<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2000
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)
Delaware 58-2234342
---------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
1900 Emery Street, NW, Atlanta, Georgia 30318
------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
(800) 673-5544
---------------------------
(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 August 7, 2000
---------------------- -------------------------------
Common Stock, $.01 par value 75,705,081
<PAGE> 2
iXL ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
QUARTER ENDED JUNE 30, 2000
PART I FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited) ........... 1
Condensed Consolidated Balance Sheets at June 30, 2000
and December 31, 1999 .......................................... 1
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999 .............. 2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 ........................ 3
Notes to Condensed Consolidated Financial Statements .............. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Of Operations ...................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 13
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ......................... 14
Item 4. Submission of Matters to a Vote of Security Holders ............... 14
Item 6. Exhibits and Reports on Form 8-K .................................. 14
Signatures ..................................................................... 15
</TABLE>
<PAGE> 3
PART 1
ITEM 1. FINANCIAL STATEMENTS
iXL ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents ...................................................... $ 62,738 $ 120,812
Marketable securities .......................................................... 48,185 34,895
Accounts receivable, net ....................................................... 91,844 62,836
Unbilled revenue ............................................................... 31,106 21,794
Prepaid expenses and other assets .............................................. 7,099 6,610
---------- ----------
Total current assets ................................................ 240,972 246,947
Property and equipment, net .................................................... 72,658 52,273
Intangible assets, net ......................................................... 161,771 55,851
Equity investment in affiliates ................................................ 8,458 --
Other non-current assets ....................................................... 5,305 2,784
---------- ----------
Total assets ........................................................ $ 489,164 $ 357,855
========== ==========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY
Accounts payable ............................................................... $ 9,168 $ 13,988
Deferred revenue ............................................................... 12,580 10,750
Accrued liabilities ............................................................ 29,615 22,229
Current portion of long-term debt .............................................. 400 530
---------- ----------
Total current liabilities ........................................... 51,763 47,497
Long-term debt ................................................................. 558 1,308
---------- ----------
Total liabilities ................................................... 52,321 48,805
---------- ----------
Mandatorily redeemable preferred stock of subsidiary ........................... 7,000 48,955
Stockholders' equity
Common Stock ............................................................ 759 676
Additional paid in capital .............................................. 618,264 392,432
Accumulated deficit ..................................................... (185,150) (135,973)
Accumulated other comprehensive income .................................. 3,063 12,020
Treasury stock at cost .................................................. (888) (888)
Note receivable from stockholder ........................................ -- (900)
Unearned compensation ................................................... (6,205) (7,272)
---------- ----------
Total stockholders' equity .......................................... 429,843 260,095
---------- ----------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity .................................. $ 489,164 $ 357,855
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
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iXL ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Professional services revenue ....................................... $ 119,168 $ 45,706 $ 221,455 $ 78,234
Other revenue ....................................................... -- 190 -- 674
---------- ---------- ---------- ----------
Net revenue .................................................. 119,168 45,896 221,455 78,908
Professional services expense, excluding stock-based compensation
of $256 and $36 for the three months ended June 30, 2000
and June 30, 1999 and $618 and $65 for the six months ended
June 30, 2000 and June 30, 1999 ................................... 55,494 22,747 103,747 38,587
Sales and marketing expenses, excluding stock-based compensation of
$27 and $258 for the three months ended June 30, 2000 and June 30,
1999 and $2,357 and $675 for the six months ended June 30, 2000
and June 30, 1999 ................................................. 15,656 11,050 30,061 18,783
General and administrative expenses, excluding stock-based
compensation of $473 and $347 for the three months ended June 30,
2000 and June 30, 1999 and $831 and $1,375 for the six months
ended June 30, 2000 and June 30, 1999 ............................. 38,836 20,571 71,516 40,040
---------- ---------- ---------- ----------
Operating loss before stock compensation, depreciation and
amortization ..................................................... 9,182 (8,472) 16,131 (18,502)
Stock-based compensation and other .................................. 756 641 3,866 2,115
Depreciation ........................................................ 4,945 2,931 9,141 5,215
Amortization ........................................................ 11,208 4,333 22,039 8,684
---------- ---------- ---------- ----------
Total operating expenses ..................................... 126,895 62,273 240,370 113,424
Loss from operations ......................................... (7,727) (16,377) (18,915) (34,516)
Other expense, net .................................................. (85) (183) (267) (114)
Interest income ..................................................... 1,719 517 3,396 733
Interest expense .................................................... (219) (357) (690) (693)
Loss on equity investment ........................................... (21,639) -- (32,101) (65)
---------- ---------- ---------- ----------
Loss before income taxes ..................................... (27,951) (16,400) (48,577) (34,655)
Income tax expense .................................................. (600) -- (600) --
---------- ---------- ---------- ----------
Net loss ..................................................... (28,551) (16,400) (49,177) (34,655)
Dividends and accretion on mandatorily
redeemable preferred stock .................................... -- (14,769) -- (20,062)
---------- ---------- ---------- ----------
Net loss available to common
stockholders ............................................... $ (28,551) $ (31,169) $ (49,177) $ (54,717)
========== ========== ========== ==========
Basic and diluted net loss per common
share ...................................................... $ (0.38) $ (1.09) $ (0.67) $ (2.44)
========== ========== ========== ==========
Weighted average common shares
outstanding ................................................ 74,801 28,719 73,339 22,401
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE> 5
iXL ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss ............................................................. $ (49,177) $ (34,655)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation ....................................................... 9,141 5,215
Amortization ....................................................... 22,039 8,684
Provision for bad debts ............................................ 8,839 1,321
Non-cash investment and losses in equity affiliate and
amortization .................................................... 32,101 65
Effect of stock options and warrants ............................... 3,956 3,716
Changes in assets and liabilities, net of effects from purchase and
deconsolidation of subsidiaries
Accounts receivable ............................................. (30,101) (13,468)
Unbilled revenue ................................................ (8,120) (10,920)
Prepaid expenses and other assets ............................... (6,178) 118
Accounts payable and accrued liabilities ........................ 6,744 8,751
Deferred revenue ................................................ 651 4,898
---------- ----------
Net cash used in operating activities ...................... (10,105) (26,275)
---------- ----------
Cash flows from investing activities
Purchases of property and equipment ................................ (37,752) (14,535)
Purchases of subsidiaries, net of cash acquired .................... (2,640) --
Deconsolidation of CFN to equity basis ............................. (15,221) --
Purchases of marketable securities ................................. (42,394) --
Proceeds from sale of marketable securities ........................ 19,063 --
Proceeds from sale of fixed and intangible assets .................. 147 1,892
---------- ----------
Net cash used in investing activities ...................... (78,797) (12,643)
Cash flows from financing activities
Repayment of borrowings ............................................ (245) (19,754)
Proceeds from issuance of stock .................................... 24,783 125,110
Proceeds from issuance of mandatorily redeemable preferred stock
of subsidiary .................................................... 7,000 49,296
---------- ----------
Net cash provided by financing activities .................. 31,538 154,652
---------- ----------
Effect of exchange rate changes on cash and cash equivalents ......... (710) (204)
Net (decrease) increase in cash and cash equivalents ....... (58,074) 115,530
Cash and cash equivalents at beginning of period ..................... 120,812 19,259
---------- ----------
Cash and cash equivalents at end of period ........................... $ 62,738 $ 134,789
========== ==========
Supplemental disclosure of cash flow information
Cash paid for interest ............................................ $ 282 $ 674
Non-cash investing and financing activities
Acquisition of equipment through capital leases ................... $ -- $ 312
Unrealized (loss) gain on marketable securities ................... $ (8,247) $ 5,878
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 6
iXL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
iXL Enterprises, Inc. ("the Company") is a worldwide consulting firm
that helps companies utilize the power of emerging technologies and advanced
business strategy to build stronger, more profitable relationships with their
customers and business partners. iXL has 23 offices in the United States,
Europe, Latin America and Asia. The Company 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 consulting services, the
Company is the largest shareholder of Consumer Financial Network, Inc. ("CFN"),
an e-commerce and software application company, 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 condensed consolidated financial statements
have been prepared by the Company 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 included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. In the opinion of management, the accompanying
unaudited condensed 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, 2000, the results
of its operations for the three and six month periods ended June 30, 2000 and
1999 and its cash flows for the three and six month periods ended June 30, 2000
and 1999. Certain items have been reclassed to conform to the current year
presentation. Operating results for the three and six month periods ended June
30, 2000 are not necessarily indicative of the operating results that may be
expected for the year ending December 31, 2000.
During the second quarter of 2000 the Company's voting interest in CFN
was reduced to less than 50% as the result of the issuance of common stock and
mandatorily redeemable convertible preferred stock. Accordingly, in the second
quarter of 2000, the Company deconsolidated CFN. The Company has presented its
results of operations and financial condition as if the deconsolidation occurred
on January 1, 2000.
3. DECONSOLIDATION OF CONSUMER FINANCIAL NETWORK, INC.
In the first quarter of 2000, the Company's subsidiary CFN sold
32,896,000 shares of its mandatorily redeemable Series C Convertible Preferred
Stock for net proceeds of approximately $127,084,000. During the second quarter
of 2000, CFN completed three acquisitions for cash and shares of common stock
of approximately $111,000,000.
4
<PAGE> 7
In the second quarter of 2000, CFN sold 25,000,000 shares of
mandatorily redeemable Series D Convertible Preferred Stock to Gateway, Inc.
("Gateway") for net proceeds of approximately $148,000,000. Concurrent with the
investment, CFN entered into a promotional agreement with Gateway and also
purchased Gateway's minority ownership interest in iBelong, Inc. In total, the
amount paid for the promotional agreement with Gateway and the ownership
interest in iBelong was $70,000,000.
As a result of the above transactions, the Company's ownership of CFN
was reduced to approximately 49% of the voting interest and 85% of CFN's
outstanding common stock. Therefore, CFN is no longer a consolidated subsidiary
and the Company will account for its ownership using the equity method of
accounting. The above transactions resulted in the Company recording an increase
in its stockholders' equity of approximately $62,800,000 in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin 51. During the
second quarter of 2000, CFN recorded approximately $1,700,000 of stock
compensation expense for the acceleration of the Company's stock options. At
June 30, 2000, the Company's remaining equity investment in CFN is $7,820,000.
The Company will continue to record 85% of CFN's operating results until there
is no remaining basis. Revenue and loss from operations for CFN for the six
months ended June 30, 1999 were $859,000 and $11,679,000 respectively.
4. LONG-TERM DEBT
On January 7, 2000, the Company entered into a senior secured revolving
syndicated credit facility (the "Credit Facility") with several banks providing
for borrowings of up to $50,000,000. The Credit Facility expires December 31,
2002. The Credit Facility bears interest payable at least quarterly at a rate of
either 2.75% plus an adjusted LIBOR rate or 1.75% plus the greater of Chase
Manhattan Bank's prime rate or .5% plus the federal funds rate. The Credit
Facility is secured by liens on substantially all of the assets of the Company's
domestic operating subsidiaries other than iXL Ventures, Inc., CFN and CFN's
subsidiaries. These obligations are also secured by all of the stock of iXL's
domestic operating subsidiaries other than CFN's subsidiaries, and 65% of the
stock of iXL's foreign subsidiaries, including the pledge of the capital stock
of the same subsidiary companies. The Credit Facility provides for borrowings
based upon a borrowing base formula. A commitment fee is charged on the unused
portion of the Credit Facility.
At June 30, 2000, the Company had no borrowings outstanding under the
Credit Facility and had utilized approximately $22,600,000 of the Credit
Facility for Letters of Credits issued primarily as security for office leases.
At June 30, 2000 approximately $27,400,000 of the Credit Facility was available.
5. ACQUISITION
In the first quarter of 2000, the Company acquired Tessera Enterprise
Systems, Inc. in exchange for $3,700,000 and 3,588,655 shares of the Company's
common stock. Pro forma information is as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, 1999
------------------------
(in thousands, except per share)
<S> <C>
Revenue $ 90,386
Net loss available to common stockholders $(67,332)
Basic and diluted net loss per common share $ (2.59)
</TABLE>
During the second quarter, the Company acquired Redwing Consulting
Limited. The acquisition was deemed to be immaterial to the Company's operating
results.
6. SEGMENT REPORTING
In 1999, the Company operated in two business segments: strategic
Internet services, which includes Internet strategy consulting, Internet-based
5
<PAGE> 8
business solutions and solution sets; and CFN, an e-commerce platform for
marketing financial services and employee benefits. In the second quarter of
2000, the Company deconsolidated CFN as discussed in Note 3. Therefore, the CFN
segment has been eliminated in 2000.
Information concerning the operations in these reportable segments is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------- --------- -------------------------
2000 1999 2000 1999
---------- --------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Strategic Internet Services $ 119,168 $ 45,706 $ 221,455 $ 78,234
CFN -- 375 -- 859
Eliminations -- (185) -- (185)
--------- --------- --------- --------
$ 119,168 $ 45,896 $ 221,455 $ 78,908
========= ========= ========= ========
Loss from operations:
Strategic Internet Services $ (7,727) $ (9,077) $ (18,915) $(22,837)
CFN -- (7,300) -- (11,679)
--------- --------- --------- --------
$ (7,727) $ (16,377) $ (18,915) $(34,516)
========= ========= ========= ========
Depreciation and amortization:
Strategic Internet Services $ 16,153 $ 6,923 $ 31,180 $ 13,269
CFN -- 341 -- 630
--------- --------- --------- --------
$ 16,153 $ 7,264 $ 31,180 $ 13,899
========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(in thousands)
<S> <C> <C>
Identifiable assets:
Strategic Internet Services $ 489,164 $ 323,487
CFN -- 34,368
---------- ----------
$ 489,164 $ 357,855
========== ==========
</TABLE>
7. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Net loss $ (28,551) $ (16,400) $ (49,177) $ (34,655)
Foreign currency translation adjustment (273) (87) (710) (204)
Unrealized (loss) gain on marketable (1,522) 5,878 (8,247) 5,878
securities
--------- --------- --------- ---------
Comprehensive loss $ (30,346) $ (10,609) $ (58,134) $ (28,981)
========= ========= ========= =========
</TABLE>
6
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8. 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. iXL will be required to adopt FAS 133 for the quarter ended March
31, 2001. iXL does not expect the adoption to have a material impact on its
financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). In June 2000, the SEC
staff issued SAB 101B to provide registrants additional time to implement
guidance contained in SAB 101. SAB 101B delays the implementation date of SAB
101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company is evaluating the implications of SAB 101
and to date nothing has been identified that would significantly change the
Company's historical practices with respect to the events that trigger revenue
recognition and the measurement of revenue.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying Opinion 25. Among other
issues, this Interpretation clarifies (a) the definition of an employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. The provisions of FIN No. 44 are effective July 1, 2000,
except for the provisions regarding modifications to fixed stock option awards
which reduce the exercise price of an award, which apply to modifications made
after December 15, 1998. Provisions regarding modifications to fixed stock
option awards to add reload features apply to modifications made after January
12, 2000. Management does not expect the provisions of Fin No. 44 to have a
material impact on the Company's financial statements.
7
<PAGE> 10
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.
Overview
iXL is a worldwide consulting firm that helps companies utilize the
power of emerging technologies and advanced business strategy to build
stronger, more profitable relationships with their customers and business
partners. iXL has 23 offices in the United States, Europe, Latin America and
Asia.
iXL was founded in March 1996, and since that time iXL has acquired a
total of 35 consulting companies and 5 e-commerce and software application
companies. All of these 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, 2000, iXL
had an accumulated deficit of approximately $185.2 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 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. iXL prices its projects on both a
fixed-price and 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.
Professional services expenses consist primarily of compensation and
benefits for our employees engaged in the delivery of professional services.
Professional services margins reflect net revenues less professional services
expenses which are incurred regardless of whether or not the employee's time is
billed to a client. We expect that our professional services expenses will
increase over time as a result of an anticipated increase in our number of
employees and to a lesser extent, an increase in salaries. Our professional
services margins are affected by trends in the percentage of professional
services employees' time that is billed to clients, and will vary in the future.
Any significant decline in fees billed to clients or the loss of a significant
client would materially adversely affect our professional services margins.
Early terminations of client engagements result in unbillable time, which
adversely affects professional services margins.
8
<PAGE> 11
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. iXL's ability to hire and
retain personnel will have a significant impact on its profitability.
During the second quarter of 2000 the Company's voting interest in CFN
was reduced to less than 50% as the result of the issuance of common stock and
mandatorily redeemable convertible preferred stock. During the second quarter of
2000, the Company deconsolidated CFN. The Company has presented its results of
operations and financial condition as if the deconsolidation occurred on January
1, 2000. This change did not have a material effect on our consolidated
revenue and has resulted in a decrease in our consolidated operating expenses.
During the six months ended June 30, 2000, iXL incurred non-cash stock
compensation expense related to its option grants totaling $3.9 million as
compared to $2.1 million for the six months ended June 30, 1999. iXL expects to
recognize approximately $4.9 million in 2000, $2.2 million in 2001, $1.9 million
in 2002 and $1.0 million in 2003 in stock compensation expense relating to the
grant of options in 1998, 1999, and 2000.
Acquisitions
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.
Results of Operations
Discussions of results of operations exclude all non-cash stock compensation
expense.
Comparison of Three Months Ended June 30, 2000 and June 30, 1999
Net revenue. Net revenue increased $73.3 million, or 160%, to $119.2
million for the quarter ended June 30, 2000 from $45.9 million for the quarter
ended June 30, 1999. The increase was attributable to an aggressive hiring
initiative which expanded our billable headcount. The growth was also due to an
increase in the number and size of client engagements and the development and
growth of our specialized strategy consulting groups. Specifically, averaged
annualized revenue from the Company's top ten clients increased from $7.1
million during the quarter ended June 30, 1999 to $14.1 million during the
quarter ended June 30, 2000.
Professional services expense. Professional services expense increased
$32.8 million, or 144%, to $55.5 million for the quarter ended June 30, 2000
9
<PAGE> 12
from $22.7 million for the quarter ended June 30, 1999. As a percentage of
professional services revenues, professional services expense decreased from
49% for the quarter ended June 30, 1999, to 47% for the quarter ended June 30,
2000. The dollar increase was primarily attributable to an increase in billable
headcount. 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
$4.6 million, or 41%, to $15.7 million for the quarter ended June 30, 2000 from
$11.1 million for the quarter ended June 30, 1999. The increase was primarily
attributable to increased advertising, promotional material, and public
relations expenditures. As a percentage of net revenue, sales and marketing
expenses decreased from 24% for the quarter ended June 30, 1999 to 13% for the
quarter ended June 30, 2000. Of this decrease, 55% relates to the
deconsolidation of CFN.
General and administrative expenses. General and administrative
expenses increased $18.2 million, or 88%, to $38.8 million for the quarter ended
June 30, 2000 from $20.6 million for the quarter ended June 30, 1999. The
increase was primarily attributable to the increase in recruiting, knowledge
management, information technology, finance and administrative personnel and
costs of leasing additional office space. As a percentage of net revenue,
general and administrative expenses decreased from 45% for the quarter ended
June 30, 1999 to 33% for the quarter ended June 30, 2000. Of this decrease, 83%
relates to the deconsolidation of CFN.
Stock-based compensation and other. In accordance with APB 25, the
Company has recorded stock compensation for the difference between the exercise
price of certain stock option grants and the deemed fair value of our common
stock at the time of such grants. We are expensing this amount over the vesting
periods of the applicable options resulting in expense of $0.8 million and $0.6
million in the three months ended June 30, 2000 and 1999, respectively.
Depreciation. Depreciation expense increased $2.0 million to $4.9
million for the quarter ended June 30, 2000 from $2.9 million for the quarter
ended June 30, 1999. The increase is primarily related to the investments in
physical infrastructure to support continued growth of the company.
Amortization. Amortization expense increased $6.9 million to $11.2
million for the quarter ended June 30, 2000, from $4.3 million for the quarter
ended June 30, 1999. The increase was primarily a result of the amortization of
goodwill and assembled workforce recorded in connection with the two
acquisitions that took place during 2000.
Loss on equity investment. The company incurred a $21.6 million loss
on equity investment in the three months ended June 30, 2000. This loss is
primarily related to the Company's percentage share of the results of CFN's
operations, including a $1.7 million stock compensation expense recorded by CFN
for the acceleration of the Company stock options.
Income taxes. The provision for income taxes for the three months ended
June 30, 2000 is comprised of taxes on foreign and state income. The income tax
provisions for each period differs from the federal statutory rate primarily as
a result of a valuation allowance established for the U.S. federal net operating
losses not utilized in the current period.
In June 1999, the Company's ownership in CFN decreased to less than
80%. As a result, CFN is no longer included in the Company's consolidated group
for tax purposes and the net operating loss carry forward applicable to CFN can
not be used by the Company.
Comparison of Six Months Ended June 30, 2000 and June 30, 1999
Net revenue. Net revenue increased $142.6 million, or 181%, to $221.5
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million for the six months ended June 30, 2000 from $78.9 million for the six
months ended June 30, 1999. The increase was attributable to an aggressive
hiring initiative, which expanded our billable headcount. The growth was also
due to an increase in the number and size of client engagements and the
development and growth of our specialized strategy consulting groups.
Specifically, averaged annualized revenue from the Company's top ten clients
increased from $5.1 million during the six months ended June 30, 1999 to $12.4
million during the six months ended June 30, 2000.
Professional services expense. Professional services expense increased
$65.1 million, or 169%, to $103.7 million for the six months ended June 30,
2000 from $38.6 million for the six months ended June 30, 1999. As a percentage
of professional services revenues, professional services expense decreased from
49% for the six months ended June 30, 1999, to 47% for the six months ended
June 30, 2000. The dollar increase was primarily attributable to an increase in
billable headcount. 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
$11.2 million, or 60%, to $30.0 million for the six months ended June 30, 2000
from $18.8 million for the six months ended June 30, 1999. The increase was
primarily attributable to increased advertising, promotional material, and
public relations expenditures. As a percentage of net revenue, sales and
marketing expenses decreased from 24% for the six months ended June 30, 1999 to
14% for the six months ended June 30, 2000. Of this decrease, 50% relates to the
deconsolidation of CFN.
General and administrative expenses. General and administrative
expenses increased $31.5 million, or 79%, to $71.5 million for the six months
ended June 30, 2000 from $40.0 million for the six months ended June 30, 1999.
The increase was primarily attributable to the increase in recruiting,
knowledge management, information technology, finance and administrative
personnel and costs of leasing additional office space. As a percentage of net
revenue, general and administrative expenses decreased from 51% for the six
months ended June 30, 1999 to 32% for the six months ended June 30, 2000.
Of this decrease, 47% relates to the deconsolidation of CFN.
Stock-based compensation and other. In accordance with APB 25, the
Company has recorded stock compensation for the difference between the exercise
price of certain stock option grants and the deemed fair value of our common
stock at the time of such grants. We are expensing this amount over the vesting
periods of the applicable options resulting in expense of $3.9 million and $2.1
million in the six months ended June 30, 2000 and 1999, respectively.
Depreciation. Depreciation expense increased $3.9 million to $9.1
million for the six months ended June 30, 2000 from $5.2 million for the six
months ended June 30, 1999. The increase is primarily related to the
investments in physical infrastructure to support continued growth of the
company.
Amortization. Amortization expense increased $13.3 million to $22.0
million for the six months ended June 30, 2000, from $8.7 million for the six
months ended June 30, 1999. The increase was primarily a result of the
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<PAGE> 14
amortization of goodwill and assembled workforce recorded in connection with
the two acquisitions that took place during 2000.
Loss on equity investment. The company incurred a $32.1 million loss
on equity investment in the six months ended June 30, 2000. This loss is
primarily related to the Company's percentage share of the results of CFN's
operations, including a $1.7 million stock compensation expense recorded by CFN
for the acceleration of the Company stock options.
Income taxes. The provision for income taxes for the six months ended
June 30, 2000 is comprised of taxes on foreign and state income. The income tax
provisions for each period differs from the federal statutory rate primarily as
a result of a valuation allowance established for the U.S. federal net operating
losses not utilized in the current period.
In June 1999, the Company's ownership in CFN decreased to less than
80%. As a result, CFN is no longer included in the Company's consolidated group
for tax purposes and the net operating loss carry forward applicable to CFN can
not be used by the Company.
Liquidity and Capital Resources
On January 7, 2000, iXL terminated its existing July 29, 1998 credit
agreement and entered into a senior secured revolving syndicated Credit
Facility with several banks providing for borrowings of up to $50 million. As
of June 30, 2000, no borrowings were outstanding under the Credit Facility.
iXL's obligations under the Credit Facility are secured by substantially all of
the assets of iXL and its domestic operating subsidiaries other than iXL
Ventures, Inc., CFN and CFN's subsidiaries. These obligations are also secured
by all of the stock of iXL's domestic operating subsidiaries, other than CFN's
subsidiaries, and 65% of the stock of iXL's foreign subsidiaries. Borrowings
under the Credit Facility mature December 31, 2002 and accrue interest either
(a) at a rate of 1.75% plus the greater of Chase Manhattan Bank's prime rate or
0.5% 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. The Credit
Facility provides for borrowings based upon a borrowing base formula. A
commitment fee is charged on the unused portion of the Credit Facility.
At June 30, 2000, the Company had no borrowings outstanding under the
Credit Facility and had utilized approximately $22,600,000 of the Credit
Facility for Letters of Credits issued primarily as security for office leases.
At June 30, 2000, approximately $27,400,000 of the Credit Facility was
available.
At June 30, 2000, iXL had approximately $62.7 million in cash and cash
equivalents. For the six month period ended June 30, 2000, iXL used
approximately $10.1 million and $37.8 million to fund operating activities and
capital expenditures, respectively.
In addition, at June 30, 2000, iXL had outstanding commitments for
purchases of property and equipment of approximately $23.1 million, primarily
related to the expansion and improvement of its Atlanta and San Diego offices.
The remainder of iXL's significant commitments consists 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 expenditures
requirements for a least the next twelve 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.
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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. iXL will be required to adopt FAS 133 for the quarter ended March
31, 2001. iXL does not expect the adoption to have a material impact on its
financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). In June 2000, the SEC
staff issued SAB 101B to provide registrants additional time to implement
guidance contained in SAB 101. SAB 101B delays the implementation date of SAB
101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company is evaluating the implications of SAB 101
and to date nothing has been identified that would significantly change the
Company's historical practices with respect to the events that trigger revenue
recognition and the measurement of revenue.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying Opinion 25. Among other
issues, this Interpretation clarifies (a) the definition of an employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. The provisions of FIN No. 44 are effective July 1, 2000,
except for the provisions regarding modifications to fixed stock option awards
which reduce the exercise price of an award, which apply to modifications made
after December 15, 1998. Provisions regarding modifications to fixed stock
option awards to add reload features apply to modifications made after January
12, 2000. Management does not expect the provisions of Fin No. 44 to have a
material impact on the Company's financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments which would
require disclosure under this item.
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PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the period from January 1, 2000 through June 30, 2000, iXL
issued and sold 75,000 shares of common stock upon exercise of options granted
under the 1998 Non-Employee Stock Option Plan for an aggregate consideration of
$1,125,000 in cash. On June 28, 2000 iXL issued 206,959 shares of restricted
common stock upon the cash free exercise of warrants. These issuances of stock
were made in reliance on Section 4(2) of the Securities Act and Rule 701
promulgated under the Securities Act.
In January 2000, the Company acquired Tessera Enterprise Systems, Inc.
in exchange for $3,700,000 and 3,588,655 shares of the Company's common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its Annual Meeting of Stockholders on May 30, 2000.
Of the 74,268,596 shares of common stock outstanding and entitled to vote at
this meeting, 52,583,097 were represented at the meeting, in person or by
proxy. The following matters were voted upon.
1. The election of a Board of Directors consisting of ten
persons named as nominees for Director in the Proxy Statement
of the Company, to serve as Directors of the Company, each to
serve until the next Annual Meeting of Stockholders or until
their successor shall have been elected. The result of the
vote for each individual Director was:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
Jeffrey Arnold .................................................. 52,285,845 297,252
Frank Bynum ..................................................... 52,521,965 61,132
Jerome Colonna .................................................. 52,512,944 70,153
U. Bertram Ellis ................................................ 52,088,994 494,103
William Nussey .................................................. 52,088,894 494,203
Thomas Rosencrants .............................................. 52,527,044 56,053
Niraj Shah ...................................................... 51,613,698 969,399
Thomas Wall ..................................................... 52,509,944 73,153
Jeffrey Walker .................................................. 52,524,394 58,703
Gary Wendt ...................................................... 52,511,365 71,732
</TABLE>
Accordingly, all ten nominees were duly elected Directors of the
Company.
2. The approval to the Amendment of iXL's 1999B Stock Option
Plan. The result of the vote was 34,395,702 shares in favor,
7,232,363 shares opposed and 15,136 shares abstained.
Accordingly, the Amendment was approved.
3. The approval of the 2000 employee stock purchase plan. The
result of the vote was 41,568,046 shares in favor, 61,219
shares opposed and 13,936 shares abstained. Accordingly, the
Plan was approved.
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 filed during the quarter ended June 30, 2000:
<TABLE>
<CAPTION>
DATE OF REPORT DATE FILED ITEMS INCLUDED
-------------- ------------ ---------------
<S> <C> <C>
May 19, 2000 June 5, 2000 5
</TABLE>
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<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/ MARK STEELE
--------------------------------------------
Mark Steele
Senior Vice President
Date: August 11, 2000
15
