<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 JUNE 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.)
1888 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. [ ] Yes [X] 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 August 10, 1999,
------------------- -------------------------------
Common Stock, $.01 par value 64,542,478
<PAGE> 2
iXL ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited) .............................................. 1
Consolidated Balance Sheet at June 30, 1999 and
December 31, 1998........................................................................ 1
Consolidated Statement of Operations for the
Three And Six Months Ended June 30, 1999 and 1998........................................ 2
Consolidated Statement of Cash Flows for the
Six Months Ended June 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>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............................................. $ 134,789 $ 19,259
Accounts receivable, net .............................................. 29,884 17,737
Unbilled revenues ..................................................... 19,009 8,089
Prepaid expenses and other assets ..................................... 9,743 3,355
--------- ---------
Total current assets ........................................ 193,425 48,440
Property and equipment, net ........................................... 37,437 27,975
Intangible assets, net ................................................ 53,764 64,217
Other non-current assets .............................................. 920 2,319
--------- ---------
Total assets ................................................ $ 285,546 $ 142,951
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable ...................................................... $ 8,550 $ 6,438
Deferred revenues ..................................................... 10,970 6,072
Accrued liabilities ................................................... 14,104 7,943
Current portion of long-term debt ..................................... 570 868
--------- ---------
Total current liabilities ................................... 34,194 21,321
Long-term debt ........................................................ 1,408 20,552
--------- ---------
Total liabilities ........................................... 35,602 41,873
--------- ---------
Mandatorily redeemable preferred stock ................................ -- 65,679
Mandatorily redeemable preferred stock of subsidiary .................. 48,086 9,839
Stockholders' equity
Class A Convertible Preferred Stock .............................. -- 2
Common stock ..................................................... 648 163
Additional paid-in capital ....................................... 299,961 94,820
Accumulated deficit .............................................. (100,415) (65,760)
Accumulated other comprehensive income (loss) .................... 5,664 (10)
Treasury stock at cost ........................................... (888) (888)
Note receivable from stockholder ................................. (900) (900)
Unearned compensation ............................................ (2,212) (1,867)
--------- ---------
Total stockholders' equity .................................. 201,858 25,560
--------- ---------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity ..................................... $ 285,546 $ 142,951
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE> 4
iXL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ....................................... $ 45,896 $ 10,520 $ 78,908 $ 17,384
Cost of revenues ............................... 27,044 8,086 46,627 12,985
-------- -------- -------- --------
Gross profit .............................. 18,852 2,434 32,281 4,399
Sales and marketing expenses ................... 11,308 2,887 19,458 4,923
General and administrative expenses ............ 15,320 5,862 31,045 8,818
Research and development expenses .............. 1,337 1,322 2,395 2,229
Depreciation ................................... 2,931 955 5,215 1,654
Amortization ................................... 4,333 1,709 8,684 2,891
-------- -------- -------- --------
Loss from operations ...................... (16,377) (10,301) (34,516) (16,116)
Other (expense) income, net .................... (183) 17 (114) 53
Loss on equity investment ...................... -- (508) (65) (903)
Interest income ................................ 517 106 733 370
Interest expense ............................... (357) (19) (693) (47)
-------- -------- -------- --------
Loss before income taxes .................. (16,400) (10,705) (34,655) (16,643)
Income tax expense ............................. -- -- -- --
-------- -------- -------- --------
Net loss .................................. (16,400) (10,705) (34,655) (16,643)
Dividends and accretion on mandatorily
redeemable preferred stock ................ (14,769) (1,753) (20,062) (2,478)
-------- -------- -------- --------
Net loss available to common stockholders . $(31,169) $(12,458) $(54,717) $(19,121)
======== ======== ======== ========
Basic and diluted net loss per common share $ (1.09) $ (1.29) $ (2.44) $ (2.10)
======== ======== ======== ========
Weighted average common shares outstanding. 28,719 9,657 22,401 9,124
======== ======== ======== ========
</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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss ............................................... $ (34,655) $(16,643)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation ...................................... 5,215 1,654
Amortization ...................................... 8,684 2,891
Provision for bad debts ........................... 1,321 275
Non-cash investment and losses in equity affili-
ate and amortization ........................... 65 774
Stock option and warrant expense .................. 3,716 --
Changes in assets and liabilities, net of effects
from purchase of subsidiaries
Accounts receivable .......................... (13,468) (4,083)
Unbilled revenues ............................ (10,920) (1,721)
Prepaid expenses and other assets ............ 118 (2,299)
Accounts payable and accrued liabilities ..... 8,751 2,773
Deferred revenues ............................ 4,898 2,567
--------- --------
Net cash used in operating activities ........ (26,275) (13,812)
--------- --------
Cash flows from investing activities
Purchases of property and equipment ............... (14,535) (8,590)
Purchases of subsidiaries, net of cash acquired ... -- (6,090)
Proceeds from sale of fixed and intangible assets . 1,892 --
--------- --------
Net cash used in investing activities ........ (12,643) (14,680)
--------- --------
Cash flows from financing activities
Proceeds from borrowings .......................... -- 4,000
Repayment of borrowings ........................... (19,754) (214)
Proceeds from issuance of mandatorily
redeemable preferred stock ..................... -- 4,935
Proceeds from issuance of stock ................... 125,110 2,383
Proceeds from issuance of mandatorily
redeemable preferred stock of subsidiary ....... 49,296 --
Acquisition of treasury stock ..................... -- (788)
--------- --------
Net cash provided by financing activities .... 154,652 10,316
--------- --------
Effect of exchange rate changes on cash and cash
equivalents ......................................... (204) --
Net increase (decrease) in cash and cash
equivalents ............................... 115,530 (18,176)
Cash and cash equivalents at beginning of period ....... 19,259 23,038
--------- --------
Cash and cash equivalents at end of period ............. $ 134,789 $ 4,862
========= ========
Non-cash investing and financing activities
Acquisition of equipment through capital leases ... $ 312 $ 382
========= ========
Unrealized gain on marketable securities .......... $ 5,878 $ --
========= ========
</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. 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 June 30, 1999, the results of its operations for the
three and six month periods ended June 30, 1999 and 1998 and the results of its
cash flows for the six month periods ended June 30, 1999 and 1998. Operating
results for the three and six month periods ended June 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. Based upon the changes in the
nature of this investment, iXL now accounts for it 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 June 30, 1999. This resulted in the reporting
of an unrealized holding gain of $5.9 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 will be charged to expense as the services are
performed.
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 will be 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
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net loss $(16,400) $(10,705) $(34,655) $(16,643)
Foreign currency translation adjustment (87) -- (204) --
Unrealized gain on marketable securities 5,878 -- 5,878 --
-------- -------- -------- --------
Comprehensive loss $(10,609) $(10,705) $(28,981) $(16,643)
======== ======== ======== ========
</TABLE>
9. SEGMENT REPORTING
iXL operates in two business segments: strategic Internet services,
which includes Internet strategy consulting, Internet-based business solutions
and solution set; 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Revenues
Strategic Internet Services $ 45,706 $ 10,503 $ 78,234 $ 17,362
CFN 375 17 859 22
Eliminations (185) -- (185) --
-------- -------- -------- --------
$ 45,896 $ 10,520 $ 78,908 $ 17,384
======== ======== ======== ========
Gross Profit (Loss)
Strategic Internet Services $ 19,413 $ 3,143 $ 33,085 $ 5,579
CFN (376) (709) (619) (1,180)
Eliminations (185) -- (185) --
-------- -------- -------- --------
$ 18,852 $ 2,434 $ 32,281 $ 4,399
======== ======== ======== ========
Loss from operations
Strategic Internet Services $ (9,077) $ (6,884) $(22,837) $(10,607)
CFN (7,300) (3,417) (11,679) (5,509)
-------- -------- -------- --------
$(16,377) $(10,301) $(34,516) $(16,116)
======== ======== ======== ========
Depreciation and amortization
Strategic Internet Services $ 6,923 $ 2,500 $ 13,269 $ 4,275
CFN 341 164 630 270
-------- -------- -------- --------
$ 7,264 $ 2,664 $ 13,899 $ 4,545
======== ======== ======== ========
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
AS OF
----------------------------------------
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(in thousands)
<S> <C> <C>
Identifiable assets:
Strategic Internet Services $191,833 $86,207
CFN 53,370 9,696
-------- -------
$245,203 $95,903
======== =======
</TABLE>
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 34 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 June 30, 1999, iXL
had an accumulated deficit of approximately $100 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, iXL is primarily
negotiating new contracts on a time and materials basis. During the three months
ended June 30, 1999 approximately 40% of its contracts were on a time and
materials basis up from approximately 20% during the three months ended March
31, 1999. 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.
7
<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 platform 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 at $12 per share 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 June 30, 1999. Net loss available to Common
Stockholders and stockholders' equity will also be 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 platform and to establish access to the CFN platform for
participating companies' employees. 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 $11.7 million for the six months ended June 30,
1999.
iXL incurred non-cash stock compensation expense related to its option
grants for the six months ended June 30, 1999, totaling $2.1 million as compared
to zero for the six months ended June 30, 1998. iXL expects to
8
<PAGE> 11
recognize approximately $2.9 million in 1999, $850,000 in 2000, $600,000 in 2001
and $330,000 in 2002 in stock compensation expense relating to the grant of
options in 1998 and 1999.
ACQUISITION PROGRAM
iXL has acquired a total of 34 businesses since its inception and
intends to continue acquiring similar businesses. There have been no
acquisitions during the six months ended June 30, 1999. During the six months
ended June 30, 1998 iXL acquired eight businesses, three of which occurred
during the three months ended June 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.
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 June 30, 1999 and June 30, 1998
Revenues. Revenues increased $35.4 million, or 336%, to $45.9 million
for the quarter ended June 30, 1999 from $10.5 million for the quarter ended
June 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 $18.9 million, or 234%, to
$27.0 million for the quarter ended June 30, 1999 from $8.1 million for the
quarter ended June 30, 1998. As a percentage of revenues, cost of revenues
decreased from 77% for the quarter ended June 30, 1998 to 59% for the quarter
ended June 30, 1999. 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 the CFN. The decrease as a percentage of revenues was primarily
attributable to increases in billing rates and improvements in revenue per
billable employee.
9
<PAGE> 12
Sales and marketing expenses. Sales and marketing expenses increased
$8.4 million, or 292%, to $11.3 million for the quarter ended June 30, 1999 from
$2.9 million for the quarter ended June 30, 1998. As a percentage of revenues,
sales and marketing expenses decreased from 27% for the quarter June 30, 1998 to
25% for the quarter ended June 30, 1999. The dollar increase was primarily
attributable to the increase in headcount due to the integration of the
companies acquired by iXL since April 1, 1998, as well as the development of
iXL's sales and marketing infrastructure and staff. Also included in this
increase was $258,000 of non-cash expense related to stock compensation charges
and $500,000 of non-cash marketing expense related to warrant issuances.
General and administrative expenses. General and administrative
expenses increased $9.4 million, or 161%, to $15.3 million for the quarter ended
June 30, 1999 from $5.9 million for the quarter ended June 30, 1998. As a
percentage of revenues, general and administrative expenses decreased from 56%
for the quarter ended June 30, 1998 to 33% for the quarter ended June 30, 1999.
The dollar increase was primarily attributable to the increase in headcount due
to the integration of the companies acquired by iXL since April 1, 1998, as well
as the expansion of management infrastructure to support the growth in iXL's
operations. Also included in this increase was $347,000 of non-cash expense
related to stock compensation charges.
Research and development expenses. Research and development expenses
remained constant at $1.3 million for the quarter ended June 30, 1999 from the
quarter ended June 30, 1998. As a percentage of revenues, research and
development expenses decreased from 13% for the quarter ended June 30, 1998 to
3% for the quarter ended June 30, 1999.
Depreciation. Depreciation expenses increased $1.9 million to $2.9
million for the quarter ended June 30, 1999 from $1.0 million for the quarter
ended June 30, 1998. The increase related to the depreciation of assets of the
companies acquired by iXL since April 1, 1998 and the investments in physical
infrastructure at these companies after acquisition.
Amortization. Amortization expense increased $2.6 million to $4.3
million for the quarter ended June 30, 1999 from $1.7 million for the quarter
ended June 30, 1998. The increase was a result of the goodwill and assembled
workforce recorded in connection with the acquisitions which took place during
1998.
Comparison of Six Months Ended June 30, 1999 and June 30, 1998
Revenues. Revenues increased $61.5 million, or 354%, to $78.9 million
for the six months ended June 30, 1999 from $17.4 million for the six months
ended June 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 $33.6 million, or 259%, to
$46.6 million for the six months ended June 30, 1999 from $13.0 million for the
six months ended June 30, 1998. As a percentage of revenues, cost of revenues
decreased to 59% for the six months ended June 30, 1999, down from 75% for the
six months ended June 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 $115,000 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
$14.6 million, or 295%, to $19.5 million for the six months ended June 30, 1999
from $4.9 million for the six months ended June 30, 1998. As a percentage of
revenues, sales and marketing expenses decreased to 25% for the six months ended
June 30, 1999, down from 28% for the six months ended June 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 development of iXL's sales and marketing infrastructure and staff. Also
included in this increase was $675,000 of
10
<PAGE> 13
non-cash expense related to stock compensation charges and $500,000 of non-cash
marketing expense related to warrant issuances.
General and administrative expenses. General and administrative
expenses increased $22.2 million, or 252%, to $31.0 million for the six months
ended June 30, 1999 from $8.8 million for the six months ended June 30, 1998. As
a percentage of revenues, general and administrative expenses decreased to 39%
for the six months ended June 30, 1999, from 51% for the six months ended June
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 $1.3 million of
non-cash expense related to stock compensation charges.
Research and development expenses. Research and development expenses
increased $166,000, or 7%, to $2.4 million for the six months ended June 30,
1999 from $2.2 million for the six months ended June 30, 1998. As a percentage
of revenues, research and development expenses decreased to 3% for the six
months ended June 30, 1999, from 13% for the six months ended June 30, 1998.
Depreciation. Depreciation expenses increased $3.5 million, or 215%, to
$5.2 million for the six months ended June 30, 1999 from $1.7 million for the
six months ended June 30, 1998. The increase 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 $5.8 million, or 200%, to
$8.7 million for the six months ended June 30, 1999 from $2.9 million for the
six months ended June 30, 1998. The increase was a result of the goodwill and
assembled workforce recorded in connection with the acquisitions which took
place during 1998.
LIQUIDITY AND CAPITAL RESOURCES
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 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.
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 June 30, 1999, there were no amounts outstanding under the credit
facility.
At June 30, 1999, iXL had approximately $134.8 million in cash and cash
equivalents. For the period from inception to June 30, 1999, iXL used
approximately $75.5 million, $27.9 million and $42.2 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 June 30, 1999, iXL had outstanding commitments for
capital expenditures totaling approximately $2.8 million, primarily related to
the expansion of and equipment purchases by its Atlanta, Chicago and Boston
offices and CFN. The remainder of iXL's significant commitments consist of
obligations outstanding under operating leases.
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.
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 is conducting internal tests of such systems as part of
its Year 2000 efforts.
iXL is researching Year 2000 compliance of all existing iXL systems
supplied by third party providers. Where Year 2000 compliance documentation is
not publicly available, iXL is issuing written requests to these providers to
certify Year 2000 compliance. 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
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 developing 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 June 30, 1999.
However, there is no guarantee that the actual costs incurred will not be
materially higher than this estimate. See "Risk Factors--Risks Related to iXL's
Business--Year 2000 risks may adversely affect our business."
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 March 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.
On June 8, 1999, IXL iXL used $13,254,640 of the proceeds from its
initial public offering to repay all indebtedness outstanding under its credit
agreement with certain lenders for whom The Chase Manhattan Bank acts as
Administrative Agent, including accrued interest. The remainder of the proceeds
will be used for working capital and general corporate purposes and possibly as
consideration for acquisitions.
On June 8, 1999, in connection with the closing of its initial public
offering, iXL sold in a private placement 2,000,000 shares its Common Stock to
GE Capital Equity Investments, Inc. and General Electric Pension Trust in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated thereunder. The
aggregate offering price of the Common Stock was $24,000,000. Net proceeds to
iXL, after deducting underwriting discounts and commissions of $500,000
and offering expenses of $200,000 were $23,300,000.
On June 8, 1999, for no cash consideration iXL issued in a private
placement 62,500 shares of its Common Stock to Kelso & Company Trust in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. The shares of Common
Stock were
13
<PAGE> 16
issued to Kelso & Company in payment for consulting services provided to iXL in
connection with its initial public offering
On June 8, 1999, for no cash consideration iXL issued in a private
placement to GE Capital Equity Investments, Inc. warrants to purchase 1,500,000
shares of Common Stock in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder. These warrants were issued in connection with the implementation of
a mutually satisfactory marketing campaign and as an incentive to make CFN's
platform available to GE Capital Equity Investments, Inc. employees.
On May 3, 1999, iXL issued for no cash consideration warrants to
purchase 1,000,000 shares its Common Stock in a private placement to GE Capital
Equity Investments, Inc. in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder. These warrants were issued in connection with a
services agreement between iXL-New York. Inc. and General Electric Capital
Corporation.
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 June
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: August 16, 1999
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 134,789
<SECURITIES> 5,978
<RECEIVABLES> 31,390
<ALLOWANCES> 1,506
<INVENTORY> 0
<CURRENT-ASSETS> 193,425
<PP&E> 51,390
<DEPRECIATION> 13,953
<TOTAL-ASSETS> 285,546
<CURRENT-LIABILITIES> 34,194
<BONDS> 0
48,086
0
<COMMON> 648
<OTHER-SE> 201,210
<TOTAL-LIABILITY-AND-EQUITY> 285,546
<SALES> 0
<TOTAL-REVENUES> 78,908
<CGS> 0
<TOTAL-COSTS> 46,627
<OTHER-EXPENSES> 66,797
<LOSS-PROVISION> 1,321
<INTEREST-EXPENSE> 693
<INCOME-PRETAX> (34,655)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,655)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,655)
<EPS-BASIC> (2.44)
<EPS-DILUTED> 0
</TABLE>
