iXL's revenues are comprised of fees from Internet strategy consulting,
Internet-based business solutions and iXL Solution Sets. iXL's revenue
composition has changed substantially from inception, and iXL expects further
change as its business develops. Historically, a substantial majority of iXL's
revenues have been derived from traditional website development and the
implementation of iXL's Solution Sets. To succeed, iXL must leverage its
existing relationships and establish new relationships in order to substantially
increase the revenues derived from more comprehensive strategic Internet
services.
We have entered into multi-year services agreements with General
Electric and Delta Air Lines under which we have agreed to provide strategic
Internet services. These agreements guarantee minimum payments to iXL for
services provided by iXL. In connection with these agreements, we have issued
warrants to General Electric and Delta Air Lines which will result in non-cash
charges that will reduce our reported revenue. For Delta Air Lines, this charge
will be approximately $1.2 million, reducing the $10 million of guaranteed
revenue from Delta in 1999 and early 2000 to $8.8 million, and for General
Electric this charge will be approximately $4.8 million, reducing the $20
million of guaranteed revenue from General Electric in 1999 and early 2000 to
$15.2 million.
iXL's expenses include cost of revenues, sales and marketing, general
and administrative, and research and development expenses. Cost of revenues
includes salaries, benefits and related overhead expenses associated with the
generation of revenues. Sales and marketing expenses include promotion, new
business generation expenses and the salary and benefit costs of personnel in
these functions. General and administrative expenses include management,
accounting, legal and human resources costs. Research and development expenses
include salary and benefit costs of technical personnel developing Solution Sets
and component frameworks. iXL's expenses also include non-cash charges related
to option grants and warrant issuances.
In connection with (1) the reasonable efforts of GE Capital Equity
Investments, Inc. to provide the CFN program to its employees and (2) the
marketing agreement among iXL and General Electric, iXL issued warrants to
purchase 1,500,000 shares of Common Stock to General Electric.
iXL believes the value of these marketing services to be $1.2 million and
accordingly this marketing campaign will result in $1.2 million of marketing
expenses to be recorded in the 12 month period from April, 1999 through March,
2000. iXL recorded approximately $300,000 of the $1.2 million marketing expenses
during the three months ended September 30, 1999. Net loss available to Common
Stockholders and stockholders' equity is also impacted by non-cash charges
related to this warrant issuance.
iXL's future success will depend in large part upon its ability to
attract, train and retain additional highly skilled executive-level management
and creative, technical, consulting and sales personnel. Competition for such
personnel is intense, and iXL is unsure that it will be successful in
attracting, training and retaining such personnel. Historically iXL has
experienced significant employee turnover, and its ability to control employee
turnover will have a significant impact on its profitability.
CFN has expended and will continue to expend significant resources to
build electronic data interchange interfaces with participating institutions, to
grow its technology infrastructure, to add additional participating companies
and employees to the program and to establish access to the YouDecide.com(TM)
website. In addition, CFN has expended and will continue to expend significant
resources to promote its YouDecide.com brand and website. These expenditures
must be incurred in advance of the recognition of revenue. None of these
expenses is incurred under long-term vendor contracts. As a result, these
expenses are expensed as incurred, except for fixed asset purchases which are
depreciated over their expected useful lives. CFN recognizes revenue upon
completion of an end-user transaction through the CFN operating network, which
also will require the realization of expenses in advance of related revenue. To
date, the volume of transactions on CFN has been limited and, accordingly, the
revenue recognized has been minimal. As a result, iXL may not be able to achieve
or sustain profitability. CFN incurred an operating loss of $13.5 million for
the year ended December 31, 1998 and $19.7 million for the nine months ended
September 30, 1999.
iXL incurred non-cash stock compensation expense related to its option
grants for the nine months ended September 30, 1999, totaling $3.4 million as
compared to zero for the nine months ended September 30, 1998. iXL expects to
8
<PAGE> 11
recognize approximately $3.7 million in 1999, $1.0 million in 2000, $780,000 in
2001, $406,000 in 2002 and $76,000 in 2003 in stock compensation expense
relating to the grant of options in 1998 and 1999.
ACQUISITION PROGRAM
iXL has acquired a total of 35 businesses since its inception and
intends to continue acquiring similar businesses. During the nine months ended
September 30, 1998, iXL acquired twenty-three businesses, sixteen of which
occurred during the three months ended September 30, 1998. iXL evaluates
acquisitions based on numerous quantitative and qualitative factors.
Quantitative factors include historical and projected revenues and
profitability, geographic coverage and contract backlog. Qualitative factors
include strategic and cultural fit, management skills, customer base and
technical proficiency. Most of the consideration paid by iXL for prior
acquisitions has been in the form of Common Stock. iXL anticipates that Common
Stock and options to acquire Common Stock will continue to constitute most of
the consideration used to make future acquisitions. iXL's acquisition program
will result in additional ownership dilution to current investors.
On October 4, 1999, iXL entered into an Agreement and Plan of Merger
with Tessera Enterprise Systems, Inc. a Wakefield, Massachusetts enterprise
relationship management solutions firm, for a purchase price of $120 million.
The acquisition is expected to provide enterprise relationship management
expertise and expand our workforce by approximately 130 employees.
All of iXL's acquisitions have been accounted for using the purchase
method. The results of operations of the acquired entities are consolidated with
those of iXL from the date of the acquisition. For each acquisition, a portion
of the purchase price is allocated to the tangible and identifiable intangible
assets acquired and liabilities assumed based on their respective fair market
values on the acquisition date. A portion of the purchase price in excess of
tangible and identifiable intangible assets and liabilities assumed is allocated
to goodwill and amortized on a straight-line basis over the estimated period of
benefit, which is primarily five years. Identifiable intangible assets consist
primarily of assembled workforce and are being amortized over a period of three
years. iXL expects additional acquisition-related amortization expense as a
result of its acquisition program.
iXL anticipates that a material portion of its future growth will be
accomplished by acquiring existing businesses. iXL has filed a registration
statement on Form S-4 registering 4,000,000 shares of Common Stock for use in
future acquisitions. Much of iXL's growth in personnel has been through
acquisitions. The success of this plan depends upon, among other things, iXL's
ability to integrate acquired personnel, operations, products and technologies
into its organization effectively, to retain and motivate key personnel of
acquired businesses and to retain customers of acquired firms. iXL cannot
guarantee that it will be able to identify suitable acquisition opportunities,
obtain any necessary financing on acceptable terms to finance such acquisitions,
consummate such acquisitions or successfully integrate acquired personnel and
operations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1999 and September 30, 1998
Revenues. Revenues increased $45.6 million, or 252%, to $63.7
million for the quarter ended September 30, 1999 from $18.1 million
for the quarter ended September 30, 1998. The increase was
attributable to a series of acquisitions and to an aggressive hiring
initiative which expanded our client base and headcount. The growth
was also due to an increase in the number and size of client
engagements and the development and growth of industry practice
groups. Specifically, averaged annualized revenue from our top ten
clients increased from $2.1 million during the quarter ended September
30, 1998 to $9.2 million during the quarter ended September 30, 1999.
Cost of revenues. Cost of revenues increased $24.0 million,
or 190%, to $36.7 million for the quarter ended September 30, 1999
from $12.6 million for the quarter ended September 30, 1998. As a
percentage of revenues, cost of revenues decreased from 70% for the
quarter ended September 30, 1998 to 58% for the quarter ended
September 30, 1999. The dollar increase was primarily attributable to
the an increase in headcount due to the integration of the companies
acquired by iXL, organic growth in billable headcount, as well as to
employee training and the development of the CFN platform. The
decrease as a percentage of revenues was primarily attributable to
increases in billing rates and improvements in revenue per billable
employee. Also included in this increase was $428,000 of non-cash
expense related to stock compensation charges.
Sales and marketing expenses. Sales and marketing expenses
increased $8.4 million, or 183%, to $13.0 million for the quarter
ended September 30, 1999 from $4.6 million for the quarter ended
September 30, 1998. As a percentage of revenues, sales and marketing
expenses decreased from 25% for the quarter September 30, 1998 to 20%
for the quarter ended September 30, 1999. The dollar increase was
primarily attributable to the increase in headcount due to the
integration of the companies acquired by iXL since July 1, 1998, as
well as the development of iXL's sales and marketing infrastructure
and staff. Also included in this increase was $691,000 of non-cash
expense related to stock compensation charges.
General and administrative expenses. General and
administrative expenses increased $12.1 million, or 172%, to $19.1
million for the quarter ended September 30, 1999 from $7.0 million for
the quarter ended September 30, 1998. As a percentage of revenues,
general and administrative expenses decreased from 39% for the quarter
ended September 30, 1998 to 30% for the quarter ended September 30,
1999. The dollar increase was primarily attributable to the increase
in headcount due to the integration of the companies acquired by iXL
since July 1, 1998, as well as the expansion of management
infrastructure to support the growth in iXL's operations. Also
included in this increase was $166,000 of non-cash expense related to
stock compensation charges.
Research and development expenses. Research and development
expenses decreased $150,000, or 12%, to $1.1 million for the quarter
ended September 30, 1999 from $1.25 million for the quarter ended
September 30, 1998. As a percentage of revenues, research and
development expenses decreased from 7% for the quarter ended September
30, 1998 to 2% for the quarter ended September 30, 1999.
Depreciation. Depreciation expenses increased $2.0 million to $3.3
million for the quarter ended September 30, 1999 from $1.3 million for the
quarter ended September 30, 1998. The increase primarily related to the
depreciation of assets of the companies acquired by iXL since July 1, 1998 and
the investments in physical infrastructure at these companies after acquisition.
Amortization. Amortization expense increased $1.2 million to
$4.3 million for the quarter ended September 30, 1999 from $3.1
million for the quarter ended September 30, 1998. The increase was a
result of the amortization of goodwill and assembled workforce recorded in
connection with the acquisitions which took place during the 1998.
9
<PAGE> 12
Comparison of Nine Months Ended September 30, 1999 and September 30, 1998
Revenues. Revenues increased $107.1 million, or 302%, to
$142.6 million for the nine months ended September 30, 1999 from $35.5
million for the nine months ended September 30, 1998. The increase was
primarily attributable to a series of acquisitions and to an
aggressive hiring initiative which expanded our client base and
headcount. The growth was also due to an increase in the number and
size of client engagements and the development and growth of industry
practice groups
Cost of revenues. Cost of revenues increased $57.7 million,
or 225%, to $83.3 million for the nine months ended September 30, 1999
from $25.6 million for the nine months ended September 30, 1998. As a
percentage of revenues, cost of revenues decreased to 58% for the nine
months ended September 30, 1999, down from 72% for the nine months
ended September 30, 1998. The dollar increase was primarily
attributable to an increase in headcount due to the integration of the
companies acquired by iXL, organic growth in billable headcount, as
well as to employee training and the development of CFN. Also included
in this increase was $543,000 of non-cash expense related to stock
compensation charges. The decrease as a percentage of revenues was
primarily attributable to increases in billing rates and improvements
in revenue per billable employee.
Sales and marketing expenses. Sales and marketing expenses
increased $22.9 million, or 241%, to $32.4 million for the nine months
ended September 30, 1999 from $9.5 million for the nine months ended
September 30, 1998. As a percentage of revenues, sales and marketing
expenses decreased to 23% for the nine months ended September 30,
1999, down from 27% for the nine months ended September 30, 1998. The
dollar increase was primarily attributable to the increase in
headcount due to the development of iXL's sales and marketing
infrastructure and staff. Also included in this increase was $1.4
million of non-cash expense related to stock compensation charges.
General and administrative expenses. General and
administrative expenses increased $34.3 million, or 216%, to $50.1
million for the nine months ended September 30, 1999 from $15.8
million for the nine months ended September 30, 1998. As a percentage
of revenues, general and administrative expenses decreased to 35% for
the nine months ended September 30, 1999, from 45% for the nine months
ended September 30, 1998. The dollar increase was primarily
attributable to the increase in headcount due to the integration of
the companies acquired by iXL since January 1, 1998, as well as the
expansion of management infrastructure to support the growth in iXL's
operations. Also included in this increase was $1.5 million of
non-cash expense related to stock compensation charges.
Research and development expenses. Research and development
expenses remained constant at $3.5 million for the nine months ended
September 30, 1999 from the nine months ended September 30, 1998. As a
percentage of revenues, research and development expenses decreased to
2% for the nine months ended September 30, 1999, from 10% for the nine
months ended September 30, 1998.
Depreciation. Depreciation expenses increased $5.6 million,
or 192%, to $8.5 million for the nine months ended September 30, 1999
from $2.9 million for the nine months ended September 30, 1998. The
increase primarily related to the depreciation of assets of the companies
acquired by iXL since January 1, 1998 and the investments in physical
infrastructure at these companies after acquisition.
Amortization. Amortization expenses increased $7.0 million,
or 117%, to $13.0 million for the nine months ended September 30, 1999
from $6.0 million for the nine months ended September 30, 1998. The
increase was a result of the amortization of goodwill and assembled workforce
recorded in connection with the acquisitions which took place during 1998.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
On June 8, 1999, iXL completed its initial public offering and received
net proceeds of $61.7 million from the sales of 6,000,000 shares of Common
Stock. On June 14, 1999, the underwriters exercised their over-allotment option
resulting in the sale of 900,000 additional shares of Common Stock for net
proceeds of $10.0 million. On June 8, 1999, CFN received net proceeds of
approximately $49.3 million from the sale of 16,190,475 shares of CFN's Series B
Convertible Preferred Stock. Also on June 8, 1999, iXL received net proceeds of
approximately $23.3 from the sale of 2,000,000 shares of Common Stock in a
private placement. Prior to its initial public offering, iXL financed its
operations primarily through private sales of capital stock, which totaled
approximately $132.2 million in aggregate net proceeds.
On July 29, 1998, iXL entered into a credit facility with Chase
Manhattan Bank providing for borrowings of up to $20.0 million. At December 31,
1998, approximately $20.0 million of borrowings were outstanding under this
credit facility. In January 1999, iXL repaid all of the approximately $9.4
million then outstanding under the revolving facility of the credit facility.
Additionally, iXL repaid all of the amounts outstanding under the credit
facility with a portion of the net proceeds of its initial public offering. The
$10 million term facility commitment terminated upon this payment, and only the
revolving commitment of $10 million remains available under the credit facility.
iXL's obligations under the credit facility are secured by substantially all of
the assets of iXL and its domestic subsidiaries other than CFN and CFN's
subsidiaries. These obligations are also secured by all of the stock of iXL's
domestic subsidiaries, other than CFN's subsidiaries, and 65% of the stock of
iXL's foreign subsidiaries. Borrowings under the credit facility accrue interest
at a rate of 2% plus the greater of Chase Manhattan Bank's prime rate or .5%
plus the weighted average of the rates on overnight Federal funds transactions.
As of September 30, 1999, there were no amounts outstanding under the credit
facility although letters of credit totalling approximately $3 million have
been issued under this facility, reducing the revolver availability by such
amount.
iXL is currently negotiating a new credit facility. iXL anticipates
that this new facility will provide a $50 million revolving credit facility
which will mature three years after execution. iXL expects borrowing to accrue
interest either (a) at a rate of 2% plus the greater of prime rate or .5% plus
the weighted average of the rates on overnight Federal funds transactions, or
(b) at a rate of 2.75% plus an adjusted LIBOR rate. We cannot be sure that this
credit facility will be consummated at all or on these terms.
At September 30, 1999, iXL had approximately $79.3 million in cash and
cash equivalents. For the period from inception to September 30, 1999, iXL used
approximately $102.2 million, $27.9 million and $53.4 million to fund operating
activities, acquisition activities, and capital expenditures, respectively.
These expenditures were financed primarily with proceeds of sales of iXL's
capital stock.
11
<PAGE> 14
In addition, at September 30, 1999, iXL had outstanding commitments for
capital expenditures totaling approximately $4.8 million, primarily related to
the expansion of and equipment purchases by its Washington, D.C. and Chicago
offices and CFN. The remainder of iXL's significant commitments consist of
obligations outstanding under operating leases.
iXL is currently negotiating the lease of its new headquarters in
Atlanta which would contain approximately 300,000 square feet. iXL anticipates
capital expenditures of up to approximately $18 million related to the
improvement of this new headquarters. We cannot be sure this new lease agreement
will be executed.
iXL believes its available cash resources and credit facilities will be
sufficient to meet its anticipated working capital and capital expenditure
requirements for at least the next 12 months. However, iXL may need to raise
significant additional funds sooner in order to support its growth, develop new
or enhanced services and products, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. iXL believes that CFN's available cash resources will be
sufficient to meet its anticipated working capital expenditure requirements
through 1999. If CFN is unable to raise additional funds prior to such period,
CFN may require additional funding from iXL, although iXL is under no obligation
to provide any such funding.
YEAR 2000 RISK
Many currently installed computer systems and software products are
coded to accept only two-digit entries to identify a year in the date code
field. Consequently, on January 1, 2000, many of these systems could fail or
malfunction because they may not be able to distinguish between 20th century
dates and 21st century dates. Accordingly, many companies, including iXL and
iXL's customers, potential customers, vendors and strategic partners, may need
to upgrade their systems to comply with applicable "Year 2000" requirements.
Because iXL and its clients are dependent, to a very substantial
degree, upon the proper functioning of its and their computer systems, a failure
of its or their systems to correctly recognize dates beyond December 31, 1999
could materially disrupt operations, which could materially and adversely affect
iXL's business, results of operations and financial condition. Additionally,
iXL's failure to provide Year 2000 compliant products and services to our
clients could result in financial loss, reputation harm and legal liability.
In 1998, iXL formed a Year 2000 Assessment and Contingency Planning
Committee to review both its information technology systems, hardware and
software, and its non-information technology systems, and where necessary to
plan for and supervise the remediation of those systems. The Y2K Committee is
headed by the Chief Information Officer of iXL, Inc. Other members of the Y2K
Committee include two full-time outside consultants and one full-time and four
part-time company employees. The Y2K Committee, utilizing iXL's iD5 engagement
methodology, has divided iXL's Year 2000 efforts into five phases: discovery ,
definition, design, development and deployment. Each of these phases has been
completed. iXL believes it has identified its mission critical systems. iXL has
obtained confirmations from the providers of these systems that they are Year
2000 compliant. iXL has conducted internal tests of such systems as part of
its Year 2000 efforts.
iXL has confirmed Year 2000 compliance of all material existing iXL
systems supplied by third party providers. iXL has already obtained written
certification regarding the critical hardware and software systems used to
assemble client solutions or to support iXL's internal electronic
infrastructure. iXL has also obtained written certification regarding
facilities items such as elevators and other non-standard applications and
systems.
iXL has not identified any older systems of the varieties more likely
susceptible to Year 2000 problems. Consequently, iXL believes its greatest
potential exposure will be presented by the failure of external systems such as
utilities and telecommunications. Further, if iXL's clients experience Year 2000
problems, iXL may be precluded from continuing to provide services for these
clients until the problems are resolved. Internally, iXL believes its greatest
potential exposure would be presented by its accounting systems, although these
functions can be handled manually without interrupting iXL's business.
iXL does not intend to examine third party readiness, although CFN is
examining the readiness of third parties that provide date sensitive information
critical to CFN's business. iXL is also not researching its clients' readiness,
except to the extent clients request iXL to examine solutions delivered by iXL.
12
<PAGE> 15
iXL is finalizing contingency plans for critical individual information
technology systems and non-information technology systems for implementation, if
required, due to Year 2000 risks not fully resolved by iXL's Year 2000 program.
Management currently believes that the Year 2000 risk will not pose significant
operational problems for iXL's computer systems. However, there is no guarantee
that iXL's Year 2000 program, including consulting with third parties, will
avoid any material adverse effect on iXL's operations, customer relations or
financial condition. iXL estimates the total cost of its Year 2000 program to be
approximately $165,000, $146,000 of which has been incurred as of September 30,
1999. However, there is no guarantee that the actual costs incurred will not be
materially higher than this estimate.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, which postpones the mandatory adoption
of FAS 133 by iXL until January 31, 2001. iXL has not entered into any
derivative financial instruments.
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 2, 1999, the Securities and Exchange Commission declared iXL's
Registration Statement on Form S-1 (File No. 333-71937) effective. On June 8,
1999, iXL closed its offering of an aggregate of 6,000,000 shares of iXL's
Common Stock at an aggregate offering price of $72,000,000. The managing
underwriters for the offering were Merrill Lynch, Pierce Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston
Robertson Stephens Inc. and SG Cowen Securities Corporation. Net proceeds to
iXL, after deducting underwriting discounts and commissions of $5,040,000 and
offering expenses of $5,293,000 were $61,667,000.
In connection with the initial public offering, iXL registered and
offered the underwriters of the offering an option to purchase an additional
900,000 shares of Common for an aggregate offering price of $10,800,000. The
underwriters exercised this option on June 14, 1999. Net proceeds to iXL, after
deducting underwriting discounts and commissions of $756,000 were $10,044,000.
iXL has used approximately $26,680,000 of the net proceeds from its
initial public offering for working capital purposes, $11,198,000 for purchases
of fixed assets related to certain office expansions and purchases of computer
hardware and software, and invested $17,704,000 in short-term,
interest-bearing, investment grade obligations pending their use.
Between July 1, 1999 and September 30, 1999, iXL granted options to
purchase a total of 1,247,300 shares of Common Stock to employees and options to
purchase 20,000 shares of Common Stock to non-employees. Between August 2, 1999
and September 28, 1999, six optionees exercised options to purchase 66,078
shares of common stock. These securities were issued without registration under
the Securities Act in reliance upon exemptions from registration under Rule 701
and Section 4(2).
13
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule (for SEC use only)
(b) Reports on Form 8-K
iXL did not file any Reports on Form 8-K during the quarter ended
September 30, 1999.
14
<PAGE> 17
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 thereunto duly authorized.
iXL Enterprises, Inc.
By: /s/ M. Wayne Boylston
------------------------------------------------
M. Wayne Boylston
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 3, 1999
15
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